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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 1-11512
SATCON TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 04-2857552
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
161 FIRST STREET, 02142
CAMBRIDGE, MASSACHUSETTS
(Address of principal executive offices) (ZIP CODE)
</TABLE>
(617) 661-0540
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act
TITLE OF CLASS
COMMON STOCK, $.01 PAR VALUE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Registrant's Common Stock, $.01 par value
per share, held by non-affiliates of the Registrant was $61,487,116, based on
the last reported sale price of the Registrant's Common Stock on the Nasdaq
National Market as of the close of business on December 15, 1999 ($8.125). There
were 11,376,570 shares of Common Stock outstanding as of December 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 2000 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
We were organized as a Massachusetts corporation in February 1985 and
reincorporated in Delaware in 1992. We design, develop and manufacture
intelligent, electro-mechanical products for aerospace, transportation,
industrial and utility applications. We also design, develop and manufacture
power and energy management products for telecommunications, silicon wafer
manufacturing, factory automation, aircraft and automotive applications. Our
electro-mechanical products are being developed for a wide variety of U.S.
government and commercial markets. For the government, our electro-mechanical
systems provide for applications ranging from satellite attitude control to high
speed drives for shipboard systems. In the transportation segment, we are
developing electric and hybrid electric drive components, auxiliary power units
and advanced steering, alternator and starter/generator systems. We are working
with major equipment producers to develop process equipment drives, high speed
and precision machine tools, manipulators and machinery isolation equipment. Our
electro-mechanical systems may offer advantages to the utility industry in power
generation, energy storage and power quality. In the consumer market, we are
developing variable speed motors for refrigeration equipment and other
long-life, high-efficiency machinery.
STRATEGY
It is our strategy to continue to expand development of our technologies for
use in commercial business applications and to seek the acquisition of
businesses, products, assets and technologies that complement or augment our
existing businesses, products, assets and technologies.
DEVELOPMENTS DURING 1999
During 1999, our technology center made a concentrated effort toward
building the power inverter for a fuel cell on-site power generation system.
Using new technology, developed with government funding over the last seven
years, we are developing new, smaller, high-efficiency, low-cost power
inverters. Our power inverters are combined with fuel cell power generation
systems, micro-turbines, or solar power generation systems for generating
on-site power. Work also continued on the Department of Energy's contract with
us to manufacture power electronics for use in hybrid-electric automobiles. With
fuel cells and microturbines becoming more affordable, their use as alternative
fuel drive trains is gaining interest from several perspectives. Our technology
center also received funded research and development contracts for a modular
drive for the U.S. Navy, miniature navigation systems, biological contamination
detection systems, and a remote surveillance and targeting vehicle for DARPA.
In January 1999, we acquired Lighthouse Software, Inc., which designs and
develops software for the industrial machine tool industry.
Over the past year, Magmotor, a manufacturer of custom electric motors
targeting the factory automation, medical, semiconductor and packaging markets,
introduced a new line of brushless DC servomotors for the machine tool industry.
Within its first year with this product line, Magmotor was able to expand its
customer base with the addition of orders from several machine tool
manufacturers. These customers purchased servomotor for inclusion in such
machines as Computer Numerical Control (CNC) machining centers, CNC lathes and
milling machines and for small part precision turning. Magmotor also completed
several delivery orders for its integrated suspension and motor (ISAM) product
to Applied Materials. By having the encoder, brake, gearbox, tachometer and
connectors that are required for each customer's unique application coupled with
the appropriate motor, Magmotor can now provide its customers with an entire
drive assembly. They have recently added brush and brushless motor amplifiers to
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their product line and are building small motors for a major automotive
manufacturer to be used in fuel cell cars.
In January 1999, we acquired Inductive Components, Inc., a value-added
supplier selling systems in the machine tool and semi-conductor industry.
During 1999, FMI, a manufacturer and producer of custom integrated circuits
for the communications, industrial, military and aerospace markets, introduced
several new products. The first was a package of uplink electronics for
satellite telecommunications systems such as mobile telephone repeater stations.
The second set of products were a series of power resistors manufactured with
aluminum nitride, FMI's solution to eliminating environmentally hazardous
beryllium oxide, the substrate commonly used in this past for these products.
These resistors are used in several telecommunications products, including
cellular telephones. FMI was also chosen to design the thin film circuits for
new satellite television/internet system for residential and business use. The
system is being manufactured and sold through a major electronics manufacturer
that also markets a satellite television service. FMI also developed a new
process for manufacturing radio frequency identification cards.
In April 1999, we acquired Hycomp, Inc., a manufacturer of high performance,
high quality multi-chip modules.
During 1999, Beacon Power Corporation, an affiliate of SatCon, successfully
completed the first phase field testing of its flywheel uninterruptible power
supply systems for telephone and cable television applications. The systems have
successfully operated for over 1,800 continuous hours. In both applications,
Beacon Power's flywheels have maintained the power during loss of utility power
with no degredation of service.
COMMERCIALIZATION
We intend to continue directing our commercialization efforts in the
following product areas:
POWER ELECTRONICS
We have developed proprietary high-voltage hybrid modules based on advanced
power semiconductor technology at a fraction of the weight of conventional
packages. The high-density topology and innovative cooling schemes utilized
allow for higher throughput in smaller, lighter weight packages. These
electronics support our high-speed drive and flywheel product developments as
well as our power inverters for fuel cell, microturbine and other alternative
fuel on-site power generation systems..
We have also developed a new hermetic amplifier product line that is
manufactured without the use of hazardous beryllium oxide. In addition to the
amplifiers, we are developing a new motor controller line based on the SAT-32
DSP motor control technology that is currently used in the Integrated Suspension
and Motor product for semiconductor manufacturing.
MOTORS AND HIGH SPEED DRIVES
We design and build high performance motors and drives that capitalize on
advances in materials and semiconductor technology to achieve high power
density. Through the use of high performance materials and design of the
magnetic circuits, we have demonstrated electric motor prototypes that are
lightweight and have provided efficiencies in excess of 97 percent. Our motor
designs are being evaluated for a wide variety of applications including
electric vehicles, shipboard motors and general industrial applications.
MAGNETIC BEARINGS AND SUSPENSION SYSTEMS
Improvements in magnetic materials and electronic control systems have led
the way to advances in electromagnetic bearings and suspension systems. We have
participated in the development of such
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systems for spacecraft and ground-based systems. Our magnetic bearing systems
feature electromagnetic and permanent magnet actuators and advanced digital
control systems. These systems have been developed for both commercial and
military applications.
By injecting electromagnetic forces along a selected bearing axis in concert
with shaft rotation, the magnetic bearings can balance a dynamic machine,
resulting in smooth and quiet operation. Similar principles guide the
application of electromagnetic suspension systems. These automated systems
provide a significant reduction of structure borne vibration transmittal,
providing low vibration machinery operation, low detection or vibration
isolation. In addition, these systems provide lubrication-free support for
rotating, reciprocating, and stationary systems. Also, through active electronic
control, these systems provide quiet, smooth and non-contaminating machinery
operation and isolation.
We are also developing a high-temperature magnetic bearing for gas turbine
engines.
FLYWHEEL ENERGY STORAGE SYSTEMS
By integrating energy storing flywheels made of high strength materials with
high power, permanent magnet motor/generators, we have developed
electro-mechanical storage systems that we believe have the potential to offer
practical solutions for mobile and stationary applications. Beacon Power's
flywheel systems are anticipated to provide extremely high power output and
energy storage in compact packages. They may be a long-lasting, lightweight, and
an environmentally friendly alternative to conventional batteries. These systems
can be used to provide backup for critical industrial processes and machines, as
power supplies for satellites and as energy recovery systems for electric and
hybrid-electric vehicle drive trains.
Beacon Power is completing the commercialization of the 20C1000
cable/telecom flywheel system. Beacon Power's focus is limited to providing
flywheel energy storage products for stationary terrestrial applications. Beacon
Power's 20C1000 cable/telecom flywheel system is being developed to offer an
alternative to lead acid batteries as an un-interruptible power supply for the
telecommunications industry, including cable television and telephone service
providers, which are required to maintain service during power outages.
MARKETS
Our objective is to capitalize on our technological developments from our
internal and contract research and development projects to become a leading
supplier of a new generation of intelligent, electro-mechanical and
electro-optic products for aerospace, transportation, industrial, utility and
food processing applications. These products, enabled by a revolution in the
size, weight and efficiency of machines, are designed to provide competitive
advantages in performance.
COMPETITION
A variety of companies compete in each of the areas in which we are
developing and selling products. To date, we have faced only limited competition
in providing research services, prototype development and custom and limited
quality manufacturing. We expect competition to intensify greatly as commercial
applications increase for our products under development. Some of our
competitors are well established and have substantial managerial, technical,
financial, marketing and product development resources competitive with, and, in
some instances, greater than ours. Additional companies, both large and small,
are entering the markets in which we compete. There can be no assurance that we
will be successful in such a competitive environment.
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PATENTS AND PROPRIETARY INFORMATION
We currently own 23 U.S. patents which expire between 2007 and 2017. We also
have 8 patent applications pending with the U.S. patent and trademark office. As
a qualifying small business, we have retained commercial ownership rights to
proprietary technology developed under various U.S. government contracts and
grants, including small business innovation research contracts. Our patent and
trade secret rights are of material importance to us and future prospects. No
assurance can be given to as to the issuance of additional patents or, if so
issued, as to their scope. Patents granted may not provide meaningful protection
from competitors. Even if a competitor's products were to infringe patents owned
by us, it would be costly for us to pursue our rights in an enforcement action
and would divert funds and resources which otherwise could be used in our
operations. Furthermore, there can be no assurance that we would be successful
in enforcing intellectual property rights or that we may not infringe patent or
intellectual of third parties. However, to date, we have not been required to
defend our patents or proprietary information against claims by third parties.
Since we intend to enforce our patent, trademarks and copyrights and protect
our trade secrets, we may be involved from time to time in litigation to
determine the enforceability, scope and validity of these rights. This
litigation could result in substantial costs to us and divert efforts by our
management and technical personnel.
In addition to our patent rights, we also rely on treatment of our
technology as trade secrets and upon confidentiality agreements, which our
employees are required to sign, assigning to us all patent rights and technical
or other information developed by employees during their employment with us. Our
employees have also agreed not to disclose any trade secret or confidential
information without our prior written consent. Notwithstanding these
confidentiality agreements, there can be no assurance that other companies will
not acquire information that we consider proprietary.
RESEARCH AND DEVELOPMENT
Approximately $6,355,000 or 41% of our revenue during the year ended
September 30, 1999 was attributable to research and development activities
funded by commercial customers and U.S. government agency sponsors. Under the
agreements funded by the U.S. Government, the government retains a royalty-free
license to use the technology developed for government purposes and we retain
exclusive rights to the technology for commercial and industrial applications.
The rights to technology developed under contracts funded by commercial
customers are negotiated on a case by case basis.
We expended approximately $726,000, $1,276,000 (as restated) and $4,055,000
(as restated) on internally-funded research and development during our years
ended September 30, 1999, 1998 and 1997, respectively. During the year ended
September 30, 1999, our most concentrated effort was directed toward building
the power inverter for a fuel cell on-site power generation system. We continued
our development efforts in the electro-optics and sensor inspection systems. In
addition, we successfully tested a new version of our "Powersmart" alternator
electronics package for Delco Remy International. Beacon Power's 20C1000
cable/telecom flywheel system and the introduction of our ISAM product accounted
for the majority of the 1998 and 1997 internally-funded costs.
GOVERNMENT REGULATION
We have entered into contracts, subcontracts and grants with the U.S.
government and its agencies which require compliance with applicable U.S.
government regulations, including regulations with respect to bidding on
proposals and billing practices. In the event that the U.S. government or its
agencies conclude that we have not adhered to federal regulations, any contracts
to which we are a party could be canceled. We could be prohibited from bidding
on future contracts which could materially adversely affect our business. All
payments for work performed on contracts with agencies of the U.S. government
are subject to adjustment upon audit by the U.S. government defense contract
audit agency, the general
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accounting office and other agencies. We could also be required to disgorge any
payments received from U.S. government agencies if we are found to have violated
federal regulations.
The commercialization of our technologies for use in various industries may
also be affected by federal and state legislative and regulatory changes
affecting such industries.
MANUFACTURING AND SUPPLIERS
If we are successful in obtaining market penetration of our products, we
will be required to deliver large volumes of quality products or components to
our customers on a timely basis at reasonable costs. When necessary, we intend
to seek to supplement our manufacturing capabilities by establishing
relationships with manufacturing organizations to deliver large volumes of our
products until such time as we can develop our own manufacturing expertise and
capacity. No assurance can be given that we will be able to successfully
establish relationships with third party manufacturing organizations or, if such
relationships are established, that they will be successful.
The principal materials and supplies in our products are available from
several commercial sources, and we do not depend on any single source for a
significant portion of our materials or supplies.
BACKLOG
Our backlog consists primarily of research and development contracts and
orders for multi-chip modules, hybrid and motor products. At September 30, 1999,
the backlog was approximately $7,300,000 for work to be performed and products
to be shipped during the year ending September 30, 2000 and beyond. Many of our
contracts and sales orders may be canceled at any time with limited or no
penalty. In addition, contract awards may be subject to funding approval from
the U.S. government and commercial entities, which involves political, budgetary
and other considerations over which we have no control. Our backlog at September
30, 1998 was approximately $10,000,000.
SIGNIFICANT CUSTOMERS
Although we have been developing applications of our technology for both
commercial and government markets, a large percentage of our revenue is from the
U.S. department of defense, department of energy and NASA contracts,
subcontracts and grants. The majority of these contracts, subcontacts and grants
were awarded through the small business innovation research program. Although we
believe that the majority of our revenue in the future will result from
commercial applications of our technologies, a significant portion of our
business in the next few years will likely continue to involve research and
development for the U.S government and its agencies. Consequently, a portion of
future revenue may be subject to funding approval from Congress, which involves
political, budgetary, and other considerations over which we have no control. To
date, we have not been adversely affected by reductions in defense spending. We
believe that government funding for the areas of our research and development
activities will continue without reduction. However, we cannot assure you that
this funding will not be reduced in the future. Any reduction could materially
adversely affect our business. In addition, many of our U.S. government
contracts may be canceled at any time by the U.S. government with limited or no
penalty.
EMPLOYEES
At September 30, 1999, we employed a total of 177 people: 171 on a regular
full-time basis, 4 on a regular part-time basis and 2 student interns. In
addition, at September 30, 1999, Beacon Power employed a total of 27 people; 26
on a regular full-time basis and 1 on a regular part-time basis. Some of our
employees are affiliated with large universities located in the greater Boston
area. Approximately 59 persons are employed in engineering, 81 in manufacturing,
28 in administration and 9 in sales and marketing. None of these employees are
represented by a union. We believe that our relations with our employees are
satisfactory.
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Our success will depend, in large part, upon our ability to attract,
motivate and retain highly qualified scientists and engineers, as well as highly
skilled and experiences management and technical personnel. Competition for
these personnel is intense, and there can be no assurance that we will be
successful in attracting, motivating or retaining key personnel.
ITEM 2. PROPERTIES
We lease 45,820 square feet of office and laboratory space at 161 First
Street, Cambridge, Massachusetts under a primary lease expiring on October 31,
2003, an additional 8,719 square feet of office and laboratory space located at
6245 East Broadway Boulevard, Suite 350, Tucson, Arizona under a primary lease
expiring on March 31, 2001 and an additional 1,561 square feet of laboratory
space located at 984 Southford Road, Middlebury, Connecticut under a primary
lease expiring on February 28, 2000. We also leases approximately 14,757 square
feet of manufacturing space at 530 Turnpike Street, North Andover, Massachusetts
under a primary lease expiring on July 31, 2002, approximately 17,000 square
feet of manufacturing space at 121 Higgins Street, Worcester, Massachusetts
under a primary lease expiring on March 31, 2003 and approximately 15,300 square
feet of manufacturing space at 165 Cedar Hill Street, Marlborough, Massachusetts
under a primary lease expiring on October 31, 2005 .
Effective November 5, 1997, we entered into an agreement to sub-lease 8,930
square feet at 161 First Street to a third party, and effective July 15, 1998,
we entered into an agreement to sub-lease an additional 3,952 square feet at 161
First Street to the same third party.
Effective February 8, 1999, we entered into an agreement to sub-lease
approximately 2,889 square feet at 6245 East Broadway Boulevard, Suite 350,
Tucson, Arizona to a third party. Effective July 29, 1999, we entered into an
agreement to sub-lease the remaining 5,830 square feet at the Tucson, Arizona
location to another third party.
We believe our facilities are adequate for our current needs and that
adequate facilities for expansion, if required, are available.
ITEM 3. LEGAL PROCEEDINGS
On October 15, 1997, we received a letter from the Department of the Air
Force stating that it may terminate for default a contract between the Air Force
and us for development of a satellite component, unless perceived performance
problems were cured. In the event of an actual default, we could be liable for
extra costs incurred by the United States government in developing the
component. We have had several discussions with the Air Force in order to
resolve the issue. We informed the Air Force contracting officer of our belief
that a termination for default is not warranted.
On December 15, 1997, the Air Force issued a "Show Cause Notice" to us
requiring us to demonstrate to the Air Force why the contract should not be
terminated "for cause." On December 31, 1997, we responded to the Air Force's
"Show Cause Notice, explaining our view that we should not be terminated for
cause.
As a related matter to the Air Force contract issue, on December 15, 1997,
we received a subpoena from the United States Attorney for the District of
Arizona. The subpoena sought documents relating to USAF Program/Contract No.
F290601-96-C-145. On January 30, 1998 and February 4, 1998, we produced the
documents responsive to the subpoena. In addition, we have made several of our
current and former employees available to interview with officials from the Air
Force and the United States Attorney's office. We are currently awaiting the
United States Attorney's decision whether to proceed with any further
investigation.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the year covered by this report through the solicitation of proxies
or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq national market under the trading
symbol SATC. As of December 15, 1999 there were approximately 189 stockholders
of record.
For the periods reported below, the following table sets forth the range of
high and low bid quotations for the common stock as reported by Nasdaq. Such
quotations represent inter-dealer quotations without adjustment for retail
markups, markdowns, or commissions and may not represent actual transactions. As
of December 15, 1999 the closing price for our common stock, as reported by
Nasdaq, was $8.125.
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FISCAL YEAR FISCAL YEAR
1999 BID 1998 BID
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HIGH LOW HIGH LOW
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<S> <C> <C> <C> <C>
First Quarter............................ $ 7.500 $5.063 $14.375 $ 8.750
Second Quarter........................... 5.688 4.750 14.250 10.875
Third Quarter............................ 9.875 4.563 12.625 8.000
Fourth Quarter........................... 10.125 7.563 9.188 5.000
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DIVIDEND POLICY
We have not paid dividends to our stockholders since our inception and do
not anticipate paying cash dividends in the foreseeable future. We intend to
reinvest earnings, if any, in the development and expansion of our business.
Declaration of dividends on our common stock or preferred stock will depend
upon, among other things, future earnings, our operating and financial
condition, our capital requirements and general business conditions.
RECENT SALES OF UNREGISTERED SECURITIES
On November 11, 1998, we issued to certain individuals, who formerly held
warrants issued by us in connection with the our initial public offering in
November 1992, warrants to purchase up to 67,125 shares of our common stock at
an exercise price of $11.43 per share. These warrants expired on November 11,
1999 unexercised and were issued in reliance upon the exemptions from
registration under Section 4(2) of the Securities Act or Regulation D
promulgated thereunder, relative to sales by an issuer not involving any public
offering.
On January 4, 1999, we issued 100,000 shares of our common stock to two
individuals in connection with the purchase by K&D MagMotor Corp., a wholly
owned subsidiary of us, of certain assets and the assumption of certain
liabilities of Inductive Components, Inc. and Lighthouse Software, Inc. These
shares were issued in reliance upon the exemptions from registration under
Section 4(2) of the Securities Act or Regulation D promulgated thereunder,
relative to sales by an issuer not involving any public offering.
On March 9, 1999, we issued 42,860 shares of our common stock to an escrow
agent in connection with a consulting agreement entered into by us and Mr.
Albert R. Snider pursuant to which Mr. Snider will perform such consulting,
advisory and related services as we may reasonably request from time to time
between October 1, 1999 and October 1, 2002. These shares were issued in
reliance upon the exemptions from registration under Section 4(2) of the
Securities Act or Regulation D promulgated thereunder, relative to sales by an
issuer not involving any public offering.
On April 7, 1999, we issued non-qualified stock options to Continental
Capital & Equity Corporation to purchase in consideration of Continental
Capital's consulting services rendered to us 50,000 shares of the our common
stock at $5.75 per share and 50,000 shares of our common stock at an exercise
price of $6.75 per share. As of December 20, 1999, Continental Capital has
received 50,000 shares of our common
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stock at an exercise price of $5.75 per share and 10,000 shares of our common
stock at an exercise price of $6.75 per share upon exercise of these options.
The remaining options expire on April 7, 2000 and were issued in reliance upon
the exemptions from registration under Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, relative to sales by an issuer not
involving any public offering.
On August 25, 1999, we issued 8,000 shares of our series A redeemable
convertible preferred stock, $0.01 par value per share, to Brown Simpson
Strategic Growth Funds for an aggregate price of $8 million. The series A
redeemable convertible preferred stock is initially convertible into 1,025,641
shares of our common stock at an initial conversion price of $7.80 per share.
Under certain circumstances, we have the option to cause the series A preferred
stock to convert into shares of common stock or otherwise be redeemed. At the
end of seven years, we must redeem any remaining shares of the series A
redeemable convertible preferred stock for cash or, at our option, common stock
with a then fair market value equal to the original purchase price of the series
A redeemable convertible preferred stock. The obligation at seven years to
redeem any remaining shares of the series A redeemable convertible preferred
stock accelerates to August 25, 2003 in the event the average bid price of our
common stock for the 60 "trading day" period immediately preceding the fourth
anniversary is $5.00 per share or less. In connection with the transaction, we
also issued to Brown Simpson warrants to purchase up to 675,000 additional
shares of common stock at an exercise price of $8.54 per share. These warrants
expire on August 25, 2003. The series A preferred stock and these warrants were
issued in reliance upon the exemptions from registration under Section 4(2) of
the Securities Act or Regulation D promulgated thereunder, relative to sales by
an issuer not involving any public offering.
On August 25, 1999, in connection with the Brown Simpson financing, we
issued to H.C. Wainwright & Co., Inc., Matthew Balk and Scott Weisman warrants
to purchase up to 18,000, 61,200 and 40,800 shares, respectively, of our common
stock at an exercise price of $7.80 per share. These warrants have a call option
value of $12.81 per share. These warrants expire on August 25, 2003 and were
issued in reliance upon the exemptions from registration under Section 4(2) of
the Securities Act or Regulation D promulgated thereunder, relative to sales by
an issuer not involving any public offering.
On October 21, 1999, in connection with our acquisition of Ling Electronics,
Inc. and Ling Electronics, Ltd., we issued 770,000 shares of our common stock to
Mechanical Technology Incorporated, the parent entity of the two acquired
entities. The common stock was issued in reliance upon the exemptions from
registration under Section 4(2) of the Securities Act or Regulation D
promulgated thereunder, relative to sales by an issuer not involving a public
offering.
On October 21, 1999, in connection with an investment, we issued 370,800
shares of our common stock to Mechanical Technology Incorporated. In addition,
we issued to Mechanical Technology Incorporated a warrant to purchase 36,000
shares of our common stock at an exercise price of $8.80 per share. This warrant
expires on October 21, 2003. In connection with this transaction, we also
received a warrant to purchase 36,000 shares of the common stock of Mechanical
Technology Incorporated at an exercise price of $37.66 per share and $2,570,000
in cash. This warrant expires on October 21, 2003. Both the common stock and the
warrant were issued in reliance upon the exemptions from registration under
Section 4(2) of the Securities Act or Regulation D promulgated thereunder,
relative to sales by an issuer not involving any public offering.
On November 16, 1999, we issued 578,761 shares of our common stock to
Northrop Grumman Corporation in exchange for certain intellectual property,
equipment and other assets which were used by Northop Grumman Corporation in
connection with its power electronics products business. In addition, we issued
to Northrop Grumman Corporation a warrant to purchase up to 100,000 shares of
our common stock at an exercise price of $9.725 per share. This warrant expires
on December 31, 2006. Both the common stock and the warrant were issued in
reliance upon the exemptions from registration under Section 4(2) of the
Securities Act or Regulation D promulgated thereunder, relative to sales by an
issuer not involving any public offering.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the year ended
September 30, 1999 has been derived from our restated financial statements which
have been audited by Arthur Andersen LLP, independent public accountants. The
selected consolidated financial data set forth below for the year ended
September 30, 1998, 1997 and 1996 has been derived from our restated financial
statements which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The selected consolidated financial data set forth below for the
year ended September 30, 1995 has been derived from our financial statements
which have been audited by PricewaterhouseCoopers LLP, independent accountants.
This information should be read in conjunction with the consolidated financial
statements and related notes and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Annual Report on Form 10-K.
