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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 1-11512
SATCON TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its Charter)
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<S> <C>
DELAWARE 04-2857552
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
161 FIRST STREET,
CAMBRIDGE, MASSACHUSETTS 02142
(Address of principal executive offices) (ZIP CODE)
</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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Registrant's Common Stock, $.01 par value
per share, held by non-affiliates of the Registrant was $106,871,599 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 12, 2000 ($13.125).
There were 13,877,185 shares of Common Stock outstanding as of December 12,
2000.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 2001 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
OVERVIEW
SatCon was organized as a Massachusetts corporation in 1985 and
reincorporated as a Delaware corporation in 1992. We are developing enabling
technologies for the emerging distributed power generation and power quality
markets. We design, develop and manufacture high-efficiency, reliable and
long-lived electronics products and a variety of standard and custom
high-performance motors to suit specific applications. Our power and energy
management products 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 we
believe will be integral components of distributed power generation and power
quality systems. Our specialty motors are typically designed and manufactured
for unique customer requirements such as high power-to-size requirements or high
efficiency.
We have been developing technology in power and energy management since our
inception. Power and energy management is the combination of products and
technology to improve the efficiency of machines and systems in the generation,
storage or usage of energy. Over the past 15 years, we have been pursuing a dual
approach for growth in these markets. The first objective is to develop
technology that meets a market demand and then transition that technology into
commercial products. The second objective is to expand our manufacturing
capabilities and product base through acquisitions.
Prior to 1993, we were primarily funded through research and development
contracts with the U.S. government. These contracts were directed at developing
new technologies in motion control, control software and electronics. Through
this work, we built an engineering base in magnetics, motor/drive technology,
digital signal processing and high-speed electronics. From 1993 to 1996, we
expanded that base through commercially-funded research and development to
include high-power electronics, high-density packaging and advanced materials.
Together, these engineering skills formed the foundation for our power and
energy management technology. Since 1996, we have concentrated on employing that
technology to solving market needs and transitioning from technology development
to product development and manufacturing.
Beginning in 1996 we introduced our first two commercial products, the
"Inertial Battery 20C1000" and the "Century 1 ISAM", which were transitioning
from the laboratory to the marketplace. Today the "Inertial Battery 20C1000" has
evolved into the 2kWh (kilowatt hour) flywheel energy storage device of our
affiliate, Beacon Power Corporation. Our second product, the "Century 1 ISAM,"
or integrated suspension and motor system, now called MagLev-TM-, is used in
Applied Materials' rapid thermal processing equipment, and represents a large
portion of the revenue generated by our MagMotor division which manufactures
motors.
Over the past five years, we have continued to transition our technology
into new products that are sold commercially, including our RF, or radio
frequency, satellite uplinks, aluminum nitride power resistors for cellular
telephones, and high efficiency motors for industrial automation. Since 1996,
our revenue has increased from $9.4 million, primarily from funded research and
development, to $31.1 million in 2000, of which $22.4 million, or 72%, was
derived from product sales. We are also introducing new products, which we
expect to transition into commercial production over the next few years,
products such as our PowerGate-TM- power conversion system, GridLink-TM- utility
grid interface and our six-degree-of-freedom shaker test system for vibration
testing of electronic components.
Since 1996, we have expanded our business and capabilities through several
acquisitions. In January 1997, we acquired K&D MagMotor Corp., a manufacturer of
custom and standard electric motors, which is now our MagMotor division. In
April 1997, we acquired Film Microelectronics, Inc., a manufacturer of thin film
substrates and hybrid microelectronics. In January 1999, we acquired Inductive
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Components, Inc., a value-added supplier of customized electric motors, and
Lighthouse Software, Inc., a supplier of control software for machine tools. We
acquired HyComp, Inc., a manufacturer of hybrid microelectronics in April 1999
followed by Ling Electronics, Inc., a manufacturer of shaker vibration test
systems, power converters, amplifiers and controllers, which we acquired in
October 1999. In November 1999, we acquired intellectual property, tooling and
other assets from Northrop Grumman Corporation enabling us to manufacture and
sell electric drivetrains.
These acquisitions have provided us with increased revenues, a manufacturing
capability to transition our technology into commercial products, and a market
presence from which we can derive the need for new products based on our
technology. Over the past five years, we have sought to expand our markets in
power and energy management to include telecommunications, industrial
automation, semiconductor manufacturing, aircraft, satellites, electric and
hybrid-electric vehicles and distributed power generation.
In fiscal year 2000, we organized SatCon into three operating segments:
motion control products, electronics products and funded research and
development. In our motion control products segment, our MagMotor division's
annual revenue increased by 128% from fiscal year 1999 to fiscal year 2000. Of
the $3.6 million increase in our MagMotor division's sales, a large proportion
was due to sales of our MagLev-TM- systems to Applied Materials. There was also
an increase in sales of our value-added motor product lines. We sell these
motors into the semiconductor and factory automation markets such as those sold
into the machine tool markets. We also realized the benefits of a national sales
representative network that has increased our overall sales efforts.
In October 1999, we completed the acquisition of Ling Electronics. This
acquisition has brought $7.4 million in increased revenue to our motion control
products segment. Ling Electronics also offers us opportunities to introduce new
products based on our technology. Earlier in fiscal year 2000, we commenced the
development of a new six-degree-of-freedom magnetic levitation shaker system
that tests electronics components.
In our electronics products segment, annual revenue increased by 36% from
fiscal year 1999 to fiscal year 2000. The increase was primarily driven by new
product sales of Film Microelectronics' RF product lines, which include
satellite uplink amplifiers, communications uplinks and power resistors for
cellular telephones.