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<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(AS RESTATED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Product revenue.............................. $ 9,123 $ 7,520 $ 3,728 $ -- $ --
Funded research and development revenue...... 6,355 8,011 8,738 9,385 11,475
-------- ------- ------- ------- -------
Total revenue................................ 15,478 15,531 12,466 9,385 11,475
Cost of product revenue...................... 9,511 5,474 2,683 -- --
-------- ------- ------- ------- -------
Gross margin................................. 5,967 10,057 9,783 9,385 11,475
-------- ------- ------- ------- -------
Research and development expenses............ 6,554 6,794 11,443 8,213 11,431
Selling, general and administrative
expenses................................... 8,819 4,523 6,198 5,569 2,512
Amortization of intangibles.................. 371 291 120 -- --
-------- ------- ------- ------- -------
Total operating expenses..................... 15,744 11,608 17,761 13,782 13,943
-------- ------- ------- ------- -------
Operating loss............................... (9,777) (1,551) (7,978) (4,397) (2,468)
Loss from investment in Beacon Power
Corporation................................ (1,030) (1,889) -- -- --
Other income (expense), net.................. (224) 170 269 464 451
-------- ------- ------- ------- -------
Net loss before income taxes................. (11,031) (3,270) (7,709) (3,933) (2,017)
Provision/(benefit) for income taxes......... -- 4 -- (144) (807)
-------- ------- ------- ------- -------
Net loss..................................... (11,031) (3,274) (7,709) (3,789) (1,210)
Accretion of redeemable convertible preferred
stock discount............................. (51) -- -- -- --
-------- ------- ------- ------- -------
Net loss attributable to common
stockholders............................... $(11,082) $(3,274) $(7,709) $(3,789) $(1,210)
======== ======= ======= ======= =======
Net loss per share, basic and diluted........ $ (1.21) $ (0.37) $ (0.97) $ (0.52) $ (0.17)
======== ======= ======= ======= =======
Weighted average number of common shares,
basic and diluted.......................... 9,176 8,957 7,959 7,286 7,080
======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
(AS RESTATED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents........................... $2,533 $1,202 $4,257 $3,771 $2,188
Total assets........................................ 17,400 16,708 18,219 16,354 19,793
Working capital..................................... 7,714 8,502 10,595 11,011 15,616
Long-term debt, net of current portion.............. 34 221 323 -- --
Redeemable convertible preferred stock.............. 4,894 -- -- -- --
Stockholders' equity................................ 9,316 13,956 15,589 15,175 18,753
</TABLE>
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (AS RESTATED)
The following discussion reflects restatement of our financial statements
for fiscal years 1997, 1998 and 1999. The restatement was prompted by the
recently completed initial audit of the financial statements of our affiliate,
Beacon Power Corporation, and reflects treating certain costs as expenses rather
than being included in the value of the net assets of Beacon Power at
December 24, 1997. We previously had accounted for these costs either as fixed
assets or as part of the net assets of Beacon Power. As a result, certain costs
previously capitalized in 1996, 1997 and 1998 should have been expensed as
incurred, therefore reducing our investment in Beacon Power by $3.1 million as
of December 24, 1997. The adjustments to our financial statements at
December 24, 1997, the date which we began accounting for our investment in
Beacon Power under the equity method of accounting, consisted of a reduction of
$37,000 from current assets, a reduction of $3.0 million from property and
equipment and intangible assets and an increase of $73,000 of accrued expenses.
The cumulative effect of this change on our stockholders' equity as of September
30, 1999, was a reduction of $130,000. The effect of this change on the reported
net loss attributable to common stockholders for each period is as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
AS RESTATED AS REPORTED INCREASE/(DECREASE)
----------- ----------- -------------------
<S> <C> <C> <C>
Net loss attributable to common stockholders for year
ended September 30, 1996................................ $ (3,789) $ (2,865) $ (924)
Net loss attributable to common stockholders for year
ended September 30, 1997................................ (7,709) (6,143) (1,566)
Net loss attributable to common stockholders for year
ended September 30, 1998................................ (3,274) (4,306) 1,032
Net loss attributable to common stockholders for year
ended September 30, 1999................................ (11,082) (12,410) 1,328
-------
Cumulative effect of change............................... $ (130)
=======
</TABLE>
We have adjusted the accumulated deficit as of September 30, 1996 for the
effect of the 1996 restatement. The cumulative effect of this change on our
stockholders' equity as of September 30, 1996 was a reduction of $924,000. See
Notes A and F to our consolidated financial statements for additional discussion
of this restatement.
In addition, for all periods presented, expenses associated with funded
research and development activities have been reclassified as research and
development expenses from cost of revenue.
OVERVIEW
We are developing enabling technologies for the emerging distributed power
generation and power quality markets. We manufacture power and energy management
products that convert, condition, store and manage electricity for businesses
and consumers that require high-quality, uninterruptible power. We are utilizing
our engineering and manufacturing expertise to develop products to serve the
distributed power generation and power quality markets, including products for
fuel cell and microturbine power generation systems, hybrid-electric vehicles
and flywheel energy storage systems. We believe the family of products we are
developing will be integral components of distributed power generation and power
quality systems.
In the past three years, we have expanded our business and capabilities
through the following acquisitions:
- K&D Magmotor Corp.--a manufacturer of custom and standard electric motors,
acquired in January 1997.
10
<PAGE>
- Film Microelectronics, Inc.--a manufacturer of thin film substrates and
hybrid microelectronics, acquired in April 1997.
- Inductive Components, Inc.--a value-added supplier of customized electric
motors, acquired in January 1999.
- Lighthouse Software, Inc.--a supplier of control software for machine
tools, acquired in January 1999.
- HyComp, Inc.--a manufacturer of hybrid microelectronics, acquired in
April 1999.
- Ling Electronics, Inc.--a manufacturer of shaker vibration test systems,
power converters, amplifiers and controllers, acquired in October 1999.
All of these acquisitions were accounted for using the purchase method of
accounting. In addition, in November 1999, we acquired intellectual property,
tooling and other assets from Northrop Grumman Corporation enabling us to
manufacture and sell electric drivetrains. See Note P to our Consolidated
Financial Statements in this Annual Report on Form 10-K for more information
regarding our acquisitions.
The results of our operations include $3.1 million loss of Beacon Power from
May 8, 1997 to December 24, 1997 under the consolidation method of accounting.
As a result of a recapitalization of Beacon Power on December 24, 1997, we began
accounting for our investment in Beacon Power using the equity method and have
included $1.9 million of losses of Beacon Power for the period from
December 25, 1997 through June 1998, which equaled our initial investment in
Beacon Power. In connection with the additional investment by outside third
parties on October 23, 1998, we committed $30,000 to Beacon Power and
accordingly, recorded a $30,000 loss from our investment in Beacon Power
representing a portion of the suspended losses as of October 23, 1998. For the
period from October 24, 1998 through June 21, 1999, we recorded no additional
losses of Beacon Power as our investment in Beacon Power had been reduced to
zero as of October 23, 1998. In June 1999, Beacon received $3.0 million of
additional financing commitments, including $1.0 million from us. As a result of
this additional commitment, we have included a $1.0 million loss from our
investment in Beacon Power representing a portion of the suspended losses as of
June 22, 1999. For the period from June 23, 1999 through September 30, 1999, we
recorded no additional losses of Beacon Power as our investment in Beacon Power
had been reduced to zero as of June 22, 1999.
Revenue from manufactured products is recognized upon shipment. We provide
for a warranty reserve at the time the product revenue is recognized.
We perform funded research and development in collaboration with third
parties under both cost reimbursement and fixed-price contracts. Cost
reimbursement contracts provide for the reimbursement of allowable costs and, in
some situations, the payment of a fee. These contracts may contain incentive
clauses providing for increases or decreases in the fee depending on how costs
compare with budget. On fixed-price contracts, revenue is generally recognized
on the percentage of completion method based upon the proportion of costs
incurred to the total estimated costs for the contract. Revenue from
reimbursement contracts is recognized as services are performed. In each form of
contract, we receive periodic progress payments or payment upon reaching interim
milestones. All payments to us for work performed on contracts with agencies of
the U.S. government are subject to audit and adjustment by the Defense Contract
Audit Agency. Adjustments are recognized in the period made. When the current
estimates of total contract revenue and contract costs indicate a loss, a
provision for the entire loss on the contract is recorded.
Cost of revenue includes cost of product revenue. Costs incurred in
connection with funded research and development arrangements are included in
research and development expenses.
We have incurred significant costs to develop our technology and products.
These costs have exceeded total revenues. As a result, we have incurred net
losses in each of the past five fiscal years. As of
11
<PAGE>
September 30, 1999, we had an accumulated deficit of $25.4 million (as
restated). We intend to significantly increase our capital expenditures and
operating expenses to rapidly expand our manufacturing capabilities and for
general corporate purposes, including product development activities, sales and
marketing and administrative activities. Because we expect to continue to invest
in our business ahead of anticipated future revenues, we expect to incur
operating losses for at least the next two years.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K/A contains or incorporates forward-looking
statements within the meaning of section 27A of the Securities Act of 1933 and
section 21E of the Securities Act of 1934. You can identify these
forward-looking statement by our use of the words "believes," "anticipates,"
"plans," "expects," "may," "will," "intends," "estimates," and similar
expressions, whether in the negative or in the affirmative. Although we believe
that these forward-looking statements reasonably reflect our plans, intentions
and expectations, our actual results could differ materially from the plans,
intentions and expectations disclosed in the forward-looking statements we make.
We have included important factors in the cautionary statements below
(particularly under the heading "Factors Affecting Future Results") that we
believe could cause our actual results to differ materially from the
forward-looking statements that we make. These factors also include, without
limitation, those set forth in Exhibit 99 to this Form 10-K, which are expressly
incorporated by reference herein. We do not intend to update information
contained in any forward-looking statement we make.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1999 (AS RESTATED) COMPARED TO FISCAL YEAR
ENDED SEPTEMBER 30, 1998 (AS RESTATED)
PRODUCT REVENUE. Product revenue increased $1.6 million or 21% from
$7.5 million to $9.1 million. Product revenue increased by $396,000 for power
electronics products and $1.2 million for motion control products.
FUNDED RESEARCH AND DEVELOPMENT REVENUE. Funded research and development
revenue decreased by $1.7 million or 21% from $8.0 million to $6.4 million.
During the year ended September 30, 1999, we devoted more resources to
internally funded research and development programs including the development of
power conversion products for the distributed power generation market.
GROSS MARGIN. Gross margin decreased by $4.1 million from $10.1 million to
$6.0 million. Gross margin from products decreased by $2.4 million and funded
research and development revenue decreased by $1.7 million. Gross margin from
product revenue as a percentage of product revenue decreased to (4)% of product
revenue in 1999 from 27% in the prior year. Gross margin from product sales as a
percentage of product revenue decreased due to increased costs incurred in
developing new products and for additional staffing and facility costs. In
addition, we also recorded a $900,000 provision for obsolete and slow moving
inventory.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased $240,000 or 4% from $6.8 million to $6.6 million. The decrease was the
result of converting to the equity method of accounting for our investment in
Beacon Power in 1998 and thus no longer including Beacon Power's research and
development expenses in our results. In 1998, we included $1.2 million of Beacon
Power's research and development expenses in our results through December 24,
1997, at which time we converted to the equity method of accounting for our
investment in Beacon Power. This decrease was partially offset by an increase in
our effort to develop distributed power conversion systems and other internal
research and development programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.3 million or 95% from $4.5 million to
$8.8 million. This increase was primarily due to $2.2 million of non-cash,
stock-based compensation expense related to the issuance of stock options and
warrants to
12
<PAGE>
consultants in 1999, $1.0 million of additional reserves for unbilled contract
costs and accounts receivable and $800,000 in costs for facilities and staffing
in an effort to meet expected growth and demand for our products.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $80,000
or 27% from $291,000 to $371,000. This was the result of the acquisition of
Inductive and Lighthouse in January 1999.
LOSS FROM INVESTMENT IN BEACON POWER CORPORATION. Loss from investment in
Beacon Power decreased $859,000 or 45% from $1.9 million to $1.0 million. As of
October 1, 1998, our remaining initial investment of $1.9 million in Beacon
Power has been reduced to zero. During 1999, we committed an additional
$1.0 million in financing to Beacon Power and accordingly, recorded a
$1.0 million loss from our investment in Beacon Power representing a portion of
our suspended losses from Beacon Power. As of June 22, 1999, our investment in
Beacon Power has been reduced to zero, and no additional losses were recorded
during the period from June 23, 1999 to September 30, 1999.
OTHER INCOME (EXPENSE), NET. Other expense, net increased to $224,000 from
$170,000 of other income, net as a result of increased interest expense and
decreased interest income.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 (AS RESTATED) COMPARED TO FISCAL YEAR
ENDED SEPTEMBER 30, 1997 (AS RESTATED)
PRODUCT REVENUE. Product revenue increased by $3.8 million or 102% from
$3.7 million to $7.5 million. The increase in product revenue was primarily due
to the impact of recording a full year of revenue in 1998 for Magmotor and FMI
versus recording less than a full year of revenue during 1997.
FUNDED RESEARCH AND DEVELOPMENT REVENUE. Funded research and development
revenue decreased by $727,000 or 8% from $8.7 million to $8.0 million. During
the year ended September 30, 1998, we devoted more resources to internally
funded research and development programs including the development of power
conversion products for the distributed power generation market.
GROSS MARGIN. Gross margin increased by $274,000 from $9.8 million to
$10.1 million. Gross margin from products increased by $1.0 million while funded
research and development revenue decreased by $727,000. Gross margin from
product revenue as a percentage of product revenue decreased to 27% of product
revenue from 28% in the prior year. Gross margin from product revenue as a
percentage of product revenue decreased due to increased costs incurred in
developing new products and for additional staffing and facility costs.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased $4.6 million or 41% from $11.4 million to $6.8 million. During 1997,
we expensed $4.3 million of product development costs related to Beacon Power's
flywheel system and the Integrated Suspension and Motor System (ISAM) products.
In December 1997, we converted to the equity method of accounting for our
investment in Beacon Power and only included $1.2 million of Beacon Power's
research and development expenses in our results.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.7 million or 27% from $6.2 million to
$4.5 million. During 1997, we established a reserve of $500,000 for expenses,
primarily lease cancellation costs relating to the consolidation of our Tucson
Space division into our Technology Center. In 1997, we also included
$1.1 million of selling, general and administrative expense of Beacon Power in
our results. In December 1997, we converted to the equity method of accounting
for our investment in Beacon Power and only included $39,000 of Beacon Power's
selling, general and administrative expenses in our results.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $171,000
or 143% from $120,000 to $291,000. The increase was the result of a full year of
goodwill amortization in connection with the acquisitions of Magmotor and FMI.
13
<PAGE>
LOSS FROM INVESTMENT IN BEACON POWER CORPORATION. For 1997, our investment
in Beacon Power was accounted for under the consolidation method of accounting.
On December 24, 1997, we converted to the equity method of accounting for our
investment as a result of the recapitalization of Beacon Power, and Beacon
Power's net loss for the period October 1, 1997 through December 24, 1997 of
$1.1 million was included in our operating results. We have included
$1.9 million loss from our investment in Beacon Power for the period from
December 25, 1997 through June 1998, which equaled our remaining initial
investment in Beacon Power. As of June 30, 1998, our investment in Beacon Power
had been reduced to zero, and no additional losses were recorded during the
period from July 1, 1998 to September 30, 1998.
OTHER INCOME (EXPENSE) NET. Other income, net decreased $99,000 or 37% from
$269,000 to $170,000. The decrease was primarily the result of a decrease of
interest income on marketable securities.
QUARTERLY RESULTS OF OPERATIONS (AS RESTATED)
The following table presents restated unaudited quarterly statement of
operations data for the eight quarters ended September 30, 1999. This data has
been prepared on a basis consistent with our restated audited financial
statements included elsewhere in this Annual Report on Form 10-K. This data
includes all adjustments, consisting solely of normal recurring adjustments,
that we believe necessary for a fair
14
<PAGE>
presentation of this information. The operating results for any quarter are not
necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31,
1999 1999 1999 1998 1998 1998 1998 1997
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(AS RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Product revenue.................... $ 2,733 $ 2,623 $1,772 $1,995 $2,077 $1,787 $ 1,940 $ 1,716
Funded research and development
revenue.......................... 1,266 1,469 1,890 1,730 1,743 1,857 2,386 2,025
------- ------- ------ ------ ------ ------ ------- -------
Total revenue...................... 3,999 4,092 3,662 3,725 3,820 3,644 4,326 3,741
Cost of product revenue............ 2,784 3,288 1,915 1,524 1,887 917 1,348 1,322
------- ------- ------ ------ ------ ------ ------- -------
Gross margin....................... 1,215 804 1,747 2,201 1,933 2,727 2,978 2,419
------- ------- ------ ------ ------ ------ ------- -------
Research and development
expenses......................... 1,526 2,136 1,465 1,428 1,001 1,515 1,726 2,552
Selling, general and administrative
expenses......................... 1,624 5,176 1,029 990 1,133 1,112 1,163 1,115
Amortization of intangibles........ 98 101 94 78 78 75 83 55
------- ------- ------ ------ ------ ------ ------- -------
Total operating expenses........... 3,248 7,413 2,588 2,496 2,212 2,702 2,972 3,722
------- ------- ------ ------ ------ ------ ------- -------
Operating (loss) income............ (2,033) (6,609) (841) (295) (279) 25 6 (1,303)
Loss from investment in Beacon
Power Corporation................ -- (1,000) -- (30) -- (808) (1,080) --
Other income (expense), net........ (31) (186) (26) 20 27 36 53 53
------- ------- ------ ------ ------ ------ ------- -------
Net loss before income taxes....... (2,064) (7,795) (867) (305) (252) (747) (1,021) (1,250)
Provision for income taxes......... -- -- -- -- 4 -- -- --
------- ------- ------ ------ ------ ------ ------- -------
Net loss........................... (2,064) (7,795) (867) (305) (256) (747) (1,021) (1,250)
Accretion of redeemable convertible
preferred stock discount......... (51) -- -- -- -- -- -- --
------- ------- ------ ------ ------ ------ ------- -------
Net loss attributable to common
stockholders..................... $(2,115) $(7,795) $ (867) $ (305) $ (256) $ (747) $(1,021) $(1,250)
======= ======= ====== ====== ====== ====== ======= =======
Net loss per share, basic and
diluted.......................... $ (0.22) $ (0.85) $(0.10) $(0.03) $(0.03) $(0.08) $ (0.11) $ (0.14)
======= ======= ====== ====== ====== ====== ======= =======
Weighted average number of common
shares, basic and diluted........ 9,488 9,177 9,059 8,980 9,008 9,019 8,955 8,845
======= ======= ====== ====== ====== ====== ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations and met our capital
expenditure requirements primarily through the sale of private equity
securities, public security offerings, borrowings on our line of credit and
capital equipment leases.
As of September 30, 1999, our cash and cash equivalents were $2.5 million,
an increase of $1.3 million from September 30, 1998. Cash used in operating
activities for the year ended September 30, 1999 was $5.6 million as compared to
$2.9 million in 1998. Cash used in operating activities during the year ended
September 30, 1999 was primarily attributable to our net loss and an increase in
unbilled contract costs and fees and inventory partially offset by non-cash
items such as depreciation and amortization, loss from our investment in Beacon
Power and compensation expense related to issuance of stock options and warrants
to non-employees.
15
<PAGE>
Cash used in investing activities during the year ended September 30, 1999
was $1.4 million as compared to $1.7 million in 1998. Net cash used in investing
activities during the year ended September 30, 1999 included the acquisitions of
certain assets of Inductive, Lighthouse and HyComp of $996,000, capital and
intellectual expenditures of $323,000 and an investment in Beacon Power of
$697,000 partially offset from the proceeds from the sale of marketable
securities of $580,000. We estimate that we will spend an additional
$2.0 million on capital expenditures during fiscal year 2000, primarily to
expand our capacity to manufacture our power conversion products. We expect
these additions will be financed by cash on hand and from lease financing.
Cash provided by financing activities during the year ended September 30,
1999 was $8.4 million. During August 1999, we completed an $8.0 million private
placement of 8,000 shares of our series A redeemable convertible preferred stock
with Brown Simpson Strategic Growth Funds. The series A redeemable convertible
preferred stock is initially convertible into 1,025,641 shares of our common
stock, at an initial conversion price of $7.80 per share. The series A
redeemable convertible preferred stock is also subject to certain dilution
protection for a period of three years. Under certain circumstances, we have the
option to cause the series A preferred stock to convert into shares of common
stock or otherwise be redeemed. At the end of seven years, we must redeem any
remaining shares of the series A redeemable convertible preferred stock for cash
or, at our option, common stock with a then fair market value equal to the
original purchase price of the series A redeemable convertible preferred stock.
The obligation at seven years to redeem any remaining shares of the series A
redeemable convertible preferred stock accelerates to the fourth anniversary of
the closing in the event the average bid price of our common stock for the 60
"trading day" period immediately preceding the fourth anniversary is $5.00 per
share or less. In the event of certain change in control events regarding us or
our common stock is delisted, Brown Simpson has the right to cause the series A
preferred stock to be redeemed. In connection with the transaction, Brown
Simpson also received warrants to purchase up to 675,000 additional shares of
common stock at $8.54 per share. The Brown Simpson warrants expire on
August 25, 2003. H.C. Wainwright & Co., Inc. served as placement agent for the
transaction and received a commission of $560,000 and warrants to purchase
120,000 shares of our common stock at $7.80 per share. These warrants expire on
August 25, 2003. H.C. Wainwright will also receive a future fee in the amount of
4% of any monies received by us upon the exercise of the Brown Simpson warrants.
During 1999, we granted options to purchase 755,000 shares of our common
stock to consultants at prices ranging from $5.75 to $10.00 per share. As of
December 20, 1999, the consultants exercised options to purchase 450,000, 50,000
and 10,000 shares at exercise prices of $7.00, $5.75 and $6.75 per share,
respectively. As of September 30, 1999, we received approximately $1,333,000 of
cash and the remaining amount due from the shareholder is classified within
stockholders' equity as amounts receivable from exercise of stock options.
We have a $3,000,000 demand discretionary line of credit with a bank. The
line of credit bears interest at the bank's prime rate plus 1 1/2% (9 3/4% as of
September 30, 1999). Available borrowings are based on a formula of eligible
accounts receivable and inventory. During 1999, we borrowed approximately
$2,657,000 against the line of credit. At September 30, 1999, there were no
amounts outstanding under the line of credit.
We anticipate that the existing $2.5 million in cash and cash equivalents
will be sufficient to fund operations for at least fiscal year 2000. However,
there can be no assurance that we will not require additional financings within
this time frame or that any additional financing, if needed, will be available
to us on terms acceptable to us, if at all.
FACTORS AFFECTING FUTURE RESULTS
Our future results remain difficult to predict and may be affected by a
number of factors which could cause actual results to differ materially from
forward-looking statements contained in this Annual Report
16
<PAGE>
on Form 10-K and presented elsewhere by management from time to time. These
factors include business conditions within the aerospace, transportation,
industrial, utility, telecommunications, silicon wafer manufacturing, factory
automation, aircraft and automotive industries and the world economies as a
whole, and competitive pressures that may impact research and development
spending. Our revenue growth is dependent on technology developments and
contract research and development for both the government and commercial sectors
and no assurance can be given that such investments will continue or that we can
successfully obtain such funds. In addition, our future growth opportunities are
dependent on the introduction of new products that must penetrate aerospace,
transportation, industrial, utility, telecommunications, silicon wafer
manufacturing, factory automation, aircraft and automotive market segments. No
assurance can be given that new products can be developed, or if developed, will
be successful; that competitors will not force prices to an unacceptably low
level or take market share from the us; or that we can achieve or maintain
profits in these markets. Because of these and other factors, past financial
performances should not be considered an indicator of future performance.
Investors should not use historical trends to anticipate future results and
should be aware that our stock price frequently experiences significant
volatility.
On October 23, 1998, we granted the purchasers of Beacon Power's Series D
redeemable preferred stock the right to cause us, under circumstances described
below, to purchase all of Beacon Power's shares of Series D redeemable preferred
stock issued to those purchasers and, upon exercise of this "put right," we must
pay $4,750,000 in our common stock, valued at the average fair value for the
fifteen trading days before and after notice of exercise of the put right. The
put right is exercisable within sixty days of the second, third, forth and fifth
anniversary of the closing date of the transaction, upon certain events of
bankruptcy of Beacon Power and upon the occurrence of certain going private
transactions involving us. If the put right is exercised, we would record the
value of the shares repurchased as an additional investment in Beacon Power. If
we determine that redemption of the put right is probable or the put right is
exercised and the value we pay for the shares of Series D redeemable preferred
stock exceeds the fair market value of Beacon Power's stock, such amount would
be recorded as a loss in the period the judgement is made or the put right is
exercised. The put right will terminate, if not previously exercised, on the
earlier of (i) October 23, 2003, (ii) upon the listing of Beacon Power's common
stock on the New York Stock Exchange or the Nasdaq National Market, or
(iii) with respect to put rights resulting from an event described above, 100
days after the purchasers receive written notice from us requesting that the
purchasers either exercise or waive their put rights resulting from that event.
EFFECTS OF INFLATION
We believe that inflation and changing prices over the past three years have
not had a significant impact on our net revenue or on our income from continuing
operations.
EFFECTS OF YEAR 2000
We have assessed our software systems and internal operations. We believe
that we have resolved all potential Year 2000 issues and problems and, to the
best of our knowledge, our systems are Year 2000 compliant. However, if our
systems do not operate properly with respect to date calculations involving the
Year 2000 and subsequent dates, we could incur unanticipated expenses to remedy
any problems, which could seriously harm our business. We may also experience
reduced sales of our products as current or potential customers reduce their
budgets due to increased expenditures on their own Year 2000 compliance efforts.
Additionally, we rely on information technology supplied by third parties
and our other business partners, including third-party distributors and
consultants, who are also heavily dependent on information technology systems
and on their own and third-party vendor systems. Year 2000 problems experienced
by us or any of these third parties could materially adversely affect our
business. Prior versions of our products may contain technology from third
parties that is not Year 2000 compliant.
17
<PAGE>
Given the pervasive nature of the Year 2000 problem, we cannot guarantee
that disruptions in other industries and market segments will not adversely
affect our business. Moreover, our costs related to Year 2000 compliance, which
thus far have not been material, could ultimately be significant. In the event
that we experience unforeseen disruptions as a result of the Year 2000 problem,
our business could be seriously affected.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 (SFAS No. 137), "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," which defers the effective date of Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities" to all fiscal quarters of all
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure these instruments at fair value. We will adopt
SFAS No. 133 beginning in the first quarter of the fiscal year ending
September 30, 2001. Adoption of SFAS No. 133 is not expected to have a material
impact to our consolidated financial position, results of operations or cash
flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
We maintain an investment portfolio consisting of debt securities of various
issuers, types and maturities. These securities are classified as available for
sale, and consequently are recorded on the balance sheet at market value, with
the unrealized gain or loss recorded through the equity section. These
instruments are not leveraged, and are not held for purposes of trading.
The following table summarizes derivative financial instruments included in
marketable securities held by us at September 30, 1998, which are sensitive to
changes in interest rates:
<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..... 5.7% 5.7% 5.7% 5.7% 5.7% 5.7%
CMO......................... $ 70,614 $ 70,614 $ 73,492
Average Interest Rate..... 5.4% 5.4% 5.4% 5.4% 5.4% 5.4%
Structured Notes............ $250,000 $250,000 $258,439
Average Interest Rate..... 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
</TABLE>
18
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I: RESTATED FINANCIAL STATEMENTS OF SATCON TECHNOLOGY
CORPORATION AND ITS SUBSIDIARIES
Reports of Independent Accountants.......................... 20
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1999 and
1998.................................................... 22
Consolidated Statements of Operations for the Years Ended
September 30, 1999, 1998,
and 1997................................................ 23
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended
September 30, 1999, 1998, and 1997...................... 24
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 1998,
and 1997................................................ 25
Notes to Consolidated Financial Statements................ 26
Schedule II; Valuation and Qualifying Accounts for the Years
Ended
September 30, 1999, 1998, and 1997........................ 54
PART II: FINANCIAL STATEMENTS OF BEACON POWER CORPORATION
Unaudited Financial Statements:
Balance Sheet as of December 31, 1999..................... 55
Statements of Operations for the Year Ended December 31,
1999 and for the Period May 8, 1997 (Date of Inception)
to December 31, 1999.................................... 56
Statement of Stockholders' Deficiency for the Year Ended
December 31, 1999....................................... 57
Statements of Cash Flows for the Year Ended December 31,
1999 and for the Period May 8, 1997 (Date of Inception)
to December 31, 1999.................................... 58
Notes to Financial Statements............................. 59
Independent Auditor's Report................................ 70
Financial Statements:
Balance Sheets as of December 31, 1998.................... 71
Statements of Operations for the Years Ended December 31,
1998 and for the Period from May 8, 1997 (Date of
Inception) to December 31, 1998......................... 72
Statements of Stockholders' Deficiency for the Years Ended
December 31, 1998....................................... 73
Statements of Cash Flows for the Years Ended December 31,
1998 and for the Period from May 8, 1997 (Date of
Inception) to December 31, 1998......................... 74
Notes to Financial Statements............................. 75
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
SatCon Technology Corporation:
We have audited the accompanying consolidated balance sheet of SatCon
Technology Corporation and its subsidiaries (a Delaware corporation) as of
September 30, 1999 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the year then ended as
restated, see Note A. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SatCon Technology
Corporation and its subsidiaries as of September 30, 1999, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 27, 1999
(except with respect to the
matter discussed in Note A for which
the date is August 7, 2000)
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of SatCon Technology Corporation:
In our opinion, the consolidated balance sheet as of September 30, 1998 and
the related consolidated statements of operations, of changes in stockholders'
equity and of cash flows for each of the two years in the period ended September
30, 1998 present fairly, in all material respects, the financial position,
results of operations and cash flows of SatCon Technology Corporation and its
subsidiaries at September 30, 1998 and for each of the two years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule for
the years ended September 30, 1998 and 1997 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of SatCon Technology Corporation for any
period subsequent to September 30, 1998.
As discussed in Note A, the accompanying consolidated financial statements
for the years ended September 30, 1997 and 1998 have been revised to expense
certain assets which had previously been capitalized.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
December 17, 1998,
except as to Note A for
which the date is August 7, 2000
21
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(AS RESTATED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,533,072 $ 1,201,610
Marketable securities..................................... -- 657,431
Accounts receivable, net of allowance of $386,686 and
$51,836 at September 30, 1999 and 1998, respectively.... 2,799,143 3,347,405
Unbilled contract costs and fees, net of allowance of
$746,121 and $57,611 at September 30, 1999 and 1998,
respectively............................................ 1,462,201 1,196,318
Inventory................................................. 3,697,972 3,678,067
Prepaid expenses and other current assets................. 346,653 338,017
Amounts due from related party............................ 2,417 596,453
----------- -----------
Total current assets.................................. 10,841,458 11,015,301
Property and equipment, net................................. 3,260,632 2,677,786
Intangibles, net............................................ 3,194,609 2,967,988
Other long-term assets...................................... 103,675 47,332
----------- -----------
Total assets........................................ $17,400,374 $16,708,407
=========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,563,605 $ 1,447,897
Accrued payroll and payroll related expenses.............. 479,888 352,701
Deferred revenue.......................................... 113,179 197,930
Accrued losses from investment in Beacon Power
Corporation............................................. 333,333 --
Other accrued expenses.................................... 620,874 368,252
Current portion of long-term debt......................... 16,226 146,594
----------- -----------
Total current liabilities............................. 3,127,105 2,513,374
Long-term liabilities:
Long-term debt, net of current portion.................... 33,871 221,462
Other long-term liabilities............................... 29,735 17,747
----------- -----------
Total long-term liabilities........................... 63,606 239,209
Commitments and contingencies (Note I)
Redeemable convertible preferred stock...................... 4,894,112 --
Stockholders' equity:
Preferred stock; $.01 par value, 1,000,000 shares
authorized; 8,000 shares series A redeemable convertible
preferred stock issued and outstanding at September 30,
1999 and none issued and outstanding at September 30,
1998.................................................... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 9,617,009 and 9,018,549 shares issued at
September 30, 1999 and 1998, respectively............... 96,170 90,185
Additional paid-in capital................................ 37,074,161 28,377,718
Common stock held in escrow, at market value; 42,860 and 0
shares at September 30, 1999 and 1998, respectively..... (428,600) --
Amounts receivable from exercise of stock options......... (1,816,667) --
Accumulated deficit....................................... (25,359,809) (14,328,623)
Net unrealized losses on marketable securities, net of tax
effect.................................................. -- (10,380)
Treasury stock, at cost; 44,500 and 28,300 shares at
September 30, 1999 and 1998, respectively............... (249,704) (173,076)
----------- -----------
Total stockholders' equity............................ 9,315,551 13,955,824
----------- -----------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity...................... $17,400,374 $16,708,407
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AS RESTATED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Product revenue....................................... $ 9,122,498 $ 7,520,188 $ 3,728,042
Funded research and development revenue............... 6,355,383 8,010,735 8,738,293
------------ ----------- -----------
Total revenue......................................... 15,477,881 15,530,923 12,466,335
------------ ----------- -----------
Cost of product revenue............................... 9,510,941 5,474,067 2,683,389
------------ ----------- -----------
Gross margin.......................................... 5,966,940 10,056,856 9,782,946
Research and development expenses..................... 6,554,464 6,793,634 11,442,465
Selling, general and administrative expenses.......... 8,818,706 4,523,424 6,197,951
Amortization of intangibles........................... 371,087 290,957 120,467
------------ ----------- -----------
Total operating expenses.............................. 15,744,257 11,608,015 17,760,883
------------ ----------- -----------
Operating loss........................................ (9,777,317) (1,551,159) (7,977,937)
Loss from investment in Beacon Power Corporation...... (1,030,000) (1,888,619) --
Other losses.......................................... (150,464) -- --
Interest income....................................... 42,287 179,861 283,131
Interest expense...................................... (115,692) (10,206) (13,933)
------------ ----------- -----------
Net loss before income taxes.......................... (11,031,186) (3,270,123) (7,708,739)
Provision for income taxes............................ -- 3,872 --
------------ ----------- -----------
Net loss.............................................. (11,031,186) (3,273,995) (7,708,739)
Accretion of redeemable convertible preferred stock
discount............................................ (50,904) -- --
------------ ----------- -----------
Net loss attributable to common stockholders.......... $(11,082,090) $(3,273,995) $(7,708,739)
============ =========== ===========
Net loss per share, basic and diluted................. $ (1.21) $ (.37) $ (.97)
============ =========== ===========
Weighted average number of common shares, basic and
diluted............................................. 9,176,041 8,956,671 7,959,309
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(AS RESTATED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
AMOUNTS
RECEIVABLE
COMMON COMMON FROM
ADDITIONAL SHARES STOCK EXERCISE OF
COMMON COMMON PAID-IN HELD IN HELD IN STOCK ACCUMULATED
SHARES STOCK CAPITAL ESCROW ESCROW OPTIONS DEFICIT
---------- -------- ----------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 (as
restated).................... 7,359,074 $73,591 $18,487,209 -- -- -- $ (3,345,889)
Net loss....................... -- -- -- -- -- -- (7,708,739)
Exercise of stock options...... 161,934 1,619 408,390 -- -- -- --
Change in net unrealized losses
on marketable securities..... -- -- -- -- -- -- --
Stock issued in acquisition.... 450,000 4,500 2,871,750 -- -- -- --
Securities purchase
agreement.................... 798,138 7,981 4,809,251 -- -- -- --
---------- ------- ----------- ------ ----------- ------------ ------------
Balance, September 30, 1997.... 8,769,146 $87,691 $26,576,600 -- -- -- $(11,054,628)
Net loss....................... -- -- -- -- -- -- (3,273,995)
Exercise of stock options...... 100,266 1,003 580,736 -- -- -- --
Exercise of warrants........... 149,137 1,491 1,220,382 -- -- -- --
Treasury stock purchased....... -- -- -- -- -- -- --
Change in net unrealized losses
on marketable securities..... -- -- -- -- -- -- --
---------- ------- ----------- ------ ----------- ------------ ------------
Balance, September 30, 1998.... 9,018,549 $90,185 $28,377,718 -- -- -- $(14,328,623)
Net loss....................... -- -- -- -- -- -- (11,031,186)
Exercise of stock options...... 455,600 4,556 3,173,445 -- -- (1,816,667) --
Treasury stock purchased....... -- -- -- -- -- -- --
Common stock issued in
acquisitions................. 100,000 1,000 567,800 -- -- -- --
Common stock issued in
connection with settlement
agreement which is held in
escrow....................... 42,860 429 189,762 42,860 (190,191) -- --
Compensation expense related to
stock options and warrants
issued to
non-employees................ -- -- 2,208,639 -- -- -- --
Valuation adjustment for common
stock held in escrow......... -- -- 238,409 -- (238,409) -- --
Warrants issued in connection
with the
sale of redeemable preferred
stock........................ -- -- 2,369,292 -- -- -- --
Change in net unrealized losses
on marketable securities..... -- -- -- -- -- -- --
Accretion of redeemable
convertible
preferred stock discount..... -- -- (50,904) -- -- -- --
---------- ------- ----------- ------ ----------- ------------ ------------
Balance, September 30, 1999.... 9,617,009 $96,170 $37,074,161 42,860 $ (428,600) $ (1,816,667) $(25,359,809)
========== ======= =========== ====== =========== ============ ============
<CAPTION>
NET
UNREALIZED
LOSS ON TOTAL
MARKETABLE TREASURY TREASURY STOCKHOLDERS'
SECURITIES SHARES STOCK EQUITY
---------- -------- --------- -------------
<S> <C> <C> <C> <C>
Balance, September 30, 1996 (as
restated).................... $(39,935) -- -- $ 15,174,976
Net loss....................... -- -- -- (7,708,739)
Exercise of stock options...... -- -- -- 410,009
Change in net unrealized losses
on marketable securities..... 19,720 -- -- 19,720
Stock issued in acquisition.... -- -- -- 2,876,250
Securities purchase
agreement.................... -- -- -- 4,817,232
-------- ------ --------- ------------
Balance, September 30, 1997.... $(20,215) -- -- $ 15,589,448
Net loss....................... -- -- -- (3,273,995)
Exercise of stock options...... -- -- -- 581,739
Exercise of warrants........... -- -- -- 1,221,873
Treasury stock purchased....... -- 28,300 $(173,076) (173,076)
Change in net unrealized losses
on marketable securities..... 9,835 -- -- 9,835
-------- ------ --------- ------------
Balance, September 30, 1998.... $(10,380) 28,300 $(173,076) $ 13,955,824
Net loss....................... -- -- -- (11,031,186)
Exercise of stock options...... -- -- -- 1,361,334
Treasury stock purchased....... -- 16,200 (76,628) (76,628)
Common stock issued in
acquisitions................. -- -- -- 568,800
Common stock issued in
connection with settlement
agreement which is held in
escrow....................... -- -- -- --
Compensation expense related to
stock options and warrants
issued to
non-employees................ -- -- -- 2,208,639
Valuation adjustment for common
stock held in escrow......... -- -- -- --
Warrants issued in connection
with the
sale of redeemable preferred
stock........................ -- -- -- 2,369,292
Change in net unrealized losses
on marketable securities..... 10,380 -- -- 10,380
Accretion of redeemable
convertible
preferred stock discount..... -- -- -- (50,904)
-------- ------ --------- ------------
Balance, September 30, 1999.... -- 44,500 (249,704) $ 9,315,551
======== ====== ========= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AS RESTATED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(11,031,186) $(3,273,995) $(7,708,739)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 1,013,037 625,976 969,010
Allowance for unbilled contract costs and fees...... 688,510 (19,065) 697,968
Allowance for doubtful accounts..................... 334,850 (94,424) 28,324
Allowance for inventory............................. 870,021 (549,765) 758,541
Loss from investment in Beacon Power Corporation.... 1,030,000 1,888,619 --
Loss on sale of marketable securities............... 87,535 -- --
Write-off impaired assets........................... 255,544 50,104 2,593,558
Compensation expense related to issuance of stock
options and warrants to non-employees............... 2,208,639 -- --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable............................... 89,858 (301,909) 535,797
Prepaid expenses and other assets................. 31,455 (8,529) 62,174
Unbilled contract costs and fees.................. (954,393) 532,573 (749,462)
Inventory......................................... (601,120) (1,550,819) (1,161,843)
Other assets...................................... 517,402 (607,245) 212,339
Accounts payable.................................. 72 647,689 (385,868)
Accrued costs for consolidation of facilities..... -- (398,000) 498,000
Accrued expenses and payroll...................... (98,163) 106,939 (1,396,970)
Other liabilities................................. (72,763) 6,802 --
------------ ----------- -----------
Total adjustments....................................... 5,400,484 328,946 2,661,568
------------ ----------- -----------
Net cash used in operating activities....................... (5,630,702) (2,945,049) (5,047,171)
------------ ----------- -----------
Cash flows from investing activities:
Purchases of marketable securities........................ -- -- (600,000)
Sales and maturities of marketable securities............. 580,144 1,340,609 2,079,064
Patent and intangible expenditures........................ (102,227) (431,526) (150,534)
Deferred financing fees................................... -- -- 56,313
Capital expenditures...................................... (220,416) (601,331) (931,229)
Acquisitions, net of cash acquired........................ (995,876) -- (112,986)
Investment in Beacon Power Corporation.................... (696,667) (2,007,508) --
------------ ----------- -----------
Net cash (used in) provided by investing activities......... (1,435,042) (1,699,756) 340,628
------------ ----------- -----------
Cash flows from financing activities:
Repayment of borrowings................................... (100,000) (40,625) (35,119)
Borrowings under line of credit........................... 2,657,234 -- --
Repayment of borrowings under line of credit.............. (2,657,234) -- --
Proceeds from exercise of stock options................... 1,361,334 581,739 410,009
Proceeds from exercise of warrants........................ -- 1,221,873 --
Proceeds from issuance of common stock.................... -- -- 4,817,232
Proceeds from issuance of redeemable convertible preferred
stock................................................... 7,212,500 -- --
Purchase of treasury stock................................ (76,628) (173,076) --
------------ ----------- -----------
Net cash provided by financing activities................... 8,397,206 1,589,911 5,192,122
------------ ----------- -----------
Net increase/(decrease) in cash and cash equivalents........ 1,331,462 (3,054,894) 485,579
Cash and cash equivalents at beginning of year.............. 1,201,610 4,256,504 3,770,925
------------ ----------- -----------
Cash and cash equivalents at end of year.................... $ 2,533,072 $ 1,201,610 $ 4,256,504
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
SatCon Technology Corporation (the "Company" or "SatCon") was organized as a
Massachusetts corporation in February 1985 and reincorporated in Delaware in
1992. SatCon designs, develops and manufactures intelligent, electro-mechanical
products for aerospace, transportation, industrial and utility applications.
SatCon also designs, develops and manufactures power and energy management
products for telecommunications, silicon wafer manufacturing, factory
automation, aircraft and automotive applications. The Company's
electro-mechanical products are being developed for a wide variety of U.S.
government and commercial markets. For the government, the electro-mechanical
systems provide for applications ranging from satellite attitude control to
high-speed drives for shipboard systems. In the transportation segment, SatCon
is developing electric and hybrid electric drive components, auxiliary power
units and advanced steering, alternator and starter/generator systems. The
Company is working with major equipment producers to develop process equipment
drives, high speed and precision machine tools, manipulators and machinery
isolation equipment. The Company's electro-mechanical systems may offer
advantages to the utility industry in power generation, energy storage and power
quality. In the consumer market, SatCon is developing variable speed motors for
refrigeration equipment and other long-life, high-efficiency machinery.
RESTATEMENT
The Company has restated its financial statements for fiscal 1997, 1998 and
1999. The restatement was prompted by the recently completed initial audit of
the financial statements of its affiliate, Beacon Power Corporation and reflects
treating certain costs as expenses rather than being included in the value of
the net assets of Beacon Power at December 24, 1997. The Company previously had
accounted for these costs either as fixed assets or as part of the net assets of
Beacon Power. As a result, certain costs previously capitalized in 1996, 1997
and 1998 should have been expensed as incurred, therefore reducing the Company's
investment in Beacon Power by $3.1 million as of December 24, 1997. The
adjustments to the financial statements at December 24, 1997, the date which the
Company began accounting for its investment in Beacon Power under the equity
method of accounting, consisted of a reduction of $37,000 from current assets, a
reduction of $3.0 million from property and equipment and intangible assets and
an increase of $73,000 of accrued expenses. The Company has adjusted its
accumulated deficit as of September 30, 1996 for the effect of the 1996
restatement. The cumulative effect of this change on the Company's stockholders'
equity as of September 30, 1996, was a reduction of $924,192. The cumulative
effect of this change on the Company's stockholders' equity as of September 30,
1999, was a reduction of $130,504. The effect of this change on the reported
results for each period is as follows:
26
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONSOLIDATED STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, 1999
---------------------------
AS RESTATED AS REPORTED
------------ ------------
<S> <C> <C>
Product revenue............................................. $ 9,122,498 $ 9,122,498
Funded research and development revenue..................... 6,355,383 6,355,383
------------ ------------
Total revenue............................................... 15,477,881 15,477,881
------------ ------------
Cost of product revenue..................................... 9,510,941 9,510,941
------------ ------------
Gross margin................................................ 5,966,940 5,966,940
Research and development expenses........................... 6,554,464 6,554,464
Selling, general and administrative expenses................ 8,818,706 8,818,706
Amortization of intangibles................................. 371,087 371,087
------------ ------------
Total operating expenses.................................... 15,744,257 15,744,257
------------ ------------
Operating loss.............................................. (9,777,317) (9,777,317)
Loss from investment in Beacon Power Corporation............ (1,030,000) (2,357,679)
Other losses................................................ (150,464) (150,464)
Interest income............................................. 42,287 42,287
Interest expense............................................ (115,692) (115,692)
------------ ------------
Net loss.................................................... (11,031,186) (12,358,865)
Accretion of redeemable convertible preferred stock
discount.................................................. (50,904) (50,904)
------------ ------------
Net loss attributable to common stockholders................ $(11,082,090) $(12,409,769)
============ ============
Net loss per share, basic and diluted....................... $ (1.21) $ (1.35)
============ ============
Weighted average number of common shares, basic and
diluted................................................... 9,176,041 9,176,041
============ ============
</TABLE>
27
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, 1998
---------------------------
AS RESTATED AS REPORTED
------------ ------------
<S> <C> <C>
Product revenue............................................. $ 7,520,188 $ 7,520,188
Funded research and development revenue..................... 8,010,735 7,965,735
------------ ------------
Total revenue............................................... 15,530,923 15,485,923
------------ ------------
Cost of product revenue..................................... 5,474,067 5,474,067
------------ ------------
Gross margin................................................ 10,056,856 10,011,856
Research and development expenses........................... 6,793,634 5,863,296
Selling, general and administrative expenses................ 4,523,424 4,787,070
Amortization of intangibles................................. 290,957 290,957
------------ ------------
Total operating expenses.................................... 11,608,015 10,941,323
------------ ------------
Operating loss.............................................. (1,551,159) (929,467)
Loss from investment in Beacon Power Corporation............ (1,888,619) (3,541,817)
Interest income............................................. 179,861 179,861
Interest expense............................................ (10,206) (10,206)
------------ ------------
Net loss before income taxes................................ (3,270,123) (4,301,629)
Provision for income taxes.................................. 3,872 3,872
------------ ------------
Net loss attributable to common stockholders................ $ (3,273,995) $ (4,305,501)
============ ============
Net loss per share, basic and diluted....................... $ (.37) $ (.48)
============ ============
Weighted average number of common shares, basic and
diluted................................................... 8,956,671 8,956,671
============ ============
</TABLE>
28
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, 1997
---------------------------
AS RESTATED AS REPORTED
------------ ------------
<S> <C> <C>
Product revenue............................................. $ 3,728,042 $ 3,728,042
Funded research and development revenue..................... 8,738,293 8,738,293
------------ ------------
Total revenue............................................... 12,466,335 12,466,335
------------ ------------
Cost of product revenue..................................... 2,683,389 2,683,389
------------ ------------
Gross margin................................................ 9,782,946 9,782,946
Research and development expenses........................... 11,442,465 9,876,968
Selling, general and administrative expenses................ 6,197,951 6,197,951
Amortization of intangibles................................. 120,467 120,467
------------ ------------
Total operating expenses.................................... 17,760,883 16,195,386
------------ ------------
Operating loss.............................................. (7,977,937) (6,412,440)
Interest income............................................. 283,131 283,131
Interest expense............................................ (13,933) (13,933)
------------ ------------
Net loss attributable to common stockholders................ $ (7,708,739) $ (6,143,242)
============ ============
Net loss per share, basic and diluted....................... $ (.97) $ (.77)
============ ============
Weighted average number of common shares, basic and
diluted................................................... 7,959,309 7,959,309
============ ============
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------- ---------------------------
AS RESTATED AS REPORTED AS RESTATED AS REPORTED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment in Beacon Power Corporation...... -- -- -- $ 1,458,183
------------ ------------ ------------ ------------
Total assets................................ $ 17,400,374 $ 17,400,374 $ 16,708,407 $ 18,166,590
============ ============ ============ ============
Accrued losses from investment in
Beacon Power Corporation................... $ 333,333 $ 202,829 -- --
------------ ------------ ------------ ------------
Accumulated deficit......................... $(25,359,809) $(25,229,305) $(14,328,623) $(12,870,440)
------------ ------------ ------------ ------------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity... $ 17,400,374 $ 17,400,374 $ 16,708,407 $ 18,166,590
============ ============ ============ ============
</TABLE>
29
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of SatCon and its
majority-owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
REVENUE RECOGNITION
The Company performs research under cost-type, fixed-price, and
time-and-material contracts and sells product prototypes. On fixed-price
contracts, revenue is recognized on the percentage-of-completion method based on
the proportion of costs incurred to total estimated costs for each contract.
Revenue recognized in excess of amounts billed are classified in current assets
as unbilled contract costs. Certain contracts contain provisions for performance
incentives. Such incentives are included in revenue when realization is assured.
If a current contract estimate indicates a loss, a provision is made for the
total anticipated loss. All payments to the Company for work performed on
contracts with agencies of the U.S. government are subject to audit and
adjustment by the Defense Contract Audit Agency. Adjustments are recognized in
the period made. Revenue on time and material contracts is recognized as
services are provided.
The Company also designs and manufactures standard products such as
multi-chip modules and hybrids, custom electric motors, and integrated
suspension and motor systems. Revenue from product sales is recognized upon
shipment. The Company provides for warranty reserves at the time product is
shipped.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits and highly liquid
investments with a maturity of three months or less when acquired. Cash
equivalents are stated at cost, which approximates market value.
MARKETABLE SECURITIES
The Company accounts for marketable securities in accordance with the
Statement of Financial Accounting Standard (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and reevaluates such determination at
each balance sheet date. Debt securities for which the Company does not have the
intent or ability to hold to maturity are classified as available for sale.
Securities available for sale are carried at fair value, based on quoted
market prices, with the unrealized gains and losses, net of tax effect, reported
in a separate component of stockholders' equity, except for unrealized losses
determined to be permanent in nature. Such unrealized losses are included in the
determination of net income in the period in which management determines the
decline to be permanent. The Company is not actively involved in the purchase
and sale of investments classified as trading. At September 30, 1999 and 1998,
the Company had no investments that qualified as trading or held to maturity.
The amortized cost of debt securities classified as available for sale is
adjusted for amortization of premiums and accretion of discounts to maturity or,
in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization and interest are included in interest income.