During fiscal year 2000, we introduced our new PowerGate-TM- power
conversion system, our GridLink-TM- utility grid interface system that allows
distributed power systems to operate in either grid-parallel (connected to the
grid) and/or grid-independent (disconnected from the grid) modes, and our
MegaVerter-TM- modular power inverter for higher power commercial and industrial
range distributed power generation systems.
We also successfully installed a new automated assembly line in our
Marlborough, Massachusetts facility. We anticipate having the initial capability
of manufacturing 25,000 PowerGate-TM- power converter systems per year by the
end of fiscal year 2001 and to be able to expand our capacity as demand
increases. The assembly line is already producing electronic circuits for other
applications, including RF amplifier circuits.
At our Technology Center, revenue from funded research and development
increased by $2.3 million from fiscal year 1999 to fiscal year 2000, primarily
as a result of work performed under the Department of Energy's AIPM, automotive
integrated power module, program to develop low-cost power conversion modules
for electric and hybrid-electric automobiles. The work builds on and further
develops our hybrid-electric automotive power conversion technology and
products.
Also, at the beginning of fiscal year 2000, we acquired the power
electronics products assets of Northrop Grumman. These assets, previously
developed as part of the electric vehicle group of Westinghouse, include power
electronics, controllers, and motors for electric and hybrid-electric vehicles,
micro-turbine power generation and energy storage products. In addition to their
power electronics
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product base, we received extensive intellectual property, including all product
development and designs and patents for several power electronics products and
system designs.
We and our affiliate, Beacon Power Corporation, are focusing our development
and manufacturing efforts on products for high-growth markets in the following
categories:
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PRODUCT CATEGORY PRODUCTS MARKETS
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<S> <C> <C>
Electronics and power Controllers, inverters, Distributed power generation
electronics hybrid microcircuits, thin (including fuel cells and
film substrates, and microturbines),
amplifiers telecommunications, aircraft,
satellites and medical
instruments
High-performance motors Industrial automation motors, Hybrid-electric vehicles,
shaker systems, and electric industrial automation,
drivetrains machine tools, semiconductor
manufacturers
Beacon Power's flywheel and Flywheels Uninterruptible power
energy storage supplies
</TABLE>
We are working with companies in the distributed power generation and power
quality markets to develop products that we believe will establish industry
standards. Plug Power, Inc., H Power Corp. and IdaTech LLC, formerly Northwest
Power Systems LLC, are currently evaluating our PowerGate-TM- power electronics
and control software for use in residential fuel cell power generation systems.
In addition, we have received an order from Nuvera Fuel Cells for two of our
PowerGate-TM- power converters. We are also working with FuelCell Energy, Inc.
to develop our MegaVerter-TM- power electronics and control software for use in
industrial fuel cell power generation systems. A major automotive manufacturer
is evaluating our high-performance motors for auxiliary uses in fuel cell
hybrid-electric vehicles. Beacon Power has received an order for 100 flywheel
energy storage systems from TLER Associates Ltd. and an initial order for
flywheels from Cox Communications, Inc. In addition, Beacon Power is conducting
field tests of its flywheel energy storage systems with Bell Atlantic Network
Services, Inc., now part of Verizon Communications, Century Communications
Corporation, now part of Adelphia Communications Corporation, and WinDBreak
Cable. Beacon Power is developing flywheel energy storage systems using
technology developed by us and licensed to Beacon Power. As of November 30,
2000, we beneficially owned approximately 25.3% of Beacon Power's common stock.
We have specialized engineering expertise in the areas of power electronics,
electromechanics, mechanical and thermal dynamics, system controls and
microelectronic design. We have leveraged research and development funding from
industry and government sources to design, develop and manufacture electronics
for power conversion, amplification and storage, high-performance electric
motors, electric drivetrains, flywheel energy storage systems and system
controls software. We continue to pursue industry and government funding to
supplement the on-going development of our products.
INDUSTRY BACKGROUND
Distributed power, or on-site power independent of the electric utility
grid, locates power-generating capability closer to the end user, while power
quality systems maintain high quality electricity despite power surges and
shortages. These systems include fuel cell and microturbine power generation
systems, hybrid-electric vehicles and flywheel energy storage systems that store
electricity in mechanical form and are an alternative to traditional lead-acid
batteries.
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The distributed power generation and power quality industries are entering a
period of rapid expansion as products approach commercialization and mass
production. In the United States, this expansion is being driven by several
factors, including:
- INCREASING DEMAND FOR ELECTRICITY, DRIVEN BY THE PROLIFERATION OF
COMPUTERS AND E-COMMERCE. The demand for electricity has increased rapidly
in recent years due in large part to the use of computers, the Internet,
e-commerce and telecommunications products. According to the Energy
Information Administration, or EIA, over the past two decades, the
percentage of energy provided by electricity to U.S. housing units
increased from 23% of all energy consumed in 1978 to 35% in 1997. In a
1999 report, Greening Earth Society science advisor Mark Mills estimated
that the share of all U.S. electricity currently consumed by
computer-based microprocessors was 13% and that within two decades, 30% to
50% of the nation's electric supply may be required to meet the direct and
indirect needs of the Internet. This growth continues a long-term trend
toward electrification of energy use throughout the developed world.
- GROWING DEMAND FOR HIGH-QUALITY POWER, AS MORE MISSION-CRITICAL AND
SENSITIVE ELECTRONICS ARE CONNECTED TO THE ELECTRIC UTILITY GRID. The
growing importance of e-commerce and the proliferation of electronics and
computer networks that are power-quality sensitive has heightened the
awareness of the importance of the quality and reliability of electricity.
Power-quality problems such as power outages, voltage instability and low
voltage in the power delivery network are significant problems for modern
computers and telecommunications equipment. As the Internet economy grows,
avoiding downtime and damaged equipment due to power-related problems will
become increasingly important. According to the Electric Power Research
Institute, or EPRI, power disruptions cost the economy approximately
$30 billion each year.
- CAPACITY CONSTRAINTS ON THE ELECTRIC UTILITY GRID THAT HAVE RESULTED IN
DECREASED RELIABILITY IN CERTAIN POWER MARKETS. Historically, the growth
in the demand for electricity has met the expansion of the existing
infrastructure, including additional investments in centralized generating
plants, high-voltage transmission lines and distribution wires. Reliance
upon this infrastructure has been and continues to be problematic for a
number of reasons. First, according to the Department of Energy, capacity
reserve margins have shown a declining trend since 1982, indicating the
increased potential for power outages during peak periods. Second, some
areas of the country have experienced capacity constraints and
weather-related outages due to the nature of the existing transmission and
distribution system. Finally, there is difficulty in finding suitable
locations for additional generating plants and transmission towers, due to
environmental concerns and local zoning laws.
- HEIGHTENING ENVIRONMENTAL CONCERNS REGARDING TRANSPORTATION VEHICLES AND
CONVENTIONAL POWER GENERATION. Among the most significant environmental
effects of energy production and consumption is the emission of greenhouse
gases, such as carbon dioxide, methane and nitrous oxide. The United
States, as one of the world's largest producers and consumers of fossil
fuels, is responsible for a major portion of the global energy-related
emissions. Utilities, due to their reliance on coal-burning power plants,
and automobiles are two of the largest sources of air pollution.
Environmental concerns, such as those that prompted the Kyoto Protocol,
are emphasizing the need to find cleaner forms of transportation and power
generation.
As a result of these market dynamics, power generation and environmental
concerns, business and residential consumers are seeking more reliable, cleaner
and cost-effective alternatives to traditional power generation. We believe that
distributed power generation and power quality products will meet these demands.
We are focused on selling our enabling products into the distributed power
generation, hybrid-electric vehicle and uninterruptible power supply markets.
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DISTRIBUTED POWER GENERATION
With the deregulation of the electric utility industry, the ability to offer
new forms of electrical power generation such as distributed power generation is
creating new markets, products and opportunities. Distributed power, or on-site
power independent of the electric utility grid, locates power generating
capability closer to the end user. The distributed generation of electrical
power from fuel cells or microturbine systems is potentially an environmentally
cleaner, more efficient and more reliable means of producing electricity
compared to conventional generation and distribution methods. Distributed power
generation systems can also alleviate congestion on highly loaded utility
distribution networks and offer an alternative to power line extensions in
remote regions. In response to the many power outages in 1999, the U.S.
Department of Energy's Power Outage Study Team recommended the increased use of
distributed power. Fuel cells and microturbines are two technologies that are
being developed to address the distributed power generation market.
Fuel cells are power generation devices that combine hydrogen, derived from
a source such as natural gas or propane, with oxygen to create electricity
through an electrochemical reaction rather than through internal combustion. As
a result, fuel cells release only a minimal amount of carbon dioxide into the
atmosphere. The only other by-products of fuel cell power generation systems are
water and heat, which can be used as a supplemental source of heat for homes and
buildings. Fuel cells typically generate a varying level of low-voltage direct
current, or DC, electricity which is then converted to useable alternating
current, or AC, electricity using power electronics and control software.
Microturbines are small turbines that generate electricity. Microturbines
operate on the same principle as a jet engine but can use a variety of
commercially available fuels, such as natural gas, diesel, kerosene and propane.
Microturbines generate a high-frequency AC electricity, which is then converted
to useable household or industrial current through power electronics and control
software.
HYBRID-ELECTRIC VEHICLES
Prices of oil and refined products will strongly influence the demand for
hybrid-electric vehicles. In the last year, significant increases in crude oil
and gasoline prices have renewed a national public policy debate regarding
substitute fuel sources. We believe these higher prices, if sustained, will
increase demand for substitute fuel sources and may result in regulatory
incentives to develop and commercialize vehicles powered by alternative fuel
sources.
In addition, automobiles are a major contributor to air pollution, and we
believe that new hybrid-electric vehicles can help to solve this problem. The
Clean Air Act Amendments of 1990 and the National Energy Policy Act of 1992 have
caused automobile manufacturers to concentrate on the development of
low-emission vehicles and zero-emission vehicles such as hybrid-electric or
electric vehicles. The California Air Resource Board also has adopted
regulations that require 10% of a manufacturer's new car sales in California be
zero-emission vehicles by 2003.
While electric cars offer the promise of zero emissions, they are unable to
provide the driving range and performance demanded by consumers due to
performance limitations of existing battery power technology. Hybrid-electric
vehicles can reduce air pollution while offering greater driving range and
performance than electric vehicles. Hybrid-electric vehicles function by
creating mechanical energy from a source such as an internal combustion engine
or fuel cell. The mechanical energy is then transformed into electricity by a
generator and transferred to an electric drivetrain which propels the vehicle.
Excess electricity is stored in an energy storage system consisting of a battery
or flywheel. All hybrid-electric vehicles require complex power and control
electronics to convert, condition and manage electricity, as well as
high-performance motors, electric drivetrains and energy storage systems.