Realized
30
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
gains and losses are included in other income or expense. The cost of securities
sold is based on the specific identification method.
INVENTORY
Inventories are stated at the lower of cost or market and costs are
determined based on the first-in, first-out method of accounting and include
material, labor and manufacturing overhead costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the asset's estimated useful life.
The estimated useful lives of property and equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED LIVES
---------------
<S> <C>
Computer equipment and software........... 3-5 years
Electronic laboratory and shop 5 years
equipment...............................
Mechanical laboratory and shop 10 years
equipment...............................
Sales and demonstration equipment......... 3-10 years
Furniture and fixtures.................... 7-10 years
Leasehold improvements.................... Lesser of the life of the lease or the
useful life of the improvement
</TABLE>
When assets are retired or otherwise disposed of, the cost and related
depreciation and amortization are eliminated from the accounts and any resulting
gain or loss is reflected in other income.
LONG-LIVED ASSETS
The Company periodically evaluates the potential impairment of its
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. At the occurrence of a
certain event or change in circumstances or at each balance sheet date, the
Company evaluates the potential impairment of an asset based on future
undiscounted cash flows. In the event that impairment exists, the Company will
measure the amount of such impairment based on the present value of estimated
future cash flows using a discount rate commensurate with the risks involved.
Factors that management considers in performing this assessment include current
operating results, trends and prospects and, in addition, demand, competition
and other economic factors. At September 30, 1999 and 1998, the Company
determined that there had been no impairment of its long-lived assets, except as
in Note E.
Intangibles, which consist primarily of patents and trademarks, goodwill and
a non-compete agreement, are amortized on a straight-line basis over periods
ranging from 5 to 15 years. At September 30, 1999 and 1998, accumulated
amortization of intangibles amounted to $831,922 and $442,237, respectively.
DEFERRED REVENUE
Deferred revenue consists of payments received from customers in advance of
services performed or product shipped.
31
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TREASURY STOCK
The Company is authorized to repurchase up to 5% of the Company's
outstanding shares of common stock through July 2000. Under the repurchase
program, the Company plans to purchase shares of the Company's outstanding
common stock on the open market from time-to-time, depending on market
conditions.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period
reported. Actual results could differ from these estimates.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which is the asset and liability method for
accounting and reporting for income taxes. Under SFAS No. 109, deferred tax
assets and deferred tax liabilities are recognized based on temporary
differences between the basis of assets and liabilities using statutory rates.
In addition, SFAS No. 109 requires a valuation allowance against net deferred
tax assets if, based upon the available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires that
companies recognize compensation expense for grants of stock, stock options, and
other equity instruments based on fair value, or, for grants to employees,
provide pro forma disclosure of net income and earnings per share in the notes
to the financial statements using the fair value method.
NET LOSS PER BASIC AND DILUTED COMMON SHARE
The Company reports net loss per basic and diluted common share in
accordance with SFAS No. 128, "Earnings Per Share," which establishes standards
for computing and presenting earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to concentrations of credit
risk consist principally of cash equivalents, investments in marketable
securities, trade accounts receivable, unbilled contract costs and amounts
receivable from exercise of stock options.
32
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's trade accounts receivable and unbilled contract costs and fees
are primarily from sales to U.S. government agencies and several commercial
customers. The Company does not require collateral and has not historically
experienced significant credit losses related to receivables or unbilled
contract costs and fees from individual customers or groups of customers in any
particular industry or geographic area.
The Company deposits its cash and invests in short-term investments and
marketable securities primarily through two regional commercial banks and an
investment company. Credit exposure to any one entity is limited by company
policy.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses research and development costs as incurred.
COMPREHENSIVE LOSS
Comprehensive loss includes net loss, as well as other changes in
stockholders' equity, except stockholders' investments and distributions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, unbilled contract costs and fees, accounts payable, debt
instruments and amounts receivable from exercise of stock options. The book
value of such financial instruments approximate their respective fair values due
to their short-term maturities.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current
year presentations. For all periods presented, expenses associated with funded
research and development activities have been reclassified as research and
development expenses from cost of revenue.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133," which defers the effective date of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" to
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133 establishes a new model for accounting for derivatives and hedging
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure these
instruments at fair value. The Company will adopt SFAS No. 133 beginning in the
first quarter of the fiscal year ending September 30, 2001.
Adoption of SFAS No. 133 is not expected to have a material impact to the
Company's consolidated financial position, results of operations or cash flows.
33
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. MARKETABLE SECURITIES
At September 30, 1998, marketable securities have been categorized as
available for sale, and as a result, are stated at fair value.
As of September 30, 1998, marketable securities consisted of the following:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
SECURITY CATEGORY COST BASIS FAIR VALUE GAINS LOSSES
----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate debt securities........................... $597,197 $583,939 $ 8,149 $(21,407)
Mortgage-backed securities.......................... 70,614 73,492 2,878 --
-------- -------- ------- --------
$667,811 $657,431 $11,027 $(21,407)
======== ======== ======= ========
</TABLE>
The change in net unrealized losses during 1999, 1998 and 1997 were $10,380,
$23,312, and $32,866, respectively, and are included in the balance sheet in a
separate component of stockholders' equity, net of tax effect.
Proceeds from sales and maturities of marketable securities during 1999,
1998 and 1997 were $580,144, $1,340,609, and $2,079,064, respectively. Gross
realized losses from the sale of securities classified as available for sale
during 1999, 1998 and 1997 were $87,535, $0, and $0, respectively.
C. UNBILLED CONTRACT COSTS AND FEES
Unbilled contract costs and fees represent revenue recognized in excess of
amounts billed due to contractual provisions. These amounts included retained
fee and unliquidated costs totaling $282,746 and $363,087 at September 30, 1999
and 1998, respectively.
D. INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Raw material......................................... $1,139,064 $1,783,803
Work-in-process...................................... 2,199,199 1,788,241
Finished goods....................................... 359,709 106,023
---------- ----------
$3,697,972 $3,678,067
========== ==========
</TABLE>
34
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Machinery and equipment.............................. $4,505,287 $3,391,758
Sales and demonstration equipment.................... -- 19,052
Furniture and fixtures............................... 280,769 265,173
Computer software.................................... 621,583 556,876
Leasehold improvements............................... 648,734 626,216
---------- ----------
6,056,373 4,859,075
Less accumulated depreciation and amortization....... 2,795,741 2,181,289
---------- ----------
$3,260,632 $2,677,786
========== ==========
</TABLE>
Depreciation expense for the years ended September 30, 1999, 1998, and 1997
was $633,964, $540,213, and $736,924, respectively.
As of September 30, 1999, there was $19,903 and $29,910 of capital leases
that were included in machinery and equipment and computer software,
respectively. As of September 30, 1998, there was no equipment under capital
lease.
During 1999 and 1997, the Company determined that certain of its machinery
and equipment totaling $105,544 and $2,593,558, respectively, was impaired based
on a change in the needs of its customers and such assets were written-off
during 1999 and 1997, respectively.
F. INVESTMENT IN BEACON POWER CORPORATION
On May 28, 1997, SatCon Technology Corporation entered into a Securities
Purchase Agreement (the "Agreement"), dated as of May 28, 1997, by and among the
Company, Beacon Power Corporation ("Beacon Power"), a new wholly-owned
subsidiary of the Company, and Duquesne Enterprises ("Duquesne"). Pursuant to
the terms of the Agreement, Duquesne purchased from the Company and the Company
issued, sold and delivered to Duquesne 798,138 shares (the "Shares") of the
Company's Common Stock. The aggregate consideration received by the Company was
$5,000,000. In exchange for a capital contribution, the Company received all of
the capital stock of Beacon Power, consisting of 3,375,000 shares of Beacon
Power's Common Stock and 1,125,000 shares of Beacon Power's preferred stock, par
value $.01 per share, as adjusted to reflect a 1:1.125 stock split. Duquesne
also entered into agreements pursuant to which it will act as exclusive
distributor of Beacon Power's products, subject to certain exceptions, in seven
Mid-Atlantic States and the District of Columbia.
During a recapitalization of Beacon Power on December 24, 1997, Beacon Power
obtained equity financing from private investors and the Company converted a
significant portion of its ownership of Beacon Power to non-voting convertible
preferred stock and the Company began accounting for its
35
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED)
investment under the equity method of accounting. The book value of assets and
liabilities of Beacon Power at the time the Company applied the equity method of
accounting was as follows:
<TABLE>
<CAPTION>
(AS RESTATED) (AS REPORTED)
------------- -------------
<S> <C> <C>
Accounts receivable................................ $ 14,487 $ 31,437
Inventory.......................................... -- 16,788
Prepaid expenses and other assets.................. 67,147 70,478
Property and equipment, net........................ -- 2,859,572
Intangibles, net................................... -- 90,957
Accounts payable................................... (50,000) --
Accrued payroll and payroll related expenses....... (32,298) (32,298)
Accrued expenses................................... (118,225) (95,000)
Subscriptions receivable........................... 2,007,508 2,058,066
----------- -----------
Investment in Beacon Power Corporation............. $ 1,888,619 $ 5,000,000
=========== ===========
</TABLE>
The restated amounts reflects treating certain costs as expenses rather than
being included in the value of the net assets of Beacon Power (See Note A).
At September 30, 1998, the Company had amounts of $596,453 due from Beacon
Power. These amounts arose from transactions after December 24, 1997, whereby
the Company advanced money and made payments for certain expenses incurred by
Beacon Power. Such amounts were subsequently repaid in connection with the
October 23, 1998 financing.
On October 23, 1998, the Company entered into a Securities Purchase
Agreement, by and among Beacon Power, Perseus Capital, L.L.C. ("Perseus"),
Duquesne, Micro Generation Technology Fund, L.L.C ("Micro", and together with
Perseus and Duquesne, the "Purchasers") and the Company. Pursuant to the terms
of the Agreement, (i) the Purchasers purchased from Beacon Power and Beacon
Power issued, sold and delivered to the Purchasers 1,900,000 shares (the
"Shares") of Beacon's Class D Redeemable Preferred Stock, $.01 par value per
share; (ii) the Purchasers have the right to receive certain warrants to
purchase shares of Beacon Power's common stock, $.01 par value per share
("Beacon Power'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 Power's Common Stock issuable
upon conversion of the Shares; and (iv) upon exercise of the Put Right pursuant
to the terms of the Agreement, the Company must pay the consideration
contemplated by the Agreement in shares of the Company's common stock, $.01 par
value per share, valued at the average fair value for the 15 trading days before
and after notice of exercise of the Put Right. The aggregate consideration
received by Beacon Power was $4,750,000. The Put Right is exercisable within 60
days of the second, third, fourth and fifth anniversary of the closing date of
the transaction, upon certain events of bankruptcy of Beacon Power and upon the
occurrence of certain going private transactions involving the Company. If the
put right is exercised, the Company would record the value of the shares
repurchased as an additional investment in Beacon Power. If management
determines that redemption of the put right is probable or the put right is
exercised and the value paid for the shares of Series D redeemable preferred
stock exceeds the fair market value of Beacon Power's stock, such amount would
be recorded as a loss in the period that the judgement is made or the put right
is exercised. The put right will terminate, if not previously exercised, on the
earlier of (i) October 23, 2003, (ii) upon the listing of Beacon Power's common
stock on the New York Stock
36
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED)
Exchange or the Nasdaq National Market, or (iii) with respect to put rights
resulting from an event described above, 100 days after the Purchasers receive
written notice from the Company requesting that the Purchasers either exercise
or waive their put rights resulting from that event. The Company retained
approximately 0.1% of Beacon Power's outstanding voting stock; however, there
was a presumption that the Company had the ability to exercise significant
influence, and therefore, the Company continues to account for its investment
using the equity method of accounting.
On June 22, 1999, the Company purchased from Beacon Power a note (the "June
22, 1999 Note") with a principal amount of $125,000 due and payable on the
earlier of (i) September 22, 1999 ("Maturity Date") or (ii) upon the occurrence
of an event of default, as defined therein. The note bears interest at 12 % per
annum; provided that, if the note is not repaid in full on or prior to Maturity
Date, the interest rate would increase to 15% per annum. The June 22, 1999 Note
was issued pursuant to the terms of a Note Purchase Agreement, dated as of
June 22, 1999, by and among Beacon Power, the Purchasers named therein, and the
Company (the "Note Purchase Agreement"). Interest on the June 22, 1999 Note is
payable on the Maturity Date.
On July 6, 1999, the Company purchased from Beacon Power an additional note
(the "July 6, 1999 Note") with a principal amount of $125,000 due and payable on
the earlier of (i) Maturity Date or (ii) upon the occurrence of an event of
default. The note bears interest at 12 % per annum; provided, that if the note
is not repaid in full on or prior to Maturity Date, the interest rate would
increase to 15% per annum (the "July 6, 1999 Note" and together with the
June 22, 1999 Note, the "Notes"). The July 6, 1999 Note was also issued pursuant
to the terms of the Note Purchase Agreement. Interest on the July 6, 1999 Note
is payable on the Maturity Date.
In August 1999, the Company exchanged in full the Notes and $83,333.33 for a
note with a principal amount of $333,333.33 ("Bridge Note") plus accrued
interest due and payable on the earlier of (i) the date of conversion of the
note as described below or (ii) upon the occurrence of an event of default. The
Bridge Note bears interest at 12 % per annum; provided that if the Funding Date
(as defined below) does not occur within six months, such interest rate shall
increase effective February 2, 2000 to 15% per annum. The Bridge Note was issued
pursuant to the terms of a Note and Warrant Purchase Agreement, dated as of
August 2, 1999, by and among Beacon Power, the Purchasers named therein, and the
Company (the "Note and Warrant Purchase Agreement"). Interest on the Bridge Note
is payable on the Maturity Date.
Pursuant to the terms of the Note and Warrant Purchase, the Company
purchased two (2) additional notes each with a principal amount of $333,333.33
on September 16, 1999 and October 19, 1999. The Bridge Note and the additional
notes each with a principal amount of $333,333.33 are collectively referred to
as the "Bridge Securities."
In the event that Beacon Power obtains a funding commitment for at least $5
million of external funds within four months of the issuance of the first Bridge
Security and closes a funding pursuant to such commitment within six months of
the first issuance of the first Bridge Security (the date of such funding, the
"Funding Date"), all outstanding principal and interest on the Bridge Securities
will convert into equity of Beacon Power at a price and on terms that are
equivalent to the securities issued by Beacon Power pursuant to the funding
commitment. If Beacon Power does not obtain a qualified financing commitment
within the four-month period referred to above, or close such funding within the
six-month period referred to above, the Bridge Securities will convert into
securities of Beacon Power pursuant to terms to be agreed
37
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED)
to with Beacon Power, or if no terms are agreed to, the Company has the right to
demand payment of all principal and interest on the Bridge Securities.
Warrants to purchase shares of Beacon Power Securities were issued in
connection with each issuance of the Bridge Securities. The warrants are for the
purchase of the type of securities to be issued upon conversion of the Bridge
Securities or if such securities are not converted, Beacon Power Common Stock.
The number of shares of Beacon Power securities that will be subject to the
warrants will be determined by dividing (i) 25% of the principal amount of the
Bridge Securities issued by (ii) the price per share of the Bridge Securities,
or, if the Bridge Securities are not converted, $2.50.
At September 30, 1999, the Company has accrued losses of $333,333 relating
to its share of Beacon Power losses, which it is required to fund pursuant to
the terms of the Note and Warrant Purchase Agreement.
Upon the conversion of Beacon Power's series D redeemable preferred stock
into common stock, the Company's investment in Beacon Power and additional paid
in capital would be written up to reflect its beneficial interest in the
proceeds of the series D redeemable preferred stock financing, in accordance
with Staff Accounting Bulletin 51. At the time of the conversion, the Company
would record its share of suspended losses in Beacon Power.
G. LINE OF CREDIT
In December 1998, as modified, the Company obtained a $3,000,000 demand
discretionary line of credit with a bank. The line of credit bears interest at
the bank's prime rate plus 1 1/2% (9 3/4% as of September 30, 1999). Available
borrowings are based on a formula of eligible accounts receivable and inventory.
There were no amounts outstanding under the line of credit at September 30,
1999. During 1999, the maximum amount outstanding on the line of credit was
$2,657,234. The Company has pledged all assets of the Company as collateral
against this line of credit.
H. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1999 1998
-------- ---------
<S> <C> <C>
Note payable due in 52 weekly payments. The total note
of $443,804 commenced on April 16, 1997.............. $ -- $ 368,056
Capital lease obligations.............................. 50,097 --
Less: Current Portion.................................. (16,226) (146,594)
-------- ---------
$ 33,871 $ 221,462
======== =========
</TABLE>
38
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. LONG-TERM DEBT (CONTINUED)
At September 30, 1999, maturities of these obligations are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2000........................................................ $ 16,226
2001........................................................ 17,494
2002........................................................ 10,778
2003........................................................ 5,599
--------
50,097
Less: Current Portion....................................... (16,226)
--------
$ 33,871
========
</TABLE>
On March 1, 1999, the Company reached a definitive settlement arrangement
with Albert R. Snider (the "Settlement Agreement"), the holder of the note
payable which commenced on April 16, 1997, regarding the suit filed against Mr.
Snider for breach of certain representations made by him, including statements
of inventory balances in the Asset Purchase Agreement, dated as of April 3,
1997, between FMI and Mr. Snider relating to the purchase of the business of FMI
and a counterclaim filed by Mr. Snider seeking, among other things, payments
allegedly due from the Company under a promissory note.
Pursuant to the terms of the Settlement Agreement, the Company made a
$100,000 cash payment to Mr. Snider on March 9, 1999 and the parties executed
mutual general releases dismissing any and all claims between them. In addition,
the Settlement Agreement provides a right of first refusal in favor of the
Company with respect to certain shares of the Company's Common Stock,
beneficially owned by Mr. Snider. Concurrently with the execution of the
Settlement Agreement, the Company and Mr. Snider entered into a consulting
agreement pursuant to which Mr. Snider will perform certain consulting, advisory
and related services as the Company may reasonably request from time to time
between October 1, 1999 and October 1, 2002. In exchange for these services, the
Company issued 42,860 shares of its Common Stock to an escrow agent who will
release such shares to Mr. Snider or his nominees on January 2, 2001. The
Company has recorded these shares held in escrow at market value and as a
reduction to stockholders' equity as of September 30, 1999. The Company will
continue to mark-to-market these securities until such shares are released from
escrow.
The Company will amortize the market value of the common stock held in
escrow as consulting, advisory and related services expense as services are
provided between the period October 1, 1999 and October 1, 2002.
I. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities under various operating leases that expire
through 2003. The Company has also entered into a master leasing agreement to
lease various items of equipment not to exceed $600,000. At September 30, 1999,
the availability under this facility has expired.
39
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum annual rentals under the lease agreements at September 30,
1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2000........................................................ $1,471,382
2001........................................................ 1,520,400
2002........................................................ 1,446,996
2003........................................................ 1,215,498
2004........................................................ 280,850
Thereafter.................................................. 218,829
----------
Total (not reduced by minimum sublease rentals of
$1,265,847)............................................... $6,153,955
==========
</TABLE>
Total rental expense including operating expenses and real estate taxes for
operating leases amounted to $1,683,749, $1,235,867, and $1,245,238 for the
years ended September 30, 1999, 1998 and 1997, respectively.
Certain of the facility leases contain escalation clauses, effective
October 1, 1998, rental expense has been recognized on a straight-line basis
over the remaining lease term. At September 30, 1999, deferred rent expense
amounted to $110,390.
In the fourth quarter of 1997, the Company decided to consolidate its
operating facility in Tucson, AZ with its facility in Cambridge, MA. As a
result, the Company accrued approximately $498,000, primarily related to the
buyout of the facility lease. At September 30, 1999 and 1998, the Company had a
reserve of $100,000, primarily related to the lease cancellation costs.
J. EMPLOYEE BENEFIT PLAN
The Company offers a 401(k) Employee Benefit Plan (the "Plan"). Under the
Plan, any regular employee, as defined by the Plan, who has completed six months
of service and has attained the age of 21 years is eligible to participate.
Under the terms of the Plan, an employee may defer up to 15% of his or her
compensation through contributions to the Plan. During 1999, the Company
extended the Plan to its wholly-owned subsidiaries. The Company made matching
contributions to the Plan of $218,729, $86,883 and $133,018 during 1999, 1998
and 1997, respectively.
40
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current payable:
Federal.............................................. -- -- --
State................................................ -- $ 3,872 --
----------- ----------- -----------
Deferred tax expense/(benefit):
Federal.............................................. $(3,888,031) $(1,349,519) $(1,823,584)
State................................................ (1,167,905) (404,950) (680,530)
Change in valuation allowance........................ 5,055,936 1,754,469 2,504,114
----------- ----------- -----------
-- -- --
----------- ----------- -----------
-- $ 3,872 --
=========== =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of September 30, 1999
and 1998, the components of the net deferred tax assets/(liabilities) are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
(AS RESTATED) (AS REPORTED) (AS RESTATED) (AS REPORTED)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Federal net operating loss....... $ 5,566,879 $ 5,048,719 $ 4,081,970 $ 3,563,810
State net operating loss, net of
federal benefit................ 495,980 404,540 666,053 574,613
Unrealized losses on marketable
securities..................... -- -- 4,116 4,116
Credits.......................... 499,585 499,585 455,982 455,982
Depreciation..................... 336,038 336,038 15,318 15,318
Loss on investment in Beacon
Power Corporation.............. 1,171,050 2,363,850 755,448 1,404,347
Other............................ 1,562,820 1,562,820 189,152 189,152
Valuation allowance.............. (9,632,352) (10,215,552) (6,168,039) (6,207,338)
------------ ----------- ------------ -----------
Net deferred income taxes........ -- -- -- --
============ =========== ============ ===========
</TABLE>
The Company has placed a full valuation allowance against its net deferred
tax assets since the Company believes it is "more likely than not" that it will
not be able to utilize its deferred tax asset.
A decrease in net deferred tax assets and a decrease in the valuation
allowance in the amount of approximately $1,240,000 (as restated) each has been
made to account for the recapitalization of Beacon Power Corporation during the
year ended September 30, 1998.
41
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the federal statutory rate due
to the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory rate............................... (34.0)% (34.0)% (34.0)%
State taxes--net of federal benefit................. (6.2) (6.2) (7.3)
Other............................................... (0.7) (0.5) .6
Change in valuation allowance....................... 40.9 40.8 40.7
----- ----- -----
Effective tax rate.................................. -- % 0.1 % -- %
===== ===== =====
</TABLE>
At September 30, 1999, the Company had net operating loss carry-forwards of
approximately $16,550,000 (as restated) and $7,976,000 (as restated) for federal
and state income tax purposes, respectively. The federal net operating losses
expire beginning September 30, 2008 through 2019. The state net operating losses
will expire beginning September 30, 2000 through 2004. The use of these losses
may be limited due to ownership change limitations under Section 382 of the
Code.
L. STOCKHOLDERS' EQUITY
STOCK OPTIONS
Under the Company's 1992, 1994, 1996 and 1998 Stock Option Plans, both
qualified and non-qualified stock options may be granted to certain officers,
employees, directors and consultants to purchase up to 1,550,000 shares of the
Company's common stock. At September 30, 1999, all of the 1,550,000 stock
options available for grant under the Company's 1992, 1994, 1996 and 1998 Stock
Option Plan have been granted.
During 1999, the Company adopted its 1999 Stock Option Plan that provides
for the grant to employees, officers, directors and consultants for qualified
and non-qualified stock options to purchase up to 1,500,000 shares of the
Company's common stock. At September 30, 1999, 816,898 of the 1,500,000 stock
options available for grant under the Company's 1999 Stock Option Plan have been
granted.
The 1992, 1994, 1996, 1998, and 1999 Stock Option Plans (collectively the
"Plans") are subject to the following provisions:
The aggregate fair market value (determined as of the date the option is
granted) of the common stock that any employee may purchase in any calendar year
pursuant to the exercise of qualified options may not exceed $100,000. No person
who owns, directly or indirectly, at the time of the granting of a qualified
option to him or her, more than 10% of the total combined voting power of all
classes of stock of the Company shall be eligible to receive any qualified
options under the Plans unless the option price is at least 110% of the fair
market value of the common stock subject to the option, determined on the date
of grant. Non-qualified options are not subject to this limitation.
Qualified options are issued only to employees of the Company, while
non-qualified options may be issued to non-employee directors, consultants, and
others, as well as to employees of the Company. Options granted under the Plans
may not be granted with an exercise price less than 100% of fair value of the
Company's common stock, as determined by the Board of Directors on the grant
date.
42
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. STOCKHOLDERS' EQUITY (CONTINUED)
Options under the Plans must be granted within 10 years from the effective
date of the Plan. Qualified options granted under the Plans cannot be exercised
more than 10 years from the date of grant, except that qualified options issued
to 10% or greater stockholders are limited to five-year terms. All options
granted under the Plans provide for the payment of the Company's exercise price
in cash, or by delivery to the Company of shares of common stock already owned
by the optionee having fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
The Plans contain antidilutive provisions authorizing appropriate
adjustments in certain circumstances. Shares of common stock subject to options
that expire without being exercised or that are canceled as a result of the
cessation of employment are available for further grants.
A summary of the status of the Company's stock option plans as of September
30, 1999, 1998 and 1997 and changes for the years then ended are presented
below.