We believe that fuel cell hybrid-electric vehicles have the potential to be
the leading alternative to internal combustion engines in meeting clean air
initiatives while offering greater driving range and
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performance than electric vehicles. The U.S. government has formed the
Partnership for a New Generation of Vehicles with Ford Motor Co., General Motors
Corp. and DaimlerChrysler AG to develop hybrid-electric vehicles that will be
capable of achieving 80 miles per gallon by 2004, and we believe that each of
these automakers has made significant progress in developing hybrid-electric
vehicles.
UNINTERRUPTIBLE POWER SUPPLIES
Uninterruptible power supply, or UPS, systems maintain a predictable quality
of electricity during power outages or periods of low power quality. As a
result, UPS systems are used to support the operation of computers,
manufacturing facilities and communication and other electronic networks in the
event of power losses. Of these applications, we believe the communications
market will be among the earliest adopters of UPS systems. Low power quality
represents problems for industries where equipment can lose synchronization and
shut down during brief power disruptions. The growth of the Internet, e-commerce
and automated manufacturing is driving the demand for UPS systems. As technology
further impacts all segments of the economy, a larger group of businesses and
individuals are demanding more reliable, high-quality power.
A leading market for UPS systems is voice, data and cable networks since
these networks must maintain operation in the event of power loss. Currently,
when power is lost or its quality drops, lead-acid batteries provide back-up
electricity until a generator can be engaged. Batteries are typically stored in
central locations in easily maintained, climate-controlled rooms. However, the
increased demand for communication bandwidth, the growth of fiber-optic
technology and the desire to locate telephone switching equipment closer to end
users is driving the trend to locate back-up battery systems in remote storage
cabinets throughout communication networks. Because these remote storage
cabinets are not climate-controlled, batteries have poor reliability and reduced
life expectancy. The dangers of explosion and acid spills are additional
environmental concerns associated with lead-acid batteries.
We believe that flywheel energy storage systems present an attractive
alternative to lead-acid batteries due to their long life and ability to operate
effectively in remote locations. An electric motor spins a flywheel to its
operating speed. The flywheel spins on magnetic bearings in a vacuum. Magnetic
bearings use magnetic fields instead of mechanical bearings and lubricants to
"float" rotating objects such as a flywheel so that there is no surface contact
and minimal friction. While the flywheel spins, it stores kinetic energy, or
energy created by motion. During power outages or periods of low power quality,
the flywheel motor converts to a generator and, like a battery, transfers the
stored electricity to the end user.
OUR OPPORTUNITY
The increased demand for reliable, high-quality, cleaner power is creating a
growing market for distributed power generation and power quality systems. All
of these systems require power and energy management products to convert,
condition, store and manage electricity. In order to be commercially viable and
operate effectively, these power and energy management products must be highly
reliable, efficient, low-cost and compact. Many of these products must be highly
customized to meet the evolving needs of the distributed power generation and
power quality marketplace. We believe that a significant opportunity exists to
manufacture and supply power and energy management products that meet these
criteria.
OUR SOLUTION
Our solution is to provide critical power products and systems necessary for
the successful commercialization of distributed power generation and power
quality systems. Our products and systems include our PowerGate-TM- and
MegaVerter-TM- power electronics, our control software, our GridLink-TM- utility
interface, high-performance motors and electric drivetrains and a flywheel
energy storage system being
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developed by Beacon Power. We believe our solution encompasses the following key
attributes demanded by the emerging distributed power and power quality markets:
- PERFORMANCE. At a minimum, distributed power generation and power quality
systems must provide the same degree of quality power that is provided by
the traditional electric utility system that supplies electric power for
commercial, industrial and residential usage. Our products use proprietary
designs to ensure that high-quality power is produced during peak as well
as steady-state operations.
- RELIABILITY. We design our products to support the long-life, always-on
requirements of the distributed power generation and power quality
markets. We have experience designing and manufacturing high-reliability,
long-life electronics for applications such as aircraft navigation systems
and satellite uplink electronics. We design, manufacture and test our
electronics to last at least fifteen years.
- EFFICIENCY. The overall efficiency of a distributed power generation
system, or its ability to deliver power with minimum energy loss, is vital
to its effective commercialization and depends on the efficiency of all of
its component parts. We apply our power electronics expertise to design
and manufacture our products to meet the efficiency needs of our customers
as defined by their specifications and the end use of the product.
- LOW-COST. The widespread commercial acceptance of distributed power
systems is dependent upon the reduction in cost of key components. We
design our products to be low-cost by making them as compact and as easy
to manufacture as possible. During 2000, we installed equipment for a
semi-automated production line in our Marlborough, Massachusetts facility
which will further automate the manufacturing process for fuel cell power
conversion products thereby reducing the cost of these systems. This
production line became operational in late November 2000 at which point we
commenced production of RF satellite uplink electronics as well as
components for our power converters. We expect the production line to be
capable of producing 25,000 power conversion systems by the end of 2001
but will employ the line to build products for which we have orders in
order to expedite the development of low-cost manufacturing processes
using this capability.
- HIGH POWER DENSITY. High power density, or the ability to convert,
condition and manage large amounts of energy within a compact design, is
required for cost reduction and is critical in applications such as
automobiles where weight and space requirements are stringent. We design
our products to meet the distributed power market's demands for high power
density.
- FLEXIBILITY. Due to the rapidly evolving nature of the distributed power
and power quality industries, our engineers work closely with our
customers to address overall systems design issues as well as to ensure
that our products meet their system specifications. We develop and
manufacture our products for use in various distributed power generation
and power quality systems such as fuel cells, microturbines, cogeneration
systems and UPS systems that are modular and scalable to meet a wide range
of power requirements.