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.......... 820,910 $9.58 700,427 $8.44 713,392 $7.08
Granted................................. 1,404,000 7.09 319,000 11.20 144,000 8.97
Exercised............................... (455,600) 6.98 (100,266) 5.80 (144,466) 2.25
Canceled................................ (118,083) 8.84 (98,251) 10.55 (12,499) 10.71
--------- ----- -------- ----- -------- -----
Outstanding at end of year................ 1,651,227 $8.24 820,910 $9.58 700,427 $8.44
========= ===== ======== ===== ======== =====
Options exercisable at year-end........... 640,560 $9.18 413,403 $8.48 503,660 $8.14
========= ===== ======== ===== ======== =====
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$5.00--$ 7.81....... 576,328 7.8 $ 5.75 159,328 $5.86
$8.75--$10.50....... 773,399 8.4 8.84 345,732 9.72
$11.00--$13.38....... 301,500 7.9 10.69 135,500 11.69
--------- ----- ------- ------- -----
1,651,227 8.1 $ 8.24 640,560 $9.18
========= ===== ======= ======= =====
</TABLE>
An additional 683,102 shares were available under the 1999 Stock Option Plan
for future grants at September 30, 1999.
During 1999, the Company granted fully vested options to purchase 755,000
shares of the Company's common stock to consultants at prices ranging from $5.75
to $10.00 per share. The Company has recorded the fair value of the options, as
determined by the Black-Scholes option pricing model, of $2,152,277, to
43
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. STOCKHOLDERS' EQUITY (CONTINUED)
selling, general and administrative expenses during the year ended
September 30, 1999. As of September 30, 1999, options to purchase 450,000 shares
at $7.00 per share have been exercised. As of September 30, 1999, the Company
received $1,333,333 of cash and the remaining amount due from the shareholders
is classified within stockholders' equity as amounts receivable from exercise of
stock options.
WARRANTS
On June 5, 1998, the Company issued to certain individuals, in settlement of
a claim asserted against the Company, Common Stock Purchase Warrants to purchase
up to 68,795 shares of common stock, as amended, at an exercise price of $11.43
per share. These warrants expired on November 11, 1999 unexercised.
On November 11, 1998, the Company issued common stock warrants to purchase
up to 67,125 shares of the Company's Common Stock at an exercise price of $11.43
per share. The Company has recorded the fair value of these warrants as
determined by the Black-Scholes option pricing model, of $56,362, to selling,
general and administrative expenses during the year ended September 30, 1999.
These warrants expired on November 11, 1999 unexercised.
On August 25, 1999, in connection with the $8 million private placement of
8,000 shares of the Company's Series A Convertible Preferred Stock, $0.01 par
value per share with Brown Simpson Strategic Growth Funds (See Note M), the
Company issued common stock warrants to purchase up to 120,000 and 675,000
shares of common stock at an exercise price of $7.80 and $8.54, respectively.
These warrants expire on August 25, 2003. At September 30, 1999, none of these
warrants have been exercised.
STOCK-BASED COMPENSATION
Had compensation cost for the Company's stock-based compensation been
determined based on fair value at the grant dates as calculated in accordance
with SFAS No. 123, the Company's net loss and loss per share for the years ended
September 30, 1999, 1998 and 1997 would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
NET LOSS NET LOSS NET LOSS
ATTRIBUTABLE LOSS PER ATTRIBUTABLE LOSS PER ATTRIBUTABLE LOSS PER
TO COMMON COMMON TO COMMON COMMON TO COMMON COMMON
STOCKHOLDERS SHARE STOCKHOLDERS SHARE STOCKHOLDERS SHARE
------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
As restated........................ $(11,082,090) $(1.21) $(3,273,995) $(.37) ($7,708,739) $ (.97)
Pro forma.......................... $(12,286,542) $(1.34) $(3,849,985) $(.43) ($7,780,546) $ (.98)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1996 and additional awards in future years are anticipated.
The fair value of each stock option is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: an expected life of seven years, expected volatility of 80.0%, no
dividends, and risk-free interest rate of 6.08% for September 30, 1999; an
expected life of seven years, expected volatility of 57.9%, no dividends, and
risk-free interest rate of 5.76% for September 30, 1998; and an expected life of
seven years, expected volatility of 57.9%, no dividends, and risk-free interest
rate of 6.125% for September 30, 1997. The weighted average price of the fair
value of
44
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. STOCKHOLDERS' EQUITY (CONTINUED)
options granted for years ended September 30, 1999, 1998 and 1997 are $5.21,
$7.14 and $5.80, respectively.
M. PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, $.01 par value. The Preferred Stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights and sinking fund
provisions
On August 25, 1999, the Company completed an $8 million private placement of
8,000 shares of its Series A Redeemable Convertible Preferred Stock, $0.01 par
value per share (the "Series A Preferred Stock"), with Brown Simpson Strategic
Growth Funds ("Brown Simpson"). The Series A Preferred Stock is initially
convertible into 1,025,641 shares of the Company's common stock, $0.01 par value
per share (the "Common Stock"), at an initial conversion price of $7.80 per
share. The Series A Preferred Stock is also subject to certain dilution
protection for a period of three years. Under certain circumstances, the Company
has the option to cause the Series A Preferred Stock to convert into shares of
Common Stock or otherwise be redeemed. At the end of seven years, the Company
must redeem any remaining shares of the Series A Preferred Stock for cash or, at
the Company's option, Common Stock with a then fair market value equal to the
original purchase price of the Series A Preferred Stock. The obligation at seven
years to redeem any remaining shares of the Series A Preferred Stock accelerates
to the fourth anniversary of the closing in the event that the average bid price
of the Company's Common Stock for the 60 "trading day" period immediately
preceeding the fourth anniversary is $5 per share or less. In the event of
certain changes in control events regarding the Company or if the Common Stock
is delisted, Brown Simpson has the right to cause the Series A Preferred Stock
to be redeemed.
In connection with the transaction, Brown Simpson also received warrants to
purchase up to 675,000 additional shares of Common Stock at $8.54 per share (the
"Brown Simpson Warrants"). The Brown Simpson Warrants expire on August 25, 2003.
The Company has allocated $1,818,558 of the proceeds, net of $1,338,234
transaction costs, based on the fair value of these warrants, as determined by
the Black-Scholes option pricing model.
H.C. Wainwright & Co., Inc. ("H.C. Wainwright") served as placement agent
for the transaction and received a commission of $560,000 and warrants to
purchase 120,000 shares of the Company's Common Stock at $7.80 per share. These
warrants expire on August 25, 2003. H.C. Wainwright will also receive a future
fee in the amount of 4% of any monies received by the Company upon the exercise
of the Brown Simpson Warrants. The Company has recorded the fair value of these
warrants, as determined by the Black-Scholes option pricing model, of $550,734
as a transaction cost of this offering.
The Company has valued the redeemable convertible preferred stock at
issuance to be $4,843,208 based on the relative fair market values of the
financial instruments issued in connection with this placement. The Company will
accrete the carrying value of the redeemable convertible preferred stock to its
redeemable value of $8,000,000 at August 25, 2003, in the event that the average
bid price for the 60 trading days prior is $5.00 or less, using the effective
interest method. As of September 30, 1999, the Company has accreted $50,904 and
recorded this as a charge against additional paid-in capital.
45
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. SIGNIFICANT CUSTOMERS
Significant customers, defined as net revenues from those customers that
account for 10% or more of total net revenue in a fiscal year, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL NET REVENUES
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------
CUSTOMER 1999 1998 1997
-------- -------- -------- --------
(AS RESTATED)
<S> <C> <C> <C>
U.S. government:
U.S. Department of Defense.............................. 20.6% 22.1% 44.6%
</TABLE>
O. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Accretion of redeemable convertible preferred stock
discount.................................................. $50,904 $ -- $ --
Acquisition of equipment under capital leases............... $49,813 $ -- $ --
</TABLE>
INTEREST AND INCOME TAXES PAID
Cash paid for interest and income taxes were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest........................................ $115,692 $10,206 $13,933
======== ======= =======
Income taxes.................................... -- $ 5,772 $ 5,800
======== ======= =======
</TABLE>
P. ACQUISITIONS
K&D MAGMOTOR CORPORATION
On January 23, 1997, the Company acquired substantially all of the assets
and assumed certain of the liabilities of K&D MagMotor Corporation ("MagMotor")
pursuant to the terms of an Asset Purchase Agreement, dated as of January 2,
1997, by and among the Company, MagMotor and MagMotor's principal stockholder
(the "Stockholder") (the "Asset Purchase Agreement"). The aggregate
consideration paid by the Company for the acquired assets of MagMotor was
approximately $210,000 in cash and 30,000 shares of the Company's common stock,
par value $.01 per share valued at $6.625 per share or $198,750. MagMotor's
assets, including machinery and equipment and inventory, were recorded at their
estimated market value of $250,000 and $160,000, respectively.
MagMotor is a manufacturer of custom electric motors targeting the factory
automation, medical, semi-conductor and packaging markets. The Company continues
to use the assets in the same manner in
46
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
P. ACQUISITIONS (CONTINUED)
which they were used by MagMotor immediately prior to the acquisition. The
Company has included in its consolidated results of operations the acquisition
of MagMotor under the purchase method of accounting.
The pro forma financial information has not been presented as the
acquisition of Magmotor is not material.
FILM MICROELECTRONICS, INC.
On April 16, 1997, the Company acquired substantially all of the assets of
Film Microelectronics, Inc. ("FMI"), pursuant to the Asset Purchase Agreement,
dated as of April 3, 1997, by and among the Company, FMI and FMI's principal
stockholder. In addition, the Company assumed trade payables aggregating
approximately $900,000 and the assumption of indebtedness of approximately $1
million. The aggregate consideration paid by the Company for the acquired assets
of FMI was 420,000 shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), valued at $6.375 per share or $2,677,500.
FMI is a manufacturer of production and custom integrated circuits for the
communications, industrial, military and aerospace markets. The Company
continues to use the assets in the same manner in which they were used by FMI
immediately prior to the acquisition. FMI's assets have been recorded at their
estimated market values with the excess purchase price assigned to goodwill,
which is being amortized over 15 years.
The Company has included in its consolidated results of operations the
acquisition of FMI under the purchase method of accounting. The following
unaudited pro forma financial information combines SatCon and FMI's results of
operations as if the acquisition had taken place on October 1, 1996. The pro
forma results are not necessarily indicative of what the results of operations
actually would have been if the transaction had occurred on the applicable dates
indicated and are not intended to be indicative of future results of operations.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
SEPTEMBER 30,
1997
-------------
(AS RESTATED)
<S> <C>
Revenue..................................................... $14,974,765
Operating loss.............................................. $(8,589,880)
Net loss.................................................... $(8,110,334)
Net loss per share.......................................... $ (.99)
</TABLE>
INDUCTIVE COMPONENTS, INC. AND LIGHTHOUSE SOFTWARE, INC.
On January 4, 1999, the Company's MagMotor subsidiary acquired substantially
all of the assets and assumed certain liabilities of Inductive Components, Inc.
and Lighthouse Software, Inc., pursuant to the terms of an Asset Purchase
Agreement, dated January 4, 1999, among MagMotor, the Company, Inductive
Components, Inc, Lighthouse Software, Inc. and Thomas Glynn, the sole
stockholder of Inductive and the majority stockholder of Lighthouse. The
aggregate consideration paid by the Company for the acquired assets of Inductive
Components, Inc. and Lighthouse Software, Inc. was 100,000 shares of the
Company's common stock, valued at $5.6875 per share or $568,750. In addition,
the Company assumed indebtedness of approximately $246,000. The Company has
included in its consolidated results of operations the
47
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
P. ACQUISITIONS (CONTINUED)
acquisition of Inductive and Lighthouse under the purchase method of accounting.
The purchase price has been allocated as follows:
<TABLE>
<S> <C>
Inventory................................................... $ 50,000
Property and equipment...................................... 100,597
Intangibles................................................. 275,000
Goodwill.................................................... 389,079
--------
$814,676
========
</TABLE>
The pro forma financial information has not been presented, as the
acquisitions of Inductive Components, Inc. and Lighthouse Software, Inc. are not
material.
HYCOMP, INC.
On April 12, 1999, the Company executed an agreement to purchase
substantially all of the assets and assume certain liabilities of HyComp, Inc.
("HyComp"). This agreement was dated March 31, 1999 and was by and between
HyComp and HyComp Acquisition Corp., a wholly-owned subsidiary of the Company.
The aggregate consideration paid by the Company for the acquired assets of
HyComp consisted of (i) $750,000 in cash; (ii) the assumption of certain
liabilities and obligations of HyComp in the amount of approximately $422,000;
(iii) transaction costs of $95,000; and (iv) a 5% royalty to HyComp on certain
sales through April 12, 2000. At September 30, 1999, the Company has recorded
$50,000 of accrued royalties. The Company has included in its consolidated
results of operations the acquisition of HyComp under the purchase method of
accounting. The purchase price has been allocated as follows:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 38,556
Inventory................................................... 318,359
Deposits.................................................... 19,800
Property and equipment...................................... 940,500
----------
$1,317,215
==========
</TABLE>
The pro forma financial information has not been presented as the
acquisition of HyComp is not material.
48
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
P. ACQUISITIONS (CONTINUED)
Net cash paid for the acquisitions of K&D MagMotor Corporation, Film
Microelectronics, Inc., Inductive Components Inc., Lighthouse Software, Inc. and
HyComp, Inc. was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------------------
1999 1998 1997
---------- -------- ----------
<S> <C> <C> <C>
Fair value of assets........................ $1,742,812 -- $4,723,408
Cost in excess of net assets of companies
acquired, net............................. 389,079 -- 987,678
Liabilities assumed, including transaction
costs..................................... (567,215) -- (2,624,836)
Stock issued................................ (568,800) -- (2,876,250)
---------- ------- ----------
Cash paid................................... $ 995,876 -- $ 210,000
Less: Cash acquired......................... -- -- (97,014)
---------- ------- ----------
Net cash paid for the acquisitions.......... $ 995,876 -- $ 112,986
========== ======= ==========
</TABLE>
Q. EARNINGS PER SHARE
The following is the reconciliation of the numerators and denominators of
the basic and diluted per share computations of net loss:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Net loss attributable to common shareholders.......... $(11,082,090) $(3,273,995) $(7,708,739)
BASIC:
Common shares outstanding, beginning of year........ 8,990,249 8,769,146 7,359,074
Weighted average common shares issued during the
year.............................................. 200,017 190,163 600,235
Weighted average shares repurchased during the
year.............................................. (14,225) (2,638) --
------------ ----------- -----------
Weighted average shares outstanding--basic.......... 9,176,041 8,956,671 7,959,309
============ =========== ===========
Net loss per share, basic........................... $ (1.21) $ (.37) $ (.97)
============ =========== ===========
DILUTED:
Weighted average shares outstanding--basic.......... 9,176,041 8,956,671 7,959,309
Weighted average common stock equivalents (a)....... -- -- --
Weighted average shares outstanding--diluted........ 9,176,041 8,956,671 7,959,309
============ =========== ===========
Net loss per share, diluted......................... $ (1.21) $ (.37) $ (.97)
============ =========== ===========
</TABLE>
(a) At September 30, 1999, 1998 and 1997, 2,582,147, 884,758 and 1,000,427
options and warrants, respectively, were excluded from the weighted average
common shares outstanding as their effect would be antidilutive.
49
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
R. COMPREHENSIVE LOSS
The Company's total comprehensive loss is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Net loss.............................................. $(11,031,186) $(3,273,995) $(7,708,739)
============ =========== ===========
Other comprehensive income/(loss), net of tax:
Unrealized gains/(losses) on securities............... $ 10,380 $ 9,835 $ 19,720
------------ ----------- -----------
Other comprehensive income/(loss)..................... $ 10,380 $ 9,835 $ 19,720
------------ ----------- -----------
Comprehensive loss.................................... $(11,020,806) $(3,264,160) $(7,689,019)
============ =========== ===========
</TABLE>
S. SEGMENT DISCLOSURES
As of October 1, 1998, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products and services, geographical areas and
major customers. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and assess their performance.
The Company's organizational structure is based on strategic business units
that offer various products to the principal markets in which the Company's
products are sold. These business units equate to three reportable segments:
research and development, power electronic products and motion-control products.
SatCon Technolgy Corporation provides research and development services in
collaboration with third-parties. Film Microelectronics, Inc designs and
manufactures power electronics products. The Magmotor Division specializes in
the engineering and manufacturing of motion-control products. The Company's
principal operations and markets are located in North America.
The accounting policies of each of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on revenue and profit and loss from operations
before income taxes, interest income, interest expense, other income and losses
and loss from investment in Beacon Power Corporation, excluding the effects of
amortization of intangible assets associated with acquisitions. Common costs not
directly attributable to a particular segment are allocated among segments based
on management's estimates.
50
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
S. SEGMENT DISCLOSURES (CONTINUED)
The following is a summary of the Company's operations by operating segment:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Research and development:
Funded research and development
revenue............................ $ 6,355,383 $ 8,010,735 $ 8,738,293
----------- ----------- -----------
Loss from operations, net of
amortization....................... $(6,577,012) $(1,454,707) $(8,088,347)
=========== =========== ===========
Power electronic products:
Revenue.............................. $ 6,306,085 $ 5,909,765 $ 2,594,023
----------- ----------- -----------
(Loss)/income from operations, net of
amortization....................... $(2,073,946) $ 504,528 $ 137,268
=========== =========== ===========
Motion-control products:
Revenue.............................. $ 2,816,413 $ 1,610,423 $ 1,134,019
----------- ----------- -----------
(Loss)/income from operations, net of
amortization....................... $ (755,272) $ (310,023) $ 93,609
=========== =========== ===========
</TABLE>
The following is a summary of the Company's long-lived assets by operating
segment:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Research and development:
Long-lived assets.................................. $1,717,228 $1,842,517
---------- ----------
Power electronic products:
Long-lived assets.................................. $3,978,027 $3,416,341
---------- ----------
Motion-control products:
Long-lived assets.................................. $ 863,661 $ 434,248
---------- ----------
</TABLE>
T. SUBSEQUENT EVENTS
On October 21, 1999, the Company received an investment from Mechanical
Technology, Inc. ("MTI") of $7,000,000 in the Company. In consideration for
MTI's investment, MTI will receive 1,030,000 shares of the Company's common
stock at a discounted price of approximately $6.80 per share, $.01 par value per
share (the "Common Stock"), and warrants to purchase an additional 100,000
shares of the Company's Common Stock. MTI funded $2,570,000 of its investment in
the Company on October 21, 1999 and received 370,800 shares of the Company's
Common Stock and a warrant to purchase 36,000 shares of the Company's Common
Stock, and it will make the remaining investment by the end of January 2000. In
addition, the Company has received a warrant to purchase 36,000 shares of MTI's
Common Stock and will receive the remaining warrant to purchase 64,000 shares of
MTI's Common Stock by the end of January 2000.
51
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
T. SUBSEQUENT EVENTS (CONTINUED)
Additionally, the Company acquired Ling Electronics, Inc. and Ling
Electronics, Ltd. (collectively, "Ling Electronics") from MTI. In consideration
for the acquisition of Ling Electronics, MTI received $70,000 and 770,000 shares
of the Company's common stock, $.01 par value per share (the "Common Stock")
valued at $9.8438 per share or $7,579,726.
The following unaudited pro forma financial information combines SatCon and
Ling's results of operations as if the acquisition had taken place on
October 1, 1997. The pro forma results are not necessarily indicative of what
the results of operations actually would have been if the transaction had
occurred on the applicable dates indicated and are not intended to be indicative
of future results of operations.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
------------ -----------
(AS RESTATED)
(UNAUDITED)
<S> <C> <C>
Revenue........................................... $ 23,849,881 $27,764,923
Operating loss.................................... $(11,252,135) $(2,109,977)
Net loss.......................................... $(12,506,004) $(4,085,069)
Net loss attributable to common stockholders...... $(12,556,908) $(4,085,069)
Net loss per share, basic and diluted............. $ (1.26) $ (0.42)
</TABLE>
On November 16, 1999, the Company purchased certain intellectual property,
equipment and other assets from Northrop Gruman Corporation ("NGC"). These
assets were used by NGC in connection with its power electronics products
business. The Company also entered into (i) a sublease with NGC pursuant it
entered into a five-year sublease for approximately 14,863 square feet of
rentable space in the Baltimore area and (ii) a three-year Transition Services
Agreement providing the Company access to certain test facilities and personnel
of NGC on a fee basis. In consideration for these foregoing acquisition and
agreements, NGC received 578,761 shares of the Company's common stock, $.01 par
value per share (the "Common Stock"), and warrants to purchase an additional
200,000 shares of the Company's Common Stock.
The pro forma financial information has not been presented, as the Company
views this transaction as the purchase of assets rather than as a business
combination.
52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE
To the Board of Directors of SatCon Technology Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated statements of SatCon Technology Corporation and its
subsidiaries (as restated) and have issued our report thereon dated
December 27, 1999 (except with respect for the matter discussed in Note A for
which the date is August 7, 2000). Our audit was made for the purpose of forming
an opinion on those consolidated financial statements taken as a whole. The
schedule listed in the financial statement schedule index is the responsibility
of the Company's management and is presented for the purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 27, 1999
53
<PAGE>
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1997:
Allowance for doubtful accounts........... $ 130,900 $ 30,750 $ (2,407) $ 159,243
Allowance for unbilled contract costs..... $ 432,500 $ 909,100 $ (211,132) $ 1,130,468
Deferred tax valuation allowance.......... $1,661,329 $1,840,639 -- $ 3,501,968
Allowance for obsolete inventory.......... -- $ 758,541 -- $ 758,541
Reserve for product warranty expense...... -- $ 16,511 -- $ 16,511
Accrued costs for consolidation of
facilities.............................. -- $ 498,000 -- $ 498,000
YEAR ENDED SEPTEMBER 30, 1998:
Allowance for doubtful accounts........... $ 159,243 $ 29,014 $ (136,421) $ 51,836
Allowance for unbilled contract costs..... $1,130,468 -- $(1,072,857) $ 57,611
Deferred tax valuation allowance.......... $3,501,968 $2,705,370 -- $ 6,207,338
Allowance for obsolete inventory.......... $ 758,541 -- $ (549,765) $ 208,776
Reserve for product warranty expense...... $ 16,511 -- $ (16,511) --
Accrued costs for consolidation of
facilities.............................. $ 498,000 -- $ (398,000) $ 100,000
YEAR ENDED SEPTEMBER 30, 1999:
Allowance for doubtful accounts........... $ 51,836 $ 345,433 $ (10,583) $ 386,686
Allowance for unbilled contract costs..... $ 57,611 $ 688,510 -- $ 746,121
Deferred tax valuation allowance.......... $6,207,338 $4,008,214 -- $10,215,552
Allowance for obsolete inventory.......... $ 208,776 $ 870,021 -- $ 1,078,797
Reserve for product warranty expense...... -- $ 36,000 -- $ 36,000
Accrued costs for consolidation of
facilities.............................. $ 100,000 -- -- $ 100,000
</TABLE>
54
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 234,350
Prepaid expenses and other current assets................. 15,987
------------
Total current assets.................................. 250,337
PROPERTY AND EQUIPMENT, Net................................. 566,013
DEFERRED FINANCING COSTS.................................... 81,934
DEPOSITS.................................................... 57,150
OTHER ASSETS................................................ 18,066
------------
TOTAL ASSETS................................................ $ 973,500
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 413,146
Accrued compensation and benefits......................... 109,206
Accrued interest.......................................... 164,140
Accrued loss on contracts................................. 325,000
Other accrued expenses.................................... 43,222
Current portion of capital lease obligations.............. 73,291
------------
Total current liabilities............................. 1,128,005
------------
DIVIDENDS PAYABLE........................................... 749,005
------------
NOTES PAYABLE TO INVESTORS.................................. 3,150,000
------------
CAPITAL LEASE OBLIGATIONS, Net of current portion........... 2,875
------------
COMMITMENTS (Note 6)
CLASS D REDEEMABLE CONVERTIBLE
PREFERRED STOCK (Liquidation preference of $4,750,000)...... 4,534,816
------------
STOCKHOLDERS' (DEFICIENCY) EQUITY:
Preferred stock:
Class A Convertible, $.01 par value; 6,000,000, shares
authorized 4,767,907 issued and outstanding
(liquidation preference, $21,217,186................... 5,707,718
Class B Convertible, $.01 par value; 1 share authorized;
no shares issued and outstanding....................... --
Class C Convertible, $.01 par value; 6 shares
authorized, issued and outstanding..................... 29,933
Common stock, $.01 par value; 30,000,000 shares
authorized; 8,424 shares issued and outstanding........ 84
Deferred consulting expense, net.......................... (100,000)
Deferred stock compensation............................... (56,648)
Additional paid-in capital................................ 515,318
Accumulated deficit during the development stage.......... (14,687,606)
------------
Total stockholders' deficiency........................ (8,591,201)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY.............. $ 973,500
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
55
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE FROM
MAY 8, 1997
(DATE OF
YEAR ENDED INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1999 1999
------------ ------------------
<S> <C> <C>
REVENUE..................................................... $ 268,868 $ 501,184
----------- ------------
OPERATING EXPENSES:
Selling, general and administrative....................... 1,558,985 3,915,621
Research and development.................................. 3,506,031 9,321,477
Loss on contracts......................................... 325,000 325,000
Depreciation and amortization............................. 218,594 296,802
----------- ------------
Total operating expenses................................ 5,608,610 13,858,900
----------- ------------
LOSS FROM OPERATIONS........................................ (5,339,742) (13,357,716)
----------- ------------
OTHER INCOME (EXPENSE):
Interest income........................................... 25,118 153,043
Interest expense.......................................... (356,869) (371,599)
----------- ------------
Total other income (expense), net....................... (331,751) (218,556)
----------- ------------
NET LOSS.................................................... (5,671,493) (13,576,272)
PREFERRED STOCK DIVIDENDS................................... (916,852) (1,029,005)
ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK......... (41,671) (48,579)
----------- ------------
LOSS TO COMMON SHAREHOLDERS................................. $(6,630,016) $(14,653,856)
=========== ============
LOSS PER SHARE--BASIC AND DILUTED........................... $ (787.04) $ (1,739.54)
=========== ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING.................. 8,424 8,424
=========== ============
</TABLE>
56
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS C DEFERRED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK CONSULTING
---------------------- --------------------- --------------------- EXPENSE,
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT NET
--------- ---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999........... 4,622,907 $5,345,218 6 $29,933 8,424 $84 $ (37,500)
Issuance of Class A preferred
stock for services............. 145,000 362,500 -- -- -- -- (125,000)
Dividend on Class D preferred
stock.......................... -- -- -- -- -- -- --
Deferred stock compensation...... -- -- -- -- -- -- --
Amortization of deferred stock
compensation................... -- -- -- -- -- -- --
Amortization of deferred
consulting expense, net........ -- -- -- -- -- -- 62,500
Issuance of warrants to holders
of Class D shares.............. -- -- -- -- -- -- --
Issuance of warrants for bridge
loans.......................... -- -- -- -- -- -- --
Accretion of redeemable preferred
stock to redemption value...... -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
--------- ---------- ---------- ------- ---------- --- ---------
BALANCE, DECEMBER 31, 1999......... 4,767,907 $5,707,718 6 $29,933 8,424 $84 $(100,000)
========= ========== ========== ======= ========== === =========
<CAPTION>
DEFICIT
ACCUMULATED
DEFERRED ADDITIONAL DURING THE TOTAL
STOCK PAID-IN DEVELOPMENT STOCKHOLDERS'
COMPENSATION CAPITAL STAGE DEFICIENCY
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999........... $ -- $ -- $(8,057,590) $(2,719,855)
Issuance of Class A preferred
stock for services............. -- -- -- 237,500
Dividend on Class D preferred
stock.......................... -- -- (636,852) (636,852)
Deferred stock compensation...... (65,318) 65,318 -- --
Amortization of deferred stock
compensation................... 8,670 -- -- 8,670
Amortization of deferred
consulting expense, net........ -- -- -- 62,500
Issuance of warrants to holders
of Class D shares.............. -- 280,000 (280,000) --
Issuance of warrants for bridge
loans.......................... -- 170,000 -- 170,000
Accretion of redeemable preferred
stock to redemption value...... -- -- (41,671) (41,671)
Net loss......................... -- -- (5,671,493) (5,671,493)
-------- --------- ------------ -----------
BALANCE, DECEMBER 31, 1999......... $(56,648) $ 515,318 $(14,687,606) $(8,591,201)
======== ========= ============ ===========
</TABLE>
57
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE FROM
MAY 8, 1997
(DATE OF
YEAR ENDED INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1999 1999
------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(5,671,493) $(13,576,272)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 218,594 296,802
Interest expense relating to issuance of warrants....... 170,000 170,000
Amortization of deferred consulting expense, net........ 300,000 562,500
Services and interest expense paid in preferred stock... -- 11,485
Accrued loss on contracts............................... 325,000 325,000
Changes in operating assets and liabilities:
Prepaid expenses and other current assets............. 4,320 (15,987)
Accounts payable...................................... (409,577) 413,146
Accrued compensation and benefits..................... 41,023 109,206
Accrued interest...................................... 164,140 164,140
Due to related party.................................. (18,611) --
Other accrued expenses and current liabilities........ 36,270 51,892
----------- ------------
Net cash used in operating activities............... (4,840,334) (11,488,088)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets.................................. (110,180) (157,150)
Purchases of property and equipment....................... (350,881) (608,304)
----------- ------------
Net cash used in investing activities............... (461,061) (765,454)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of subscription receivable...................... -- 5,000,000
Issuance of Class C preferred stock....................... -- 30,000
Issuance of Class D redeemable preferred stock............ -- 4,486,237
Repayment of capital leases............................... (105,406) (178,345)
Proceeds from notes payable issued to investors........... 3,150,000 3,150,000
----------- ------------
Net cash provided by financing activities................. 3,044,594 12,487,892
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (2,256,801) 234,350
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 2,491,151 --
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 234,350 $ 234,350
=========== ============
SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Class A Preferred Stock for subscription
receivable.............................................. $ -- $ 5,000,000
=========== ============
Acquisition of assets with capital leases................. $ -- $ 254,411
=========== ============
Issuance of warrants in conjunction with financing........ $ 450,000 $ 450,000
=========== ============
Issuance of non-qualified stock options to consultants.... $ 65,318 $ 65,318
=========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
58
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS AND OPERATIONS
NATURE OF BUSINESS--Beacon Power Corporation (the "Company" or "Beacon") (a
development stage company) was incorporated on May 8, 1997 as a wholly owned
subsidiary of SatCon Technology Corporation ("SatCon"). Since its inception,
Beacon has been engaged in the development of flywheel devices for storing and
transmitting kinetic energy. As of December 31, 1999, the Company has not yet
commenced its planned principal activities of marketing and manufacturing such
devices and accordingly is accounted for as a development stage company under
Statement of Financial Accounting Standards No. 7. As of December 31, 1999, a
majority of the Company's outstanding shares is owned by SatCon. However, in
conjunction with the October 1998 Class D preferred stock offering, the
Company's minority investors were granted the right to appoint a majority of the
members of the Company's Board of Directors.