STRATEGY
Our objective is to be a leading provider of the power and energy management
products necessary for the successful commercialization of distributed power
generation systems, such as fuel cells and microturbines, hybrid-electric
vehicles and power quality products, such as flywheel energy storage systems. We
believe that by designing and developing our products across multiple markets
and multiple applications, our success should be less dependent upon the
adoption of a specific application or on the
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business of a single market participant. To accomplish our objective, we are
pursuing the following key strategies:
- DESIGN AND DEVELOP INNOVATIVE POWER AND ENERGY MANAGEMENT PRODUCTS. We are
developing proprietary products that are integral components in
distributed power generation and power quality systems such as our
PowerGate-TM- converter, GridLink-TM- utility interface and MegaVerter-TM-
converter. We believe that we have a competitive advantage resulting from
our engineering expertise in the areas of power electronics,
electromagnetics, mechanical and thermal dynamics, system controls and
microelectronic design that we have been working on since 1985. We have
leveraged research and development funding from government and industry
sources to build a technology base within these areas that has resulted in
59 U.S. patents and 13 patent applications pending with the U.S. patent
and trademark office. In addition, 36 other patents have been issued to
our employees and assigned to DaimlerChrysler in connection with the
Chrysler Patriot racecar project.
- ESTABLISH OUR PRODUCTS AS INDUSTRY STANDARDS. We seek to establish our
power conversion products as industry standards and become a major
supplier to the distributed power generation and power quality markets by
working with our customers to determine cost and performance requirements
as we design and build our products to meet those requirements. Since we
are establishing these requirements early in the product life cycle while
we are one of the few suppliers, we hope that our products will set the
industry standard. We believe that our engineering expertise, experience
in manufacturing highly reliable products and relationships with current
power generation system manufacturers such as Plug Power, H Power, Nuvera
Fuel Cells and FuelCell Energy is positioning us to establish standards
for our distributed power generation and power quality products. We will
continue to focus on establishing strategic relationships with leading
companies in the distributed power generation industry such as our
relationship with FuelCell Energy for the development of our
MegaVerter-TM- power electronic and control software for use in their
industrial fuel cell power generation system.
- INSTALL LOW-COST, HIGH-VOLUME MANUFACTURING CAPABILITIES. We seek to
establish low-cost, high-volume manufacturing capabilities to give us a
competitive advantage in our markets. We are developing semi-automated
manufacturing processes and expanding our manufacturing capacity in order
to reduce costs as production volumes increase. During 2000, we installed
equipment for a semi-automated production line in our Marlborough,
Massachusetts facility that we expect to be capable of producing up to
25,000 of our residential fuel cell power conversion systems annually.
This production line became operational in late November 2000 at which
point we commenced production of RF satellite uplink electronics as well
as components for our power converters. We expect the production line to
be capable of producing 25,000 power conversion systems by the end of 2001
but will employ the line to build products for which we have orders in
order to expedite the development of low-cost manufacturing processes
using this capability. In the future, we expect to add additional
production lines for fuel cell power conversion systems as demand
dictates.
- ACQUIRE NEW PRODUCTS, MANUFACTURING CAPABILITIES AND TECHNOLOGIES. We
believe that the acquisition of new products, manufacturing capabilities
and technologies will enhance our competitive position and growth
opportunities. Historically, the acquisition of products or companies has
been a key element of our business strategy. The acquisition of MagMotor
provided us with revenue in the industrial automation market, a
manufacturing capability with which to build our new MagLev systems for
Applied Materials and opportunities for expansion of MagMotor's product
line into new markets and with new customers as we did with the machine
tool market. We had similar experiences with Film Microelectronics and
Ling Electronics, and we anticipate that acquisitions will continue to
play a role in our strategy.
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PRODUCTS
We design, develop and manufacture high-efficiency, high-reliability and
long-lived power and energy management products that convert, condition, store
and manage electricity. We are using our electronics and manufacturing expertise
to develop products that meet the high-reliability, high-efficiency, low-cost
and compact-size requirements of the distributed power generation and power
quality markets. Our products are sold through our operating divisions in the
following segments:
ELECTRONICS SEGMENT. The electronics segment includes power electronics and
control software such as controllers, fuel cell power conversion systems, hybrid
microcircuits, thin film substrates and amplifiers. Revenues for fiscal year
2000 within this category totaled $8.6 million, $8.3 million of which was
generated in hybrid microcircuits, thin film substrates and amplifiers.
Approximately $300,000 of revenue was generated by fuel cell power conversion
systems, which are still in the development and test stage. The following are
descriptions of our product categories within the electronics segment.
POWER ELECTRONICS AND CONTROL SOFTWARE
- CONTROLLERS. We sell controllers, which are a combination of electronics
and software, that monitor and regulate power flow from various system
components to ensure that end-use power requirements are satisfied. Our
controllers include proprietary digital signal processing software that
allows them to control a wide range of power sources, including batteries,
flywheels, fuel cells and microturbines. We sell controllers for a variety
of applications including distributed power generation and power quality
systems, motors and magnetic levitation systems. Our controller regulates
the flow of electricity to and from the various components of the fuel
cell power generation system.