The Company has a single operating segment, manufacturing alternative power
sources. The Company has no organizational structure dictated by product lines,
geography or customer type.
OPERATIONS--The Company has experienced net losses since its inception and,
as of December 31, 1999, had an accumulated deficit of approximately
$14.7 million. The Company is currently facing the challenge of finalizing
development of a viable commercial product and raising adequate capital to
sustain operations. As discussed in Note 15, during the period during
January 1, 2000 to May 25, 2000, the Company secured additional financing of
approximately $32 million. Management believes that this funding is sufficient
to continue its operations as a going concern through at least December 31,
2000.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
ACCOUNTING PRINCIPLES--The accompanying financial statements have been
prepared using accounting principles generally accepted in the United States of
America.
RECAPITALIZATION--The accompanying financial statements reflect a
recapitalization of the Company in 1997 when one shareholder exchanged shares of
common stock for Class A preferred stock.
STOCK SPLIT--The accompanying financial statements reflect a 1.125 for 1
split of the Company's preferred and common stock. All share and per share
information herein has been retroactively restated to reflect this split.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES--The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include demand deposits
and highly liquid investments with a maturity of three months or less when
acquired. Cash equivalents are stated at cost, which approximates market value.
PROPERTY AND EQUIPMENT--Property and equipment, including leasehold
improvements, are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets.
59
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
DEFERRED FINANCING COSTS--Deferred financing costs consist of legal,
administrative, financing and other related expenses incurred in connection with
the Class E financing completed during the year ending December 31, 2000 and
will be amortized over the terms of the obligations using the effective interest
method.
OTHER ASSETS--Other assets consist of unamortized legal expenses related to
patents.
CONTRACT LOSSES--Substantially all of the Company's sales commitments are
firm fixed-price. Revenue and cost of revenue on such sales commitments are
recorded as deliveries are made. Estimates of costs to complete are reviewed and
revised periodically and accruals for estimated losses from such revisions are
recorded in the accounting period in which the revisions are made. Losses on
contracts are recorded in full as they are identified.
LONG-LIVED ASSETS--At the occurrence of certain events or changes in
circumstances, the Company reviews the carrying value of its long-lived assets
to determine if impairment has occurred and, if necessary, adjusts the carrying
value accordingly. No adjustments have been required to date.
REVENUE RECOGNITION--Revenue relates to work performed under research and
development contracts. Revenue is recognized as services are performed.
STOCK-BASED COMPENSATION--Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic-value method.
Compensation expense associated with awards to nonemployees is measured using
the fair-value method and is amortized over the vesting period of three years.
INCOME TAXES--Deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and tax loss and credit carryforwards using the currently
enacted tax rates and laws. A valuation allowance is provided to the extent
realization of deferred tax assets is not considered more likely than not.
RESEARCH AND DEVELOPMENT--Research and development costs are expensed as
incurred.
FINANCIAL INSTRUMENTS--The carrying amount of cash and cash equivalents,
accounts payable, accrued expenses, notes payable to investors and capital lease
obligations approximate their fair values.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to significant concentration of credit risk consist primarily of
cash and cash equivalents. Substantially all of the Company's cash and cash
equivalents are managed by one financial institution. At December 31, 1999, the
Company had cash balances at a financial institution in excess of federally
insured limits. However, the Company does not believe that it is subject to
unusual credit risk beyond the normal credit risk associated with commercial
banking relationships.
COMPREHENSIVE LOSS--Comprehensive loss is the same as net loss for all
periods presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging
60
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
activities. The statement, as amended, is effective for fiscal years beginning
after June 15, 2000. Management is currently evaluating the effect of adopting
SFAS No. 133 on the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). SAB 101
established guidelines for revenue recognition and is effective for periods
beginning no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. Management does not expect that the adoption of SAB 101
will have a material impact on the Company's financial condition or results of
operations.
NET LOSS PER SHARE
LOSS PER SHARE--Loss per share has been computed using the weighted-average
number of shares of common stock outstanding during each period. Diluted loss
per share was computed in the same manner. The impact of the Company's
outstanding potential common shares, such as options and warrants (computed
using the treasury stock method) and convertible preferred stock, were excluded
from the calculation because such items were antidilutive.
The weighted average number of shares of common stock issuable during the
year ended December 31, 1999 and the period from May 8, 1997 (date of inception)
to December 31, 1999 were 8,149,460 and 5,338,018, respectively, upon the
exercise of options and warrants and the conversion of preferred stock
outstanding.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 1999:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
----------
<S> <C> <C>
Machinery and equipment............................... 5 years $298,180
Furniture and fixtures................................ 7 years 41,521
Office equipment...................................... 3 years 159,894
Leasehold improvements................................ lease term 108,809
Equipment under capital lease obligations............. lease term 254,411
--------
Total............................................... 862,815
Less accumulated depreciation and amortization........ (296,802)
--------
Property and equipment, net......................... $566,013
========
</TABLE>
4. NOTES PAYABLE TO INVESTORS
At December 31, 1999, notes payable to investors consists of Senior Secured
Convertible Promissory Notes (the "Senior Notes") held by the Company's primary
investors. The Senior Notes bear interest, which is payable upon conversion, at
an annual rate of 12.5%, increasing to 15% after six months if the Class E
redeemable convertible preferred stock ("Class E Stock") funding had not
occurred at that time.
61
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. NOTES PAYABLE TO INVESTORS (CONTINUED)
The notes are secured by substantially all of the assets of the Company. In
connection with the issuance of the Senior Notes, the investors received
warrants to purchase shares of the Company's common stock (see Note 10).
On April 7, 2000, the Senior Notes and accrued interest were converted into
Class E Stock (see Note 15).
5. CAPITAL LEASE OBLIGATIONS
The Company leases equipment under capital lease agreements expiring through
2001. Future obligations under such capital leases as of December 31, 1999 are
as follows:
<TABLE>
<S> <C>
2000........................................................ $77,530
2001........................................................ 3,067
-------
80,597
Less amount representing interest........................... 4,431
-------
76,166
Less current portion of capital lease obligations........... 73,291
-------
Capital lease obligations, excluding current portion........ $ 2,875
=======
</TABLE>
6. COMMITMENTS
The Company leases office and light manufacturing space under operating
leases expiring through January 30, 2001 and an operating lease for office
equipment expiring October 2001.
Future minimum annual lease payments under noncancelable operating leases as
of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $241,506
2001........................................................ 25,449
</TABLE>
Total rent expense was $199,405 during 1999, and $345,660 for the period
from May 8, 1997 (date of inception) to December 31, 1999.
7. PREFERRED STOCK
CLASS A CONVERTIBLE PREFERRED STOCK--Each share of Class A convertible
preferred stock ("Class A Stock") is convertible into one share of common stock
at the option of the holder. The Class A Stock is nonvoting. Upon liquidation,
holders of Class A Stock are entitled to receive, out of funds then generally
available prior to any payment with respect to the holders of common stock,
$4.45 per share, plus any declared and unpaid dividends thereon. Holders of the
Class A Stock have the right to receive the same dividends as declared by the
Board of Directors on common shares on an "as-if-converted" basis. The Class A
Stock will automatically be converted into shares of common stock upon the
closing of a public offering of common stock of the Company, upon a vote of the
Board of Directors or upon the automatic conversion of the Class D preferred
stock (see Note 8). Class A Stock is subordinate to Class D, E and F preferred
stock and has parity with Class B and C preferred stock. The Class A stock does
not have redemption features.
62
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. PREFERRED STOCK (CONTINUED)
CLASS B AND C CONVERTIBLE PREFERRED STOCK--Each share of Class B convertible
preferred stock ("Class B Stock") and Class C convertible preferred stock
("Class C Stock") is convertible into one share of common stock at the option of
the holder. The holders of the Class B and C Stock have voting rights equivalent
to the number of shares of common stock into which their shares of Class B and C
Stock convert. The Class B and C Stock have the right to receive the same
dividends as declared by the Board of Directors on common shares on an
"as-if-converted" basis. The Class B and C Stock will automatically be converted
into shares of common stock upon the closing of a public offering of common
stock of the Company, upon a vote of the Board of Directors, upon the automatic
conversion of the Class D preferred Stock (see Note 8), or upon conversion of
the Class A Stock. Class B and C Stock have parity with Class A in liquidation
and are subordinate to Class D, E and F preferred stock. The Class B and
C Stock do not have redemption features.
8. REDEEMABLE PREFERRED STOCK
CLASS D REDEEMABLE CONVERTIBLE PREFERRED STOCK--The Company has authorized
6,000,000 shares of Class D convertible preferred stock ("Class D Stock") with a
par value of $.01 per share. On October 23, 1998, the Company issued 1,900,000
shares of Class D Stock and received net proceeds of approximately $4,486,000.
Issuance costs totaled approximately $264,000 and are being accreted to the
carrying value of the Class D Stock over the period to the stock's earliest
redemption date. Each share of Class D Stock is convertible into one share of
common stock at the option of the holder. The holders of the Class D Stock have
voting rights equivalent to the number of shares of common stock into which
their shares of Class D Stock convert. Holders of the Class D Stock are also
entitled to appoint representatives to the Board of Directors. The Class D Stock
earns cumulative dividends at an annual rate of 12.5% through May 23, 2000 and
6% on and after this date, payable quarterly. Dividends can be paid in shares of
Class D Stock through May 23, 2000 and after this date, are payable only in
cash. Cumulative dividends not paid on Class D Stock total $112,153 and $749,005
as of December 31, 1998 and 1999, respectively. Upon liquidation, holders of
Class D Stock are entitled to receive, out of funds then generally available,
unpaid dividends previously declared or accrued and a per share amount of $2.50.
The Class D Stock is redeemable by the holder at any time after December 31,
2004 for the stated value of $2.50 per share plus accrued, but unpaid,
dividends. The Class D Stock will automatically be converted into shares of
common stock upon a change in ownership of 50% of the Company's outstanding
voting stock, upon a merger or consolidation of the Company or upon the sale of
significant assets of the Company, or upon the closing of a qualified public
offering.
Pursuant to the Stock Purchase Agreement related to the Class D Stock (the
"Class D Agreement"), the Company is bound by certain covenants. The Class D
Stock is senior to the Class A, B and C Stock, subordinate to Class F preferred
stock and has parity with Class E preferred Stock (see Note 15).
9. COMMON STOCK
DIVIDENDS--Dividends may be declared and paid on the common stock as and
when determined by the Board of Directors subject to any preferential dividend
rights of any then outstanding shares of preferred stock.
63
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. COMMON STOCK (CONTINUED)
RESERVED SHARES--At December 31, 1999, 9,130,420 shares of common stock were
reserved for issuance under the Company's stock option plan, outstanding
warrants and for the potential conversion of preferred stock.
10. STOCK WARRANTS
At its inception in 1997, the Company issued a warrant to purchase 562,500
shares of common stock to an investor at the price of $5.33 per share (the "1997
warrant"). The warrant expired unexercised on May 28, 1999. Value ascribed to
this warrant was not material.
Under the conditions of the Class D Stock offering, the Company issued
warrants in October 1999 to three investors to purchase 386,250 shares of common
stock at $3.33, 386,250 shares of common stock at $4.50, and 386,250 shares of
common stock at $6 (the "October 1999 warrants"). The estimated fair value of
the warrants at the date of their issuance was $280,000. This amount has been
recorded as a dividend to the holders of the Class D Stock and credited to
additional paid-in-capital. These warrants expire December 31, 2004. Additional
warrants were issued under the Class D agreement during April 2000 (see
Note 15).
In conjunction with the issuance of the Senior Notes in August 1999, the
Company issued warrants to four investors to purchase 315,000 shares of Class E
Stock (or common stock if the warrant was exercised prior to the Class E Stock
financing (see Note 15)) at an exercise price of $2.50 per share (the "August
1999 warrants"). The estimated fair value of the warrants at the date of grant
was $170,000. This amount has been recorded as a discount on the Senior Notes
and was charged to interest expense in 1999 as the Senior Notes are demand
notes. These warrants expire on August 2, 2004.
In conjunction with the Class E conversion in April 2000 (see Note 15), the
August 1999 warrants were cancelled.
All warrants were valued on the date of grant using the Black-Scholes
(common stock) or the Binary Option Pricing Model (preferred stock). The
assumptions used to value these warrants were as follows:
<TABLE>
<CAPTION>
AUGUST OCTOBER
1997 1999 1999
WARRANT WARRANTS WARRANTS
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate.................................. 6.25% 5.62% 5.86%
Expected life of warrant................................. 24 months 30 months 27 months
Expected dividend payment rate, as a percentage of the
stock price on the date of grant....................... 0% 0.0% 0%
Assumed volatility....................................... 48% 60% 60%
</TABLE>
11. STOCK OPTIONS
The Company's option plans provide for the granting of stock options to
purchase up to 4,500,000 shares of the Company's common stock. Options may be
granted to employees, officers, directors and consultants of the Company with
terms of up to 10 years. Under the terms of the option plans, incentive stock
options ("ISOs") are to be granted at fair market value of the Company's stock
at the date of grant, and nonqualified stock options ("NSOs") are to be granted
at a price determined by the Board of
64
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. STOCK OPTIONS (CONTINUED)
Directors. ISOs and NSOs generally vest ratably over 36 months from the grant
date and have contractual lives of up to 10 years.
Stock option activity since inception is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE FAIR
SHARES PRICE VALUE
---------- --------- ---------
<S> <C> <C> <C>
Outstanding, January 1, 1999................................ 418,500 1.78
Granted................................................... 733,500 1.78 0.80
Canceled, forfeited or expired............................ (147,844) 1.78
---------- -----
Outstanding, December 31, 1999.............................. 1,004,156 $1.78
========== =====
</TABLE>
The following table summarized information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
VESTED
WEIGHTED- --------------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE AVERAGE
OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OF OPTIONS PRICE
-------------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1.7$8 1,004,156 8.64 $1.78 189,122 $1.78
====== ========= ==== ====== ======= ======
</TABLE>
As described in Note 2, the Company uses the intrinsic-value method to
measure compensation expense associated with grants of stock options to
employees. If the Company had used the fair value method to measure
compensation, reported net loss would have been as follows:
<TABLE>
<CAPTION>
CUMULATIVE FROM
MAY 8, 1997
(DATE OF INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1999
------------ -------------------
<S> <C> <C>
Net loss to common shareholders as reported................. $(6,630,016) $(14,653,856)
Net loss pro forma.......................................... (7,154,362) (15,478,335)
Loss per share--as reported................................. (787.04) (1,739.54)
Loss per share--pro forma................................... (849.28) (1,837.41)
</TABLE>
The fair value of the options on their grant date was measured using the
Black-Scholes option-pricing model. Key assumptions used to apply this
option-pricing model are as follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Risk-free interest rate..................................... 6.0%
Expected life of option..................................... 3 years
Expected dividend payment rate, as a percentage of the stock
price on the date of grant................................ 0%
Assumed volatility.......................................... 60%
</TABLE>
65
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. STOCK OPTIONS (CONTINUED)
The option-pricing model used was designed to value readily tradable stock
options with relatively short lives. However, management believes that the
assumptions used to value the options and the model applied yield a reasonable
estimate of the fair value of the grants made under the circumstances.
12. INCOME TAXES
The components of the provision (benefit) for income taxes consisted of the
following:
<TABLE>
<CAPTION>
CUMULATIVE FROM
MAY 8, 1997
(DATE OF INCEPTION)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1999 1999
------------ -------------------
<S> <C> <C>
Federal--deferred........................................... $(1,995,158) $(4,627,983)
State--deferred............................................. (352,087) (816,703)
Increase in valuation allowance............................. 2,347,245 5,444,686
----------- -----------
Provision (benefit) for income taxes........................ $ -- $ --
=========== ===========
</TABLE>
Taxes during interim periods are computed using the estimated rate effective
for the entire year. Changes to the estimated rate are reflected in periods in
which the estimated charge occurs.
A reconciliation of the statutory federal rate to the effective rate for all
periods is as follows:
<TABLE>
<S> <C>
Statutory federal rate benefit.............................. (34)%
State, net of federal effect................................ (6)
Valuation allowance provided................................ 40
---
Effective rate.............................................. --%
===
</TABLE>
The components of the Company's deferred tax assets and liabilities
consisted of the following at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Long-term assets:
Net operating loss carryforwards.......................... $ 4,728,408
Research and development credits.......................... 524,958
Loss on contracts......................................... 130,000
Other..................................................... 61,320
-----------
Net deferred tax assets before valuation allowance.......... 5,444,686
Less valuation allowance.................................... (5,444,686)
-----------
Net deferred tax assets..................................... $ --
===========
</TABLE>
The valuation allowance increased by $2,347,245 in 1999, primarily due to
the generation of net operating loss carryforwards and credits for which
realization is not reasonably assured.
66
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. INCOME TAXES (CONTINUED)
The Company has available for future periods federal and state tax net
operating loss carryforwards for federal and state purposes of approximately
$11,850,000 and $11,616,000, respectively, as of December 31, 1999. In addition,
the Company has business credits of approximately $524,958 as of December 31,
1999. The net operating loss carryforwards expire beginning in 2012 and 2002 for
federal and state tax purposes, respectively. The federal research and
development credits begin to expire in 2012. The Company did not pay any income
taxes from inception to December 31, 1999.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may have limited, or may limit in the future,
the amount of net operating loss carryforwards which could be utilized annually
to offset future taxable income and income tax liabilities. The amount of any
annual limitation is determined based upon the Company's value prior to an
ownership change.
13. BENEFIT PLAN
In 1998, the Company created a 401(k) Profit Sharing Plan (the "Plan") for
its full-time employees. Each participant in the Plan may elect to contribute a
percentage of his or her annual compensation to the Plan on a pre-tax basis up
to the annual limit established by the Internal Revenue Service ($10,200 for
1999). The Company matches employee contributions at a rate of 50% up to the
first 6% of the employee's contributions. The Company may also elect to make a
profit-sharing contribution based on the discretion of the Board of Directors.
Employee contributions are fully vested. Company matching and profit sharing
contributions vest 20% after two years of service consisting of at least
1,000 hours per calendar year and 20% annually thereafter. Company contributions
were $41,963 and $61,339 during 1999, and the period from May 8, 1997 (date of
inception) to December 31, 1999, respectively.
14. RELATED-PARTY TRANSACTIONS
CONSULTING AGREEMENTS--The Company entered into consulting agreements with
three investors in 1998 and 1997. The contracts are seven-year agreements,
renewable annually thereafter, for consulting services to be provided by the
investors in exchange for annual issuances of shares of the Company's Class A
Stock. During 1999 and the period from May 8, 1997 (date of inception),
$300,000, and $562,500, respectively, was recorded as consulting expense
relating to these agreements, and 145,000 and 265,000 shares of Class A Stock in
1999 and the period from May 8, 1997 (date of inception) to December 31, 1999,
respectively, were issued or issuable as compensation under these contracts.
Prepaid and accrued consulting expenses have been recorded annually, based on
the terms and dates of the consulting agreements. The services provided by the
investors were recorded based upon the value of the securities issued. These
contracts all expire immediately upon an initial public offering of the
Company's common stock.
PATENTS--The Company has entered into an agreement with SatCon whereby
SatCon granted the Company a perpetual license to use the technology patented by
SatCon relating to the field of flywheel energy storage products, systems and
processes for stationary terrestrial applications.
SERVICES AGREEMENTS--SatCon performs certain research and development,
administrative and other services for the Company. Amounts paid to SatCon for
such services rendered amounted to approximately $59,000 and $1,853,000 during
1999 and the period from May 8, 1997 (date of inception) to December 31, 1999,
respectively.
67
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
14. RELATED-PARTY TRANSACTIONS (CONTINUED)
DISTRIBUTION AGREEMENT--In 1997, the Company signed a 20-year agreement
which granted an investor (DQE Enterprises, Inc.) exclusive rights to distribute
certain of the Company's products in a territory comprised of seven Mid-Atlantic
states and the District of Columbia. However, the Company retained the right to
distribute products directly to cable television and telephone companies.
15. SUBSEQUENT EVENTS
BRIDGE FINANCING--On January 7, 2000, the Company received $600,000 of
bridge loans bearing annual interest at a rate of 12.5%; $200,000 of these loans
were repaid in February 2000 and the remaining loans were converted into
Class E redeemable convertible preferred stock (the "Class E Stock") in
conjunction with the Class E conversion (see below).