- FUEL CELL POWER CONVERSION SYSTEM. We have developed a PowerGate-TM-
residential fuel cell power conversion system that combines DC to DC
converters, a DC to AC inverter and a controller with control software. We
have also developed our GridLink-TM- utility interface which is designed
to allow distributed power generation systems such as fuel cells,
microturbines, UPS systems and others to operate in either grid-parallel
(connected to the grid) or grid-independent (disconnected from the grid)
modes. The following diagram outlines the various components of a typical
fuel cell power generation system and identifies our products that have
been developed for use in the system:
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Within a box, there is a diagram entitled "PowerGate-TM- Power Conversion
System." Preceding the diagram is the following text: "In a typical residential
fuel cell power generation system, a fuel processor separates hydrogen from a
hydrocarbon source, such as natural gas. The fuel cell stack then creates low
voltage DC electricity through an electrochemical reaction. By-products from the
fuel cell stack are heat and hot water which can be used in the home. Since the
fuel cell stack generates the average amount of electricity needed, the energy
storage device, such as a lead-acid battery or Beacon Power's flywheel, stores
electricity to handle peak loads created when several appliances call for more
than the average amount of power. Our power conversion system, shown below,
transitions the power into useable AC electricity while transferring the power
between the fuel cell power generation system."
The diagram follows, which is a graphic portrayal of the different components of
the PowerGate-TM- Power Conversion System, with arrows flowing from and to
numbered boxes, and a graphical representation of a power utility transmission
tower and a residential dwelling. The boxes are shaded to denote which products
are manufactured by SatCon and which products are manufactured by SatCon's
Beacon Power affiliate, with a corresponding legend.
Beneath the diagram, is the following text, numbered to correspond to the
numbers in the boxes in the diagram above:
"1. Motors and motor controllers are used for auxiliary functions, such as pumps
that provide compressed air for the fuel cell.
2. The power converter controller and software determines where the DC
electricity needs to be routed--either to the home or to the energy storage
device.
3. The DC to DC converters transfers DC power between the fuel cell stack, the
energy storage device and the DC to AC inverter.
4. The DC to AC inverter provides high-quality AC electricity to the home.
5. The GridLink-TM- utility interface allows the power generation system to
operate in either grid-parallel (connected to the electric utility grid) or
grid-independent (disconnected from the electric utility grid) modes.
6. An energy storage device, such as a lead-acid battery or Beacon Power's
flywheel, can be used to provide power to support higher load requirements
when operating independent from the electric utility grid."
The entire PowerGate-TM- Power Conversion System graphic and explanatory text is
surrounded by a box.
Our products have been developed for use in both residential and larger
industrial fuel cell power generation systems. Plug Power, H Power and IdaTech
are currently evaluating our PowerGate-TM- power electronics and control
software for use in their residential fuel cell power generation systems, and we
have received orders for 30 of our residential fuel cell power conversion
systems from Plug Power, orders for three systems from H Power, orders for two
systems from Nuvera Fuel Cells and an order for one system from IdaTech.
We have also developed a technology to make modular inverter units that can
be combined and scaled to handle high-power requirements. Using this technology,
we developed the MegaVerter-TM- for use in connection with large, commercial
sized, fuel cell or microturbine power generation systems that
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produce power ranging from 200 kilowatts to 5 megawatts. We have a collaborative
arrangement with FuelCell Energy to develop power electronics and control
software for use in their industrial fuel cell power generation system. Under
this agreement, we plan to install a MegaVerter-TM- in a 250 kilowatt fuel cell
power generation system that is currently powering FuelCell Energy's facility in
Danbury, Connecticut.
- HYBRID MICROCIRCUITS. We manufacture standard and custom hybrid
microcircuits, which are a combination of several electronic components
imbedded in a miniature printed circuit board. Due to their size,
versatility and high reliability, these hybrid microcircuits are used in a
broad spectrum of applications including communications, industrial,
medical, military and aerospace. Some of our microcircuit products have
been employed by our customers as follows:
- Radio frequency amplifiers that are currently used in satellite uplink
systems such as the Mobil SpeedPass, satellite television and wireless
Internet service,
- Motor controllers, such as high reliability motor controllers for
helicopter hoist systems, and
- Video amplifiers, such as those used for a cruise missile video camera
system.
- THIN FILM SUBSTRATES. Thin film substrates are miniature printed circuits
onto which small electronic components are mounted, such as those used in
hybrid microcircuits. Our thin film products are integrated into
electronic devices that require small, high-reliability components such as
cellular telephones and other wireless communications devices. We
manufacture power resistors for cellular telephones using aluminum nitride
as the thin film substrate instead of beryllium oxide. Beryllium oxide is
hazardous, and its use in manufacturing is restricted in the United States
and banned in Europe. In addition to producing thin film substrates for
other manufacturers, we use our thin film substrates in our own hybrid
microcircuit products.
- AMPLIFIERS. We sell amplifiers which take an input signal and replicate it
using amplified power to boost the signal. We sell amplifiers for a
variety of applications, including telecommunications uplinks, power
amplifiers for aircraft applications and video amplifiers for cruise
missiles.
MOTION CONTROL SEGMENT. The motion control segment includes high-performance
motors and electric drivetrains such as motors for fuel cells, magnetic
levitation systems, shaker vibration test systems, electric drivetrains,
industrial automation and machine tool motors. Revenues for fiscal year 2000
within this category totaled $13.8 million. The majority of the revenues, $7.4
million, were generated by the sale of Ling Electronics' shaker vibration test
systems. Revenues of $3.3 million were generated by the sale of magnetic
levitation systems to Applied Materials. Industrial automation and machine tool
motors generated $3.1 million in revenues. Motors for fuel cell automobiles
generated little revenue as these motors are in the development and test phase.
Electric drivetrains also contributed little revenue as we are just beginning to
re-market these products that were acquired as part of the asset purchase of the
electronics products group of Northrop Grumman.
HIGH-PERFORMANCE MOTORS AND ELECTRIC DRIVETRAINS
We design and manufacture a variety of standard and custom high-performance
motors to suit specific applications. Our specialty motors are typically
designed and manufactured for unique customer requirements such as high
power-to-size requirements or high efficiency. We believe that our technical and
design expertise enables us to shorten the time between receiving customer
specifications and designing and building motors that meet these specifications.
Some of our products include:
- FUEL CELL MOTORS. We are currently developing a line of high-performance
motors for auxiliary uses, such as fuel pumps, in fuel cell
hybrid-electric vehicles. We are also developing these high-performance
motors for use in commercial and residential fuel cell power generation
systems.
- MAGNETIC LEVITATION SYSTEMS. We manufacture magnetic levitation, or
MagLev-TM-, systems that enable machinery to rotate or move without
contacting other machine parts. Our MagLev-TM- systems use
electro-magnetic fields to lift mechanical components without any surface
contact. Sensors within
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the system determine the actual position of the levitated object and send
signals to a high-speed digital controller, which commands electricity to
activate the electro-magnets thereby making the object move away from any
surface it is about to contact. This is done at extremely high speeds in
order to maintain the stability of the levitated object and can be
accomplished with objects that spin, such as motors, or objects that move
in one direction, like pistons or push rods. Our largest selling
MagLev-TM- system is the integrated suspension and motor, or ISAM, system
that is sold to Applied Materials, Inc. for silicon wafer manufacturing.
Because none of the rotating parts contact any other parts, the ISAM
system does not require lubrication and is ideal for applications such as
silicon wafer production where a contaminant-free environment is critical.
Applied Materials has the exclusive right to use this product in rapid
thermal processing equipment for silicon wafers, and we are Applied
Materials' sole source provider. MagLev-TM- technology is also used in the
manufacture of magnetic bearings for Beacon Power's flywheel. We have also
developed MagLev-TM- systems for applications such as vibration isolators
and magnetic bearings for jet engines and turbines. We are currently
developing new applications for use in silicon wafer manufacturing, laser
printing, equipment testing and other manufacturing applications.
- SHAKER VIBRATION TEST SYSTEMS. We sell shaker vibration test systems that
enable manufacturers to understand how their mechanical and electronic
products will perform after exposure to vibrations. Our shaker vibration
test systems are designed to replicate vibrations ranging from continuous
shaking to high impact forces such as those arising from dropping a
product on the floor or landing a plane. Our shaker vibration test systems
are used for testing a variety of products, including small electronic
components, computer hardware, consumer electronics, automobiles and
aerospace and satellite structures. In addition, since our acquisition of
Ling Electronics in October 1999, we have begun to sell a line of
digitally modulated power amplifiers. We sell these amplifiers
individually and as components of our shaker vibration test systems.
- ELECTRIC DRIVETRAINS. In November 1999, we acquired certain intellectual
property and assets from Northrop Grumman Corporation to give us the
ability to manufacture and sell electric drivetrains which convert
electricity into mechanical energy for propulsion of automobiles. Northrop
Grumman developed this intellectual property while designing a
100-horsepower electric drivetrain for DaimlerChrysler for light duty,
high-power electric vans and utility vehicles and a 230-horsepower
electric drivetrain for a 33,000 pound vehicle such as a bus or truck.
Prior to November 1999, over 300 of the 100-horsepower motors were
installed in DaimlerChrysler's electric powered interurban commuter
minivans, and a 230-horsepower electric drivetrain was installed in a Blue
Bird Corporation bus as part of the Cedar Rapids Electric Transportation
Coalition. We are currently pursuing opportunities to sell these products
in the electric drivetrain marketplace.
- INDUSTRIAL AUTOMATION MOTORS. We manufacture brush and brushless DC motors
for the industrial automation market. These small, high-efficiency motors
are available with a variety of options including optical encoders,
tachometers, brakes, custom cables and connectors. Our industrial
automation motors are typically used in semiconductor equipment
manufacturing, medical device assembly and other automated assembly
processes.
- MACHINE TOOL MOTORS. We manufacture a line of precise positioning motors
for use with machine tools such as computer numerical controlled machines.
These include machining centers, lathes and milling machines.
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ENERGY STORAGE SYSTEMS.
FLYWHEEL ENERGY STORAGE SYSTEMS
We have been developing flywheels for energy storage and other applications
since 1985. Our flywheel development programs included the development of
flywheel energy storage systems for the Chrysler Patriot hybrid-electric
vehicle, for a U.S. Marine Corps field communications system and for a combined
satellite control and energy storage system. In 1995, we began development of a
stationary flywheel energy storage system to provide uninterruptible back-up
power. In 1997, after we formed Beacon Power, we contributed this technology to
Beacon Power pursuant to an exclusive license, enabling Beacon Power to pursue
the development of a stationary, terrestrial flywheel energy storage system.
Currently, we do not have revenues generated by flywheel energy storage systems.
This business currently resides within our affiliate, Beacon Power. However, we
retain the right to market flywheels for such applications as space vehicles. As
a result, the primary value of this category is our beneficial ownership, as of
November 30, 2000, of 25.3% of Beacon Power's common stock. See "Beacon Power
Corporation."
FUNDED RESEARCH AND DEVELOPMENT SEGMENT
We perform funded research and development in connection with government
programs and for third parties. We pursue funded research and development in
areas where we have technical expertise and where we believe there is
significant commercial application for the developed technology. We have
performed funded research and development in connection with the development of
each of our product areas. Funded research and development accounted for
$8.6 million in revenues in fiscal year 2000.