In February, March and April 2000, the Company received additional bridge
financing of $1,400,000 from previous investors and $4,100,000 from new and
previous investors (the "Class F Bridge Loans"). The Class F Bridge Loans bear
annual interest at a rate of 6%. $5,200,000 of these loans were converted into
Class F redeemable convertible preferred stock ("Class F Stock") in May 2000,
(see below). The remaining $300,000 plus interest was repaid in April 2000.
In conjunction with the April bridge loans, investors were granted warrants
to purchase 41,000 shares of the Company's common stock at $4.20 per share.
These warrants expire April 21, 2005. The estimated fair value of such warrants
is $27,000 based on the Black-Scholes Pricing Model.
WARRANTS ISSUED UNDER CLASS D AGREEMENT--Under the conditions of the
Class D Stock offering, the Company issued warrants in April 2000 to three
investors to purchase 356,250 shares of common stock at $3.33, 356,250 shares of
common stock at $4.50, and 356,250 shares of common stock at $6. Upon issuance
of these warrants the Company recorded a dividend of approximately $1,300,000
for the fair market value of these warrants based on the Black-Scholes Pricing
Model. These warrants expire December 31, 2004.
CLASS E CONVERSION--During April 2000, the Company authorized 2,000,000
shares of $.01 par value per share Class E Stock. On April 7, 2000, the Company
converted $3,550,000 of bridge loans plus interest of $275,559 into 1,226,141
shares of Class E Stock (the "Class E conversion"). Each share of Class E Stock
is convertible into one share of common stock at the option of the holder.
Holders of the Class E Stock have voting rights equivalent to the number of
shares of common stock into which their shares of Class E Stock convert. Holders
of the Class E Stock also share with the Class D Stock shareholders the right to
appoint representatives to the Board of Directors. The Class E Stock earns
cumulative dividends at an annual rate of 12.5% through May 23, 2000 and 6% on
and after this date, payable quarterly. Dividends are payable in shares of
Class E Stock through May 23, 2000 and after this date, are payable in cash.
Upon liquidation, holders of Class E Stock are entitled to receive, out of funds
then generally available unpaid dividends previously declared or accrued and a
per share amount of $3.12. The Class E Stock is redeemable by the holder at any
time after December 31, 2004 for the stated value of $3.12 per share plus
accrued but unpaid dividends. The Class E Stock will automatically be converted
into shares of common stock upon a change in ownership of 50% of the Company's
outstanding voting stock, upon a merger or consolidation of the Company, upon
the sale of significant assets of the Company, or upon consummation of a
qualified public offering.
Class E Stock is senior to Class A, B and C Stock, on parity with Class D
Stock and subordinate to Class F Stock.
68
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
15. SUBSEQUENT EVENTS (CONTINUED)
In conjunction with the Class E conversion, warrants totaling 315,000,
issued in conjunction with the issuance of the Senior Notes in August 1999
(Note 10), were cancelled. In exchange, warrants to purchase 306,535 shares of
Class E Stock at $2.50 per share were issued. These warrants expire April 7,
2005. The estimated fair market value of these warrants is approximately
$344,000 based on the Binary Option Pricing Model.
Pursuant to the stock purchase agreement related to the Class E Stock, the
Company is bound by certain covenants.
CLASS F ISSUANCE--During May 2000 the Company authorized 7,500,000 shares of
$.01 par value Class F Stock. On May 23, 2000, the Company sold 6,785,711 shares
of Class F Stock for a total of $28.5 million, and accordingly, the outstanding
Class F Bridge Loans of $5,200,000 were converted to Class F Stock.
Each share of Class F Stock is convertible into one share of common stock at
the option of the holder. Holders of the Class F Stock have voting rights
equivalent to the number of shares of common stock into which their shares of
Class F Stock convert. The Class F Stock earns cumulative dividends at an annual
rate of 6%, payable quarterly. Dividends are payable in cash. The Class F Stock
will automatically be converted into shares of common stock immediately prior to
a merger or consolidation of the Company or upon the sale of significant assets
of the Company, or the consummation of a qualified public offering. The Class F
shareholders are entitled to appoint representatives to the Board of Directors.
The Class F stock is redeemable by the holder at any time after May 23, 2005 at
a price per share equal to the sum of the Class F stated value, initially $4.20
per share, multiplied by the number of shares to be redeemed, plus all accrued
but unpaid dividends.
The Class F Stock is senior to all other classes of preferred stock.
Upon liquidation, holders of the Class F stock are entitled to receive, out
of funds then generally available, unpaid dividends previously paid or accrued
and a per share amount equal to the Class F stated value.
Pursuant to the Stock Purchase Agreement related to the Class F Stock (the
"Class F Agreement"), the Company is bound by certain covenants.
Under the conditions of the Class F Agreement, the Company will issue
warrants for shares of common stock equal to $14,250,000 divided by the warrant
price. The warrant price is defined as 75% of the lower of: (i) the effective
price per share of common stock paid by the acquirer in a sale transaction as
determined by a nationally recognized banking firm chosen by the Company and
approved by a majority of the purchasers that hold a majority of the aggregate
preferred shares and conversion shares (shares of common stock issuable upon
conversion of the Class F Stock) as of the date of consummation of such sale
transaction and (ii) the initial price in the first qualified offering of the
Company's common stock. These warrants expire on May 23, 2005 and no warrants
have been issued at this time.
* * * * * *
69
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Beacon Power Corporation:
We have audited the accompanying balance sheet of Beacon Power Corporation
(the "Company")(a development stage company) as of December 31, 1998 and the
related statements of operations, stockholders' deficiency and cash flows for
the year then ended and for the period May 8, 1997 (date of inception) through
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Beacon Power Corporation as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended and for the period May 8, 1997 (date of inception) through
December 31, 1998 in conformity with accounting principles generally accepted in
the United States of America.
/S/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
May 25, 2000
70
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $2,491,151
Prepaid expenses and other current assets................. 20,307
----------
Total current assets.................................. 2,511,458
PROPERTY AND EQUIPMENT, Net................................. 433,726
DEPOSITS.................................................... 42,595
OTHER ASSETS................................................ 4,375
----------
TOTAL ASSETS................................................ $2,992,154
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 822,723
Accrued compensation and benefits......................... 68,183
Due to related party...................................... 18,611
Other accrued expenses.................................... 15,622
Current portion of capital lease obligations.............. 105,406
----------
Total current liabilities............................. 1,030,545
----------
DIVIDENDS PAYABLE........................................... 112,153
----------
CAPITAL LEASE OBLIGATIONS, Net of current portion........... 76,166
----------
COMMITMENTS (Note 5)
CLASS D REDEEMABLE CONVERTIBLE
PREFERRED STOCK (Liquidation preference of $4,750,000)...... 4,493,145
----------
STOCKHOLDERS' (DEFICIENCY) EQUITY:
Preferred stock:
Class A Convertible, $.01 par value; 6,000,000, shares
authorized 4,622,907 shares issued and outstanding
(liquidation preference, $20,571,936)................. 5,345,218
Class B Convertible, $.01 par value; 1 share authorized;
no shares issued and outstanding...................... --
Class C Convertible, $.01 par value; 6 shares
authorized, issued and outstanding.................... 29,933
Common stock, $.01 par value; 30,000,000 shares
authorized; 8,424 shares issued and outstanding....... 84
Deferred consulting expense, net.......................... (37,500)
Accumulated deficit during the development stage.......... (8,057,590)
----------
Total stockholders' deficiency........................ (2,719,855)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY.............. $2,992,154
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
71
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE FROM
MAY 8, 1997
(DATE OF
YEAR ENDED INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1998
------------ ------------------
<S> <C> <C>
REVENUE..................................................... $ -- $ 232,316
----------- ------------
OPERATING EXPENSES:
Selling, general and administrative....................... 1,188,165 2,356,636
Research and development.................................. 3,523,572 5,815,446
Depreciation and amortization............................. 78,208 78,208
----------- ------------
Total operating expenses................................ 4,789,945 8,250,290
----------- ------------
LOSS FROM OPERATIONS........................................ (4,789,945) (8,017,974)
----------- ------------
OTHER INCOME (EXPENSE):
Interest income........................................... 11,277 127,925
Interest expense.......................................... (14,730) (14,730)
----------- ------------
Total other income (expense), net....................... (3,453) 113,195
----------- ------------
NET LOSS.................................................... (4,793,398) (7,904,779)
PREFERRED STOCK DIVIDENDS................................... (112,153) (112,153)
ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK......... (6,908) (6,908)
----------- ------------
LOSS TO COMMON SHAREHOLDERS................................. $(4,912,459) $ (8,023,840)
=========== ============
LOSS PER SHARE--BASIC AND DILUTED........................... $ (583.15) $ (952.50)
=========== ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING.................. 8,424 8,424
=========== ============
</TABLE>
72
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
CLASS A CLASS C DEFERRED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK CONSULTING
---------------------- --------------------- --------------------- EXPENSE,
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT NET
--------- ---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998........... 4,498,313 $5,033,733 6 $29,933 8,424 $ 84 $ 87,500
Issuance of Class A preferred
stock for services............. 120,000 300,000 -- -- -- -- (150,000)
Issuance of Series A preferred
stock for services and interest
on loans....................... 4,594 11,485 -- -- -- -- --
Dividend on Class D preferred
stock.......................... -- -- -- -- -- -- --
Repayment of subscription
receivable..................... -- -- -- -- -- -- --
Amortization of deferred
consulting expense, net........ -- -- -- -- -- -- 25,000
Accretion of redeemable preferred
stock to redemption value...... -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
--------- ---------- ---------- ------- ---------- -------- ---------
BALANCE, DECEMBER 31, 1998......... 4,622,907 $5,345,218 6 $29,933 8,424 $ 84 $ (37,500)
========= ========== ========== ======= ========== ======== =========
<CAPTION>
DEFICIT
ACCUMULATED
STOCK DURING THE TOTAL
SUBSCRIPTION DEVELOPMENT STOCKHOLDERS'
RECEIVABLE STAGE DEFICIENCY
------------ ------------ -------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1998........... $(2,007,508) $(3,145,131) $ (1,389)
Issuance of Class A preferred
stock for services............. -- -- 150,000
Issuance of Series A preferred
stock for services and interest
on loans....................... -- -- 11,485
Dividend on Class D preferred
stock.......................... -- (112,153) (112,153)
Repayment of subscription
receivable..................... 2,007,508 -- 2,007,508
Amortization of deferred
consulting expense, net........ -- -- 25,000
Accretion of redeemable preferred
stock to redemption value...... -- (6,908) (6,908)
Net loss......................... -- (4,793,398) (4,793,398)
----------- ------------ ------------
BALANCE, DECEMBER 31, 1998......... $ -- $(8,057,590) $ (2,719,855)
=========== ============ ============
</TABLE>
73
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE FROM
MAY 8, 1997
(DATE OF
YEAR ENDED INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1998
------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(4,793,398) $(7,904,779)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 78,208 78,208
Amortization of deferred consulting expense, net........ 175,000 262,500
Services and interest expense paid in preferred stock... 11,485 11,485
Changes in operating assets and liabilities:
Accounts receivable................................... 14,487 --
Prepaid expenses and other current assets............. (20,307) (20,307)
Accounts payable...................................... 772,723 822,723
Accrued compensation and benefits..................... 37,141 68,183
Due to related party.................................. 18,611 18,611
Other accrued expenses and current liabilities........ (16,359) 15,622
----------- -----------
Net cash used in operating activities............... (3,722,409) (6,647,754)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets.................................. (19,823) (46,970)
Repayment (issuance) of note receivable from officer...... 40,000 --
Purchases of property and equipment....................... (257,423) (257,423)
----------- -----------
Net cash used in investing activities............... (237,246) (304,393)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of subscription receivable...................... 2,007,508 5,000,000
Issuance of Class C preferred stock....................... -- 30,000
Issuance of Class D redeemable preferred stock............ 4,486,237 4,486,237
Repayment of capital leases............................... (72,939) (72,939)
----------- -----------
Net cash provided by (used in) financing activities....... 6,420,806 9,443,298
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 2,461,151 2,491,151
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 30,000 --
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,491,151 2,491,151
=========== ===========
SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Class A preferred stock for subscription
receivable.............................................. $ -- $ 5,000,000
=========== ===========
Acquisition of assets with capital leases................. $ 254,411 $ 254,411
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
74
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND OPERATIONS
NATURE OF BUSINESS--Beacon Power Corporation (the "Company" or "Beacon") (a
development stage company) was incorporated on May 8, 1997 as a wholly owned
subsidiary of SatCon Technology Corporation ("SatCon"). Since its inception,
Beacon has been engaged in the development of flywheel devices for storing and
transmitting kinetic energy. As of December 31, 1998, the Company has not yet
commenced its planned principal activities of marketing and manufacturing such
devices and accordingly is accounted for as a development stage company under
Statement of Financial Accounting Standards No. 7. As of December 31, 1998, a
majority of the Company's outstanding shares is owned by SatCon. However, in
conjunction with the October 1998 Class D preferred stock offering, the
Company's minority investors were granted the right to appoint a majority of the
members of the Company's Board of Directors.
The Company has a single operating segment, manufacturing alternative power
sources. The Company has no organizational structure dictated by product lines,
geography or customer type.
OPERATIONS--The Company has experienced net losses since its inception and,
as of December 31, 1998, had an accumulated deficit of approximately
$8 million. The Company is currently facing the challenge of finalizing
development of a viable commercial product and raising adequate capital to
sustain operations. As discussed in Note 15, during the period during
January 1, 1999 to May 25, 2000, the Company secured additional financing of
approximately $32 million. Management believes that this funding is sufficient
to continue its operations as a going concern through at least December 31,
2000.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
ACCOUNTING PRINCIPLES--The accompanying financial statements have been
prepared using accounting principles generally accepted in the United States of
America.
RECAPITALIZATION--The accompanying financial statements reflect a
recapitalization of the Company in 1997 when one shareholder exchanged shares of
common stock for Class A preferred stock.
STOCK SPLIT--The accompanying financial statements reflect a 1.125 for 1
split of the Company's preferred and common stock. All share and per share
information herein has been retroactively restated to reflect this split.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES--The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include demand deposits
and highly liquid investments with a maturity of three months or less when
acquired. Cash equivalents are stated at cost, which approximates market value.
PROPERTY AND EQUIPMENT--Property and equipment, including leasehold
improvements, are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets.
75
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LONG-LIVED ASSETS--At the occurrence of certain events or changes in
circumstances, the Company reviews the carrying value of its long-lived assets
to determine if impairment has occurred and, if necessary, adjusts the carrying
value accordingly. No adjustments have been required to date.
REVENUE RECOGNITION--Revenue relates to work performed under research and
development contracts. Revenue is recognized as services are performed.
STOCK-BASED COMPENSATION--Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic-value method.
Compensation expense associated with awards to nonemployees is measured using
the fair-value method and is amortized over the vesting period of three years.
INCOME TAXES--Deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and tax loss and credit carryforwards using the currently
enacted tax rates and laws. A valuation allowance is provided to the extent
realization of deferred tax assets is not considered more likely than not.
RESEARCH AND DEVELOPMENT--Research and development costs are expensed as
incurred.
FINANCIAL INSTRUMENTS--The carrying amount of cash and cash equivalents,
accounts payable, accrued expenses, notes payable to investors and capital lease
obligations approximate their fair values.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to significant concentration of credit risk consist primarily of
cash and cash equivalents. Substantially all of the Company's cash and cash
equivalents are managed by one financial institution. At December 31, 1998, the
Company had cash balances at a financial institution in excess of federally
insured limits. However, the Company does not believe that it is subject to
unusual credit risk beyond the normal credit risk associated with commercial
banking relationships.
COMPREHENSIVE LOSS--Comprehensive loss is the same as net loss for all
periods presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The statement, as amended, is effective
for fiscal years beginning after June 15, 2000. Management is currently
evaluating the effect of adopting SFAS No. 133 on the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). SAB 101
established guidelines for revenue recognition and is effective for periods
beginning no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. Management does not expect that the adoption of SAB 101
will have a material impact on the Company's financial condition or results of
operations.
NET LOSS PER SHARE
LOSS PER SHARE--Loss per share has been computed using the weighted-average
number of shares of common stock outstanding during each period. Diluted loss
per share was computed in the same manner. The impact of the Company's
outstanding potential common shares, such as options and warrants
76
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(computed using the treasury stock method) and convertible preferred stock, were
excluded from the calculation because such items were antidilutive.
The weighted average number of shares of common stock issuable during the
year ended December 31, 1998 and the period from May 8, 1997 (date of inception)
through December 31, 1998 aggregated 7,247,769 and 4,294,283, respectively, upon
the exercise of options and warrants and the conversion of preferred stock
outstanding.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 1998:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
----------
<S> <C> <C>
Machinery and equipment............................... 5 years $214,635
Furniture and fixtures................................ 7 years 19,423
Office equipment...................................... 3 years 10,904
Leasehold improvements................................ lease term 12,561
Equipment under capital lease obligations............. lease term 254,411
--------
Total............................................... 511,934
Less accumulated depreciation and amortization........ (78,208)
--------
Property and equipment, net......................... $433,726
========
</TABLE>
4. CAPITAL LEASE OBLIGATIONS
The Company leases equipment under capital lease agreements expiring through
2001. Future obligations under such capital leases as of December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999........................................................ $113,406
2000........................................................ 77,530
2001........................................................ 3,067
--------
194,003
Less amount representing interest........................... 12,431
--------
181,572
Less current portion of capital lease obligations........... 105,406
--------
Capital lease obligations, excluding current portion........ $ 76,166
========
</TABLE>
5. COMMITMENTS
The Company leases office and light manufacturing space under operating
leases expiring through January 30, 2001 and an operating lease for office
equipment expiring October 2001.
77
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS (CONTINUED)
Future minimum annual lease payments under noncancelable operating leases as
of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $199,405
2000........................................................ 241,506
2001........................................................ 25,449
</TABLE>
Total rent expense was $146,255 for 1998 and the period from May 8, 1997
(date of inception) to December 31, 1998.
6. PREFERRED STOCK
CLASS A CONVERTIBLE PREFERRED STOCK--Each share of Class A convertible
preferred stock ("Class A Stock") is convertible into one share of common stock
at the option of the holder. The Class A Stock is nonvoting. Upon liquidation,
holders of Class A Stock are entitled to receive, out of funds then generally
available prior to any payment with respect to the holders of common stock,
$4.45 per share, plus any declared and unpaid dividends thereon. Holders of the
Class A Stock have the right to receive the same dividends as declared by the
Board of Directors on common shares on an "as-if-converted" basis. The Class A
Stock will automatically be converted into shares of common stock upon the
closing of a public offering of common stock of the Company, upon a vote of the
Board of Directors or upon the automatic conversion of the Class D preferred
stock (see Note 7). Class A Stock is subordinate to Class D, E and F preferred
stock and has parity with Class B and C preferred stock. The Class A stock does
not have redemption features.
78
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. PREFERRED STOCK (CONTINUED)
CLASS B AND C CONVERTIBLE PREFERRED STOCK--Each share of Class B convertible
preferred stock ("Class B Stock") and Class C convertible preferred stock
("Class C Stock") is convertible into one share of common stock at the option of
the holder. The holders of the Class B and C Stock have voting rights equivalent
to the number of shares of common stock into which their shares of Class B and C
Stock convert. The Class B and C Stock have the right to receive the same
dividends as declared by the Board of Directors on common shares on an
"as-if-converted" basis. The Class B and C Stock will automatically be converted
into shares of common stock upon the closing of a public offering of common
stock of the Company, upon a vote of the Board of Directors, upon the automatic
conversion of the Class D preferred Stock (see Note 7), or upon conversion of
the Class A Stock. Class B and C Stock have parity with Class A in liquidation
and are subordinate to Class D, E and F preferred stock. The Class B and
C Stock do not have redemption features.
7. REDEEMABLE PREFERRED STOCK
CLASS D REDEEMABLE CONVERTIBLE PREFERRED STOCK--The Company has authorized
6,000,000 shares of Class D convertible preferred stock ("Class D Stock") with a
par value of $.01 per share. On October 23, 1998, the Company issued 1,900,000
shares of Class D Stock and received net proceeds of approximately $4,486,000.
Issuance costs totaled approximately $264,000 and are being accreted to the
carrying value of the Class D Stock over the period to the stock's earliest
redemption date. Each share of Class D Stock is convertible into one share of
common stock at the option of the holder. The holders of the Class D Stock have
voting rights equivalent to the number of shares of common stock into which
their shares of Class D Stock convert. Holders of the Class D Stock are also
entitled to appoint representatives to the Board of Directors. The Class D Stock
earns cumulative dividends at an annual rate of 12.5% through May 23, 2000 and
6% on and after this date, payable quarterly. Dividends can be paid in shares of
Class D Stock through May 23, 2000 and after this date, are payable only in
cash. Cumulative dividends not paid on Class D Stock total $112,153 as of
December 31, 1998. Upon liquidation, holders of Class D Stock are entitled to
receive, out of funds then generally available, unpaid dividends previously
declared or accrued and a per share amount of $2.50. The Class D Stock is
redeemable by the holder at any time after December 31, 2004 for the stated
value of $2.50 per share plus accrued, but unpaid, dividends. The Class D Stock
will automatically be converted into shares of common stock upon a change in
ownership of 50% of the Company's outstanding voting stock, upon a merger or
consolidation of the Company or upon the sale of significant assets of the
Company, or upon the closing of a qualified public offering.
Pursuant to the Stock Purchase Agreement related to the Class D Stock (the
"Class D Agreement"), the Company is bound by certain covenants. The Class D
Stock is senior to the Class A, B and C Stock, subordinate to Class F preferred
stock and has parity with Class E preferred Stock (see Note 14).
8. COMMON STOCK
DIVIDENDS--Dividends may be declared and paid on the common stock as and
when determined by the Board of Directors subject to any preferential dividend
rights of any then outstanding shares of preferred stock.
RESERVED SHARES--At December 31, 1998, 7,548,772 shares of common stock were
reserved for issuance under the Company's stock option plan, outstanding
warrants and for the potential conversion of preferred stock.
79
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK WARRANTS
At its inception in 1997, the Company issued a warrant to purchase 562,500
shares of common stock to an investor at the price of $5.33 per share. The
warrant expired unexercised on May 28, 1999. Value ascribed to this warrant was
not material.
The warrant was valued on the date of grant using the Black-Scholes Option
Pricing Model. The assumptions used to value this warrant were as follows:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 6.25%
Expected life of warrant.................................... 24 months
Expected dividend payment rate, as a percentage of the stock
price on the date of grant................................ 0%
Assumed volatility.......................................... 48%
</TABLE>
10. STOCK OPTIONS
The Company's option plans provide for the granting of stock options to
purchase up to 4,500,000 shares of the Company's common stock. Options may be
granted to employees, officers, directors and consultants of the Company with
terms of up to 10 years. Under the terms of the option plans, incentive stock
options ("ISOs") are to be granted at fair market value of the Company's stock
at the date of grant, and nonqualified stock options ("NSOs") are to be granted
at a price determined by the Board of Directors. ISOs and NSOs generally vest
ratably over 36 months from the grant date and have contractual lives of up to
10 years.
Stock option activity since inception is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE FAIR
SHARES PRICE VALUE
---------- --------- ---------
<S> <C> <C> <C>
Outstanding, January 1, 1998................................ 323,937 1.78
Granted................................................... 99,563 1.78 0.75
Canceled, forfeited or expired............................ (5,000) 1.78
----------
Outstanding, December 31, 1998.............................. 418,500 1.78
==========
</TABLE>
The following table summarized information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
VESTED
WEIGHTED- --------------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE AVERAGE
OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OF OPTIONS PRICE
-------------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1.7$8 418,500 8.68 $1.78 108,188 $1.78
====== ======= ==== ====== ======= ======
</TABLE>
80
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS (CONTINUED)
As described in Note 2, the Company uses the intrinsic-value method to
measure compensation expense associated with grants of stock options to
employees. If the Company had used the fair value method to measure
compensation, reported net loss would have been as follows:
<TABLE>
<CAPTION>
CUMULATIVE FROM
MAY 8, 1997
(DATE OF INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1998
------------ -------------------
<S> <C> <C>
Net loss to common shareholders as reported................. $(4,912,459) $ (8,023,840)
Net loss pro forma.......................................... (4,987,251) (8,323,973)
Loss per share--as reported................................. (583.15) (952.50)
Loss per share--pro forma................................... (592.03) (988.13)
</TABLE>
The fair value of the options on their grant date was measured using the
Black-Scholes option-pricing model. Key assumptions used to apply this
option-pricing model are as follows:
<TABLE>
<CAPTION>
<S> <C>
Risk-free interest rate..................................... 5.75%
Expected life of option..................................... 3 years
Expected dividend payment rate, as a percentage of the stock
price on the date of grant................................ 0%
Assumed volatility.......................................... 58%
</TABLE>
The option-pricing model used was designed to value readily tradable stock
options with relatively short lives. However, management believes that the
assumptions used to value the options and the model applied yield a reasonable
estimate of the fair value of the grants made under the circumstances.
11. INCOME TAXES
The components of the provision (benefit) for income taxes consisted of the
following:
<TABLE>
<CAPTION>
CUMULATIVE FROM
MAY 8, 1997
(DATE OF INCEPTION)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1998 1998
------------ -------------------
<S> <C> <C>
Federal--deferred........................................... $(1,594,955) $(2,632,825)
State--deferred............................................. (282,933) (464,616)
Increase in valuation allowance............................. 1,877,888 3,097,441
----------- -----------
Provision (benefit) for income taxes........................ $ -- $ --
=========== ===========
</TABLE>
Taxes during interim periods are computed using the estimated rate effective
for the entire year. Changes to the estimated rate are reflected in periods in
which the estimated charge occurs.
81
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
A reconciliation of the statutory federal rate to the effective rate for all
periods is as follows:
<TABLE>
<S> <C>
Statutory federal rate benefit.............................. (34)%
State, net of federal effect................................ (6)
Valuation allowance provided................................ 40
---
Effective rate.............................................. --%
===
</TABLE>
The components of the Company's deferred tax assets and liabilities
consisted of the following at December 31, 1998:
<TABLE>
<S> <C>
Long-term assets:
Net operating loss carryforwards.......................... $ 2,643,962
Research and development credits.......................... 444,513
Loss on contracts......................................... --
Other..................................................... 8,966
-----------
Net deferred tax assets before valuation allowance.......... 3,097,441
Less valuation allowance.................................... (3,097,441)
-----------
Net deferred tax assets..................................... $ --
===========
</TABLE>
The valuation allowance increased by $1,877,888 in 1998 primarily due to the
generation of net operating loss carryforwards and credits for which realization
is not reasonably assured.
The Company has available for future periods federal and state tax net
operating loss carryforwards for federal and state purposes of approximately
$6,639,000 and $6,405,000, respectively, as of December 31, 1998. In addition,
the Company has business credits of $444,513 as of December 31, 1998. The net
operating loss carryforwards expire beginning in 2012 and 2002 for federal and
state tax purposes, respectively. The federal research and development credits
begin to expire in 2012. The Company did not pay any income taxes from inception
to December 31, 1998.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may have limited, or may limit in the future,
the amount of net operating loss carryforwards which could be utilized annually
to offset future taxable income and income tax liabilities. The amount of any
annual limitation is determined based upon the Company's value prior to an
ownership change.
12. BENEFIT PLAN
In 1998, the Company created a 401(k) Profit Sharing Plan (the "Plan") for
its full-time employees. Each participant in the Plan may elect to contribute a
percentage of his or her annual compensation to the Plan on a pre-tax basis up
to the annual limit established by the Internal Revenue Service. The Company
matches employee contributions at a rate of 50% up to the first 6% of the
employee's contributions. The Company may also elect to make a profit-sharing
contribution based on the discretion of the Board of Directors. Employee
contributions are fully vested. Company matching and profit sharing
contributions vest 20% after two years of service consisting of at least
1,000 hours per calendar year and 20% annually thereafter. Company contributions
were $19,376 during 1998 and the period from May 8, 1997 (date of inception) to
December 31, 1998.
82
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. RELATED-PARTY TRANSACTIONS
CONSULTING AGREEMENTS--The Company entered into consulting agreements with
three investors in 1998 and 1997. The contracts are seven-year agreements,
renewable annually thereafter, for consulting services to be provided by the
investors in exchange for annual issuances of shares of the Company's Class A
Stock. During 1998 and the period from May 8, 1997 (date of inception) to
December 31, 1998, $175,000, and $262,500, respectively, was recorded as
consulting expense relating to these agreements, and 120,000 shares of Class A
Stock were issued or issuable in 1998 as compensation under these contracts.
Prepaid and accrued consulting expenses have been recorded annually, based on
the terms and dates of the consulting agreements. The services provided by the
investors were recorded based upon the value of the securities issued. These
contracts all expire immediately upon an initial public offering of the
Company's common stock.
PATENTS--The Company has entered into an agreement with SatCon whereby
SatCon granted the Company a perpetual license to use the technology patented by
SatCon relating to the field of flywheel energy storage products, systems and
processes for stationary terrestrial applications.
SERVICES AGREEMENTS--SatCon performs certain research and development,
administrative and other services for the Company. Amounts paid to SatCon for
such services rendered amounted to approximately $443,000, and $1,794,000 during
1998 and the period from May 8, 1997 (date of inception) to December 31, 1998,
respectively. As of December 31, 1998, there was $18,611 due to SatCon relating
to such services.
DISTRIBUTION AGREEMENT--In 1997, the Company signed a 20-year agreement
which granted an investor (DQE Enterprises, Inc.) exclusive rights to distribute
certain of the Company's products in a territory comprised of seven Mid-Atlantic
states and the District of Columbia. However, the Company retained the right to
distribute products directly to cable television and telephone companies.
14. SUBSEQUENT EVENTS
BRIDGE FINANCING--On August 2, 1999, the Company issued Senior Secured
Convertible Promissory Notes (the "Senior Notes") to the Company's primary
investors. The Senior Notes bear interest, which is payable upon conversion, at
an annual rate of 12.5%, increasing to 15% after six months if the Class E
redeemable convertible preferred stock ("Class E Stock") funding had not
occurred at that time. The notes are secured by substantially all of the assets
of the Company. In connection with the issuance of the Senior Notes, the
investors received warrants to purchase shares of the Company's common stock.
On April 7, 2000, the Senior Notes and accrued interest were converted into
Class E Stock (see below).
In conjunction with the issuance of the Senior Notes in August 1999, the
Company issued warrants to four investors to purchase 315,000 shares of Class E
Stock (or common stock if the warrant was exercised prior to the Class E Stock
financing) at an exercise price of $2.50 per share (the "August 1999 warrants").
The estimated fair value of the warrants at the date of grant was $170,000.
These warrants expire on August 2, 2004.
In conjunction with the Class E conversion in April 2000, the August 1999
warrants were cancelled.
WARRANTS ISSUED UNDER CLASS D AGREEMENT--Under the conditions of the
Class D Stock offering, the Company issued warrants in October 1999 to three
investors to purchase 386,250 shares of common stock at $3.33, 386,250 shares of
common stock at $4.50, and 386,250 shares of common stock at $6 (the
83
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
"October 1999 warrants"). The estimated fair value of the warrants at the date
of their issuance was $280,000 based on the Black-Scholes Pricing Model. These
warrants expire December 31, 2004.
In April 2000, the Company issued additional warrants to three investors to
purchase 356,250 shares of common stock at $3.33, 356,250 shares of common stock
at $4.50, and 356,250 shares of common stock at $6. The fair market value of
these warrants was approximately $1,300,000 based on the Black-Scholes Pricing
Model. These warrants expire December 31, 2004.
BRIDGE FINANCING--On January 7, 2000, the Company received $600,000 of
bridge loans bearing annual interest at a rate of 12.5%; $200,000 of these loans
were repaid in February 2000 and the remaining loans were converted into
Class E redeemable convertible preferred stock (the "Class E Stock") in
conjunction with the Class E conversion (see below).
In February, March and April 2000, the Company received additional bridge
financing of $1,400,000 from previous investors and $4,100,000 from new and
previous investors (the "Class F Bridge Loans"). The Class F Bridge Loans bear
annual interest at a rate of 6%. $5,200,000 of these loans were converted into
Class F redeemable convertible preferred stock ("Class F Stock") in May 2000,
(see below). The remaining $300,000 plus interest was repaid in April 2000.
In conjunction with the April bridge loans, investors were granted warrants
to purchase 41,000 shares of the Company's common stock at $4.20 per share.
These warrants expire April 21, 2005. The estimated fair value of such warrants
is $27,000 based on the Black-Scholes Pricing Model.
CLASS E CONVERSION--During April 2000, the Company authorized 2,000,000
shares of $.01 par value per share Class E Stock. On April 7, 2000, the Company
converted $3,550,000 of bridge loans plus interest of $275,559 into 1,226,141
shares of Class E Stock (the "Class E conversion"). Each share of Class E Stock
is convertible into one share of common stock at the option of the holder.
Holders of the Class E Stock have voting rights equivalent to the number of
shares of common stock into which their shares of Class E Stock convert. Holders
of the Class E Stock also share with the Class D Stock shareholders the right to
appoint representatives to the Board of Directors. The Class E Stock earns
cumulative dividends at an annual rate of 12.5% through May 23, 2000 and 6% on
and after this date, payable quarterly. Dividends are payable in shares of
Class E Stock through May 23, 2000 and after this date, are payable in cash.
Upon liquidation, holders of Class E Stock are entitled to receive, out of funds
then generally available unpaid dividends previously declared or accrued and a
per share amount of $3.12. The Class E Stock is redeemable by the holder at any
time after December 31, 2004 for the stated value of $3.12 per share plus
accrued but unpaid dividends. The Class E Stock will automatically be converted
into shares of common stock upon a change in ownership of 50% of the Company's
outstanding voting stock, upon a merger or consolidation of the Company, upon
the sale of significant assets of the Company, or upon consummation of a
qualified public offering.
Class E Stock is senior to Class A, B and C Stock, on parity with Class D
Stock and subordinate to Class F Stock.
In conjunction with the Class E conversion, warrants totaling 315,000,
issued in conjunction with the issuance of the Senior Notes in August 1999 were
cancelled. In exchange, warrants to purchase 306,535 shares of Class E Stock at
$2.50 per share were issued. These warrants expire April 7, 2005. The estimated
fair market value of these warrants is approximately $344,000 based on the
Binary Option Pricing Model.
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<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
Pursuant to the stock purchase agreement related to the Class E Stock, the
Company is bound by certain covenants.
CLASS F ISSUANCE--During May 2000 the Company authorized 7,500,000 shares of
$.01 par value Class F Stock. On May 23, 2000, the Company sold 6,785,711 shares
of Class F Stock for a total of $28.5 million, and accordingly, the outstanding
Class F Bridge Loans of $5,200,000 were converted to Class F Stock.
Each share of Class F Stock is convertible into one share of common stock at
the option of the holder. Holders of the Class F Stock have voting rights
equivalent to the number of shares of common stock into which their shares of
Class F Stock convert. The Class F Stock earns cumulative dividends at an annual
rate of 6%, payable quarterly. Dividends are payable in cash. The Class F Stock
will automatically be converted into shares of common stock immediately prior to
a merger or consolidation of the Company or upon the sale of significant assets
of the Company, or the consummation of a qualified public offering. The Class F
shareholders are entitled to appoint representatives to the Board of Directors.
The Class F stock is redeemable by the holder at any time after May 23, 2005 at
a price per share equal to the sum of the Class F stated value, initially $4.20
per share, multiplied by the number of shares to be redeemed, plus all accrued
but unpaid dividends.
The Class F Stock is senior to all other classes of preferred stock.
Upon liquidation, holders of the Class F stock are entitled to receive, out
of funds then generally available, unpaid dividends previously paid or accrued
and a per share amount equal to the Class F stated value.
Pursuant to the Stock Purchase Agreement related to the Class F Stock (the
"Class F Agreement"), the Company is bound by certain covenants.
Under the conditions of the Class F Agreement, the Company will issue
warrants for shares of common stock equal to $14,250,000 divided by the warrant
price. The warrant price is defined as 75% of the lower of: (i) the effective
price per share of common stock paid by the acquirer in a sale transaction as
determined by a nationally recognized banking firm chosen by the Company and
approved by a majority of the purchasers that hold a majority of the aggregate
preferred shares and conversion shares (shares of common stock issuable upon
conversion of the Class F Stock) as of the date of consummation of such sale
transaction and (ii) the initial price in the first qualified offering of the
Company's common stock. These warrants expire on May 23, 2005 and no warrants
have been issued at this time.
* * * * * *
85
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 12, 1999, we dismissed PricewaterhouseCoopers LLP from its position
as our independent public accountants. The decision to change accountants was
recommended by our Audit Committee and approved by our Board of Directors. None
of the reports of PricewaterhouseCoopers LLP on our financial statements for the
years ended September 30, 1998 and 1997 contained an adverse opinion or
disclaimer of opinion, or was qualified or modified at to uncertainty, audit
scope or accounting principles. During the years ended September 30, 1998 and
1997, and any subsequent interim period immediately preceding the date of
dismissal of PricewaterhouseCoopers LLP, we had no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused PricewaterhouseCoopers LLP to make reference to such
matter of disagreement(s) in connection with its report on our financial
statements. None of the reportable events listed in Item 304 (a) (1) (v) of
Regulation S-K under the Securities Act of 1934, as amended, occurred with
respect to the years ended September 30, 1998 and 1997 or the subsequent interim
period preceding the dismissal of PricewaterhouseCoopers LLP.
On May 25, 1999, we engaged Arthur Andersen LLP as our independent public
accountants. The decision to engage Arthur Andersen LLP was recommended by our
Audit Committee and approved by our Board of Directors. During our two most
recent fiscal years, and any subsequent interim period prior to engaging Arthur
Andersen LLP, (i) neither we nor anyone on our behalf consulted Arthur Andersen
LLP regarding the application of accounting principles to a specific completed
or proposed transaction or the type of audit opinion that might be rendered on
our financial statements; and (ii) no written report or oral advice concerning
the same was provided to us that Arthur Andersen LLP concluded was an important
factor considered by us in reaching a decision as to any accounting, auditing or
financial reporting issue.
86
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors required under this item is
incorporated herein by reference to the information set forth under the section
entitled "Election of Directors" in the Company's Proxy Statement for the 2000
Annual Meeting of Stockholders which was held on March 15, 2000 (the "2000 Proxy
Statement"). Information relating to certain filings of Forms 3, 4, and 5 of the
Company is contained in the 2000 Proxy Statement under the caption "Section
16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated by reference to the
section entitled "Compensation of Executive Officers" in the 2000 Proxy
Statement.
The sections entitled "Compensation Committee Report on Executive
Compensation" and "Comparative Stock Performance Graph" in the 2000 Proxy
Statement are not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" in the 2000
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. CONSOLIDATED FINANCIAL STATEMENT OF SATCON TECHNOLOGY CORPORATION AND ITS
SUBSIDIARIES:
Consolidated Balance Sheets as of September 30, 1999 and 1998
Consolidated Statements of Operations for the Years Ended September 30, 1999
1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 1999 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended September 30, 1999
1998 and 1997
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE OF SATCON TECHNOLOGY CORPORATION AND ITS
SUBSIDIARIES:
Schedule II; Valuation and Qualifying Accounts for the Years Ended
September 30, 1999 1998 and 1997
All other financial statement schedules not listed have been omitted because
they are either not required, not applicable, or the information has been
included elsewhere in the consolidated financial statements or notes
thereto.
3. FINANCIAL STATEMENTS OF BEACON POWER CORPORATION
Balance Sheets at December 31, 1998 and 1999
87
<PAGE>
Statements of Operations for the Period May 8, 1997 (Date of Inception) to
December 31, 1997 and for the Years Ended December 31, 1998 and 1999
Statements of Stockholders' Equity (Deficiency) for the Period May 8, 1997
(Date of Inception) to December 31, 1997 and for the Years Ended
December 31, 1998 and 1999
Statement of Cash Flows for the Period May 8, 1997 (Date of Inception) to
December 31, 1997 and for the Years Ended December 31, 1998 and 1999
Notes to Financial Statements
3. EXHIBITS:
The Exhibits listed in the Exhibit Index immediately preceding such exhibits
are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
On August 26, 1999, we filed a Current Report on Form 8-K, dated August 25,
1999, in connection with our completion of an $8 million private placement
of 8,000 shares of our Series A Convertible Preferred Stock, $0.01 par value
per share, with Brown Simpson Strategic Growth Funds.
On November 5, 1999, we filed a Current Report on Form 8-K, dated
October 21, 1999, in connection with our acquisition of Ling Electronics,
Inc. and Ling Electronics, Ltd. from Mechanical Technology Incorporated and
an investment by Mechanical Technology Incorporated of approximately
$7,000,000.
On November 24, 1999, we filed a Current Report on Form 8-K, dated
November 16, 1999, in connection with our purchase of certain intellectual
property, equipment and other assets from Northrop Grumman Corporation.
88
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cambridge, Commonwealth of Massachusetts on August 14, 2000.
<TABLE>
<S> <C> <C>
SATCON TECHNOLOGY CORPORATION
By: /s/ DAVID B. EISENHAURE
-----------------------------------------
David B. Eisenhaure
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, This
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
President, Chief Executive
/s/ DAVID B. EISENHAURE Officer and Chairman of the
---------------------------------------- Board of Directors August 14, 2000
David B. Eisenhaure (Principal Executive
Officer)
Vice President, Chief
/s/ SEAN F. MORAN Financial Officer and
---------------------------------------- Treasurer (Principal August 14, 2000
Sean F. Moran Financial and Principal
Accounting Officer)
/s/ MICHAEL C. TURMELLE Director, Vice President,
---------------------------------------- Chief Operating Officer and August 14, 2000
Michael C. Turmelle Secretary
/s/ JAMES L. KIRTLEY, JR.
---------------------------------------- Director, Vice President, and August 14, 2000
James L. Kirtley, Jr. Chief Scientist
/s/ MARSHALL J. ARMSTRONG
---------------------------------------- Director August 14, 2000
Marshall J. Armstrong
/s/ ALAN P. GOLDBERG
---------------------------------------- Director August 14, 2000
Alan P. Goldberg
/s/ THOMAS A. HURKMANS
---------------------------------------- Director August 14, 2000
Thomas A. Hurkmans
---------------------------------------- Director
Gerald L. Wilson
</TABLE>
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ------------------------------------------------------------
<C> <S>
2.1(1) --Amended and Restated Asset Purchase Agreement among SatCon
Film Microelectronics, Inc., Film Microelectronics Inc., and
Albert R. Snider, dated as of April 3, 1997.
2.2(2) --Stock Purchase Agreement, dated as of October 21, 1999, by
and among the Registrant, Mechanical Technology
Incorporated, Ling Electronics, Inc. and Ling Electronics,
Ltd.
2.3(3) --Asset Purchase Agreement, dated as of November 16, 1999,
by and between the Registrant and Northrop Grumman
Corporation.
3.1(4) --Certificate of Incorporation of the Registrant.
3.2(4) --Bylaws of the Registrant.
3.3(5) --Certificate of Amendment of Certificate of Incorporation
of the Registrant, as filed with the Secretary of State of
the State of Delaware on May 12, 1997.
3.4(5) --Bylaws Amendment of the Registrant.
3.5(6) --Certificate of Amendment of Certificate of Incorporation
of the Registrant, as filed with the Secretary of State of
the State of Delaware on March 17, 1999.
3.6(6) --Certificate of Designation of Series and Statement of
Variations of Relative Rights, Preferences and Limitations
of Preferred Stock, dated as of August 25, 1999, relating to
the Series A Preferred Stock.
4.1(4) --Specimen Certificate of Common Stock, $.01 par value.
10.1(4)(*) --Employment Agreement, dated July 1, 1992, between the
Registrant and David B. Eisenhaure.
10.2(4)(*) --Employment Agreement, dated July 1, 1992, between the
Registrant and Michael C. Turmelle.
10.3(4)(*) --1992 Stock Option Plan.
10.4(7)(*) --1994 Stock Option Plan.
10.5(8)(*) --1996 Stock Option Plan.
10.6(9)(*) --1998 Stock Incentive Plan.
10.7(*)(17) --1999 Stock Incentive Plan.
10.8(4) --Lease, dated October 21, 1993, between the Registrant and
Gunwyn/First Street Limited Partnership.
10.9(5) --Manufacturing Agreement between Applied Materials, Inc.
and its wholly-owned subsidiaries and the Registrant, dated
as of February 20, 1997.
10.10(10) --Securities Purchase Agreement, dated as of May 28, 1997,
by and among the Registrant,
Beacon Power Corporation and Duquesne Enterprises.
10.11(11) --Securities Purchase Agreement, dated as of October 23,
1998, by and among Beacon Power Corporation, Perseus
Capital, L.L.C., Duquesne Enterprises, Micro Generation
Technology Fund, L.L.C. and the Registrant.
10.12(11) --Amended and Restated License Agreement, dated as of
October 23, 1998, by and among the Registrant and Beacon
Power Corporation.
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ------------------------------------------------------------
<C> <S>
10.13(11) --Registration Rights Statement, dated as of October 23,
1998, by and among Beacon Power Corporation, Perseus
Capital, L.L.C., Duquesne Enterprises, Micro Generation
Technology Fund, L.L.C., and the Registrant, setting forth
certain registration rights granted by the Registrant.
10.14(11) --Registration Rights Statement, dated as of October 23,
1998, by and among Beacon Power Corporation, Perseus
Capital, L.L.C., Duquesne Enterprises, Micro Generation
Technology Fund, L.L.C. and the Registrant, setting forth
certain registration rights granted by Beacon Power
Corporation.
10.15(12) --Form of Common Stock Purchase Warrant issued to certain
individuals and entities on June 15, 1998.
10.16(12) --Form of Common Stock Purchase Warrant issued to certain
individuals and entities on November 11, 1998.
10.17(12) --Lease, dated February 27, 1996, by and between the
Registrant and Diamond Management, Inc.
10.18(12) --Lease, dated March 5, 1998, by and between the Registrant
and Harold W. Slovin.
10.19(12) --Discretionary Demand Line of Credit Letter Agreement,
dated as of December 16, 1998, between the Registrant,
SatCon Film Microelectronics, Inc., K&D MagMotor Corp. and
BankBoston, N.A., together with Promissory Note, dated as of
December 16, 1998, made in favor of BankBoston, N.A. by the
Registrant, SatCon Film Microelectronics, Inc. and K&D
MagMotor Corp. and Security Agreement, dated as of December
16, 1998, between the Registrant and BankBoston N.A.
10.20(17) --Modification, dated April 9, 1999, to Discretionary Demand
Line of Credit Letter Agreement, dated as of December 16,
1998, between the Registrant, SatCon Film Microelectronics,
Inc., K&D MagMotor Corp. and BankBoston N.A. together with
modification, dated May 7, 1999, to Discretionary Demand
Line of Credit Letter Agreement, dated as of December 16,
1998, between the Registrant, SatCon Film Microelectronics,
Inc., K&D MagMotor Corp. , HyComp Acquisition Corp. and
BankBoston, N.A.
10.21(12) --North America Distributor Agreement, dated June 4, 1998,
by and between SatCon Film Microelectronics, Inc., a
division of the Registrant, and Falcon Electronics, Inc.
10.22(13) --Asset Purchase Agreement, dated as of January 4, 1999,
among K&D MagMotor Corp., the Registrant, Inductive
Components, Inc., Lighthouse Software, Inc. and Thomas
Glynn.
10.23(14) --Asset Purchase Agreement dated as of March 31, 1999 by and
between HyComp, Inc. and HyComp Acquisition Corp., a
wholly-owned subsidiary of the Registrant.
10.24(14) --Note Purchase Agreement dated as of June 22, 1999 by and
among Beacon Power Corporation, Perseus Capital, L.L.C.,
Duquesne Enterprises, Inc., Micro Generation Technology
Fund, L.L.C. and the Registrant.
10.25(14) --Note and Warrant Purchase Agreement dated as of August 2,
1999 by and among Beacon Power Corporation, Perseus Capital,
L.L.C., Duquesne Enterprises, Inc., Micro Generation
Technology Fund, L.L.C. and the Registrant.
10.26(15) --License and Technical Assistant Agreement dated as of June
7, 1999 by and between Delco Remy America, Inc. and the
Registrant.
10.27(6) --Securities Purchase Agreement, dated as of August 25,
1999, among the Registrant and the purchasers listed on
Schedule I thereto.
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ------------------------------------------------------------
<C> <S>
10.28(6) --Registration Rights Agreement, dated as of August 25,
1999, among the Registrant and the investors named on the
signature pages thereof.
10.29(6) --Form of Warrants issued on August 25, 1999 in connection
with the sale of the Series A Preferred Stock.
10.30(2) --Securities Purchase Agreement, dated as of October 21,
1999, between the Registrant and Mechanical Technology
Incorporated.
10.31(2) --SatCon Registration Rights Agreement, dated as of October
21, 1999, between the Registrant and Mechanical Technology
Incorporated.
10.32(2) --MTI Registration Rights Agreement, dated as of October 21,
1999, between Mechanical Technology Incorporated and the
Registrant.
10.33(2) --Form of Stock Purchase Warrant issued on October 21, 1999
by the Registrant to Mechanical Technology Incorporated.
10.34(2) --Form of Stock Purchase Warrant issued on October 21, 1999
by Mechanical Technology Incorporated to the Registrant.
10.35(3) --Sublease, dated November 16, 1999, between the Registrant
and Northrop Grumman Corporation.
10.36(3) --Transition Services Agreement, dated as of November 16,
1999, between the Registrant and Northrop Grumman
Corporation.
10.37(3) --Memorandum of Understanding, entered into on November 16,
1999, between the Registrant and Northrop Grumman
Corporation.
10.38(3) --Registration Rights Agreement, dated as of November 16,
1999, between the Registrant and Northrop Grumman
Corporation.
10.39(3) --Form of Stock Purchase Warrant issued on November 16, 1999
by the Registrant to Northrop Grumman Corporation.
10.40(3) --Form of Stock Purchase Warrant to be issued to Northrop
Grumman Corporation upon the satisfaction of certain
conditions.
16(16) --Letter Regarding Registrant's Change in Certifying
Accountant.
21.1(17) --Subsidiaries of the Registrant.
23.1 --Consent of Arthur Andersen LLP.
23.2 --Consent of PricewaterhouseCoopers LLP.
23.3 --Consent of Deloitte & Touche LLP.
27 --Financial Data Schedule.
99 --Risk Factors.
</TABLE>
------------------------
(1) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated April 16, 1997.
(2) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated October 21, 1999
(3) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated November 16, 1999.
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<PAGE>
(4) Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 33-49286).
(5) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the period ended March 31, 1997.
(6) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated August 25, 1999.
(7) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1994.
(8) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1996.
(9) Incorporated by reference to Exhibit B to the Registrant's Definitive
Schedule 14A filed January 26, 1999.
(10) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated May 28, 1997.
(11) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated October 23, 1998.
(12) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the period ended September 30, 1998.
(13) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated January 4, 1999.
(14) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the period ended June 30, 1999.
(15) Incorporated by reference to Exhibits to the Registrant's Amendment No. 1
to the Quarterly Report on Form 10-Q for the period ended March 31, 1999.
(16) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated May 12, 1999.
(17) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1999.
(*) Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K.
93