In 1999, we entered into an agreement with the U.S. Department of Energy, or
DOE, for the research, development and demonstration of a power conversion
system for a new generation of hybrid-electric vehicles. Under this government
contract, we expect to design a power conversion system that can be manufactured
at high volume and low cost. We believe that the resulting design will enable us
to enhance our manufacturing capabilities to produce our power conversion
products for distributed power generation systems. This program will be funded
half by us and half by DOE. The total DOE approved budget for this program is
$10.0 million through September 29, 2002. As of November 30, 2000, DOE has
funded $5.4 million of this budget. Revenues in fiscal year 2000 and 1999 for
this program totaled $3.4 million and $1.0 million, respectively. The additional
DOE funding of $4.6 million is subject to congressional appropriation and DOE
approval.
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BEACON POWER CORPORATION
BUSINESS. Since its formation, Beacon Power has been developing stationary
flywheel energy storage systems to offer customers an environmentally cleaner,
more reliable alternative to lead-acid batteries for energy storage and power
quality management. Lead-acid batteries have three primary deficiencies. Weather
extremes and frequent discharging and recharging limit their reliability and
useful lives, they cannot be remotely monitored currently, and they represent an
environmental risk due to the threat of explosion and battery acid spills.
Beacon Power is developing its flywheel energy storage system to operate in
all weather conditions, to offer remote monitoring, to have no limitations on
charge and discharge cycles and to have a longer useful life than batteries.
Beacon Power's flywheel energy storage system consists of a rotating, composite
rim that spins on magnetic bearings in a vacuum. The flywheel is powered up to
its operational speed by an internal motor. Because of negligible friction,
little power is required to maintain the flywheel's operating speed. During
power outages or periods of low power quality, the flywheel motor converts to a
generator and, like a battery, transfers the stored electricity to the end user.
The following is a diagram of a flywheel energy storage system:
Graphic of a flywheel (cutaway to reveal internal components inside protective
casing), with arrows pointing on the left hand side from the following text
descriptions to the diagram: "Vacuum Housing," "Motor/Generator," "Magnetic
Bearings" and "Composite Rim." On the right hand side of the diagram, there are
four bullets with the following text, descending from top to bottom:
- "Motor/generator draws power from a power source to spin up the flywheel.
- Flywheel spins in a vacuum on magnetic bearings with negligible friction.
- Energy is stored in the flywheel.
- To provide power, the motor transitions into a generator."
The entire flywheel cutaway graphic and explanatory text is surrounded by a box.
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Because of its advantages over lead-acid batteries, Beacon Power's flywheel
energy storage system may be a viable alternative for use in applications where
the loss or disruption of electricity could have potentially significant
economic impacts. Beacon Power's current market focus is to provide flywheel
energy storage systems to telecommunication service providers who must maintain
service during power outages. We believe that the lifetime costs and
functionality of a flywheel energy storage system will compare favorably to
lead-acid batteries in many applications. Over the long-term, if the cost of
manufacturing flywheel energy storage systems is significantly lowered, these
systems could potentially replace batteries that are planned for use in fuel
cell power generation systems.
In January 2000, Beacon Power received a sales commitment for 100 flywheel
energy storage systems for $15,000 per system from TLER. These systems will be
used for back-up power for a residential telephone system in Mexico. These
systems are required to be delivered by June 2001. In June 2000, Beacon Power
received an initial order for flywheels from Cox Communications. In addition,
Beacon Power has conducted field tests of its flywheel energy storage systems
with Bell Atlantic Network Services, Inc., now part of Verizon Communications,
Century Communications Corporation, now part of Adelphia Communications
Corporation, and WinDBreak Cable. Beacon Power is located in Woburn,
Massachusetts, where it occupies an approximately 20,000 square foot facility.
Beacon Power has signed a lease and expects to move into an approximately 52,000
square foot facility in the Wilmington, Massachusetts area in the first quarter
of 2001. As of September 30, 2000, Beacon Power had a total of 80 full-time
employees and one independent contractor, of which approximately 60 were
engineers, scientists and other degreed professionals.
FORMATION AND FINANCING HISTORY. In May 1997, we formed Beacon Power to
develop stationary, terrestrial flywheel energy storage systems for commercial
applications. At that time, DQE Enterprises, Inc., who is currently one of our
investors, made a $5 million investment in SatCon, and we were required to
contribute the $5 million to the capital of Beacon Power to fund its development
efforts. As a condition of DQE Enterprises' investment in us, we granted Beacon
Power a perpetual, worldwide, royalty-free, exclusive right and license to our
flywheel technology for stationary, terrestrial applications.
On October 23, 1998, Beacon Power completed a $4.8 million private placement
of its class D preferred stock and warrants to Perseus Capital L.L.C., DQE
Enterprises and Micro-Generation Technology Fund, L.L.C. At that time, we
relinquished significant control of Beacon Power and Beacon Power came under the
control of its third-party investors. From June 1999 through March 31, 2000,
Beacon Power was financed through the issuance of approximately $4.7 million of
bridge notes and warrants to its investors, including approximately
$1.0 million from us. On April 7, 2000, Beacon Power issued 1,226,141 shares of
its class E preferred stock and warrants to purchase 306,535 shares of its
class E preferred stock in exchange for the conversion of all of its outstanding
bridge notes of which we received 347,407 shares of Beacon Power's class E
preferred stock and a warrant to purchase 86,852 shares of its class E preferred
stock.
On April 21, 2000, Beacon Power raised an additional $4.1 million through
the sale of additional bridge notes and warrants to purchase 82,000 shares of
Beacon Power's common stock. We did not participate in this financing. On
May 23, 2000, Beacon Power issued 6,785,711 shares of its class F preferred
stock and additional warrants to purchase shares of Beacon Power's common stock.
The exercise price and the number of shares subject to these additional warrants
were based on the initial public offering price of Beacon Power's common stock.
The shares of class F preferred stock and the additional warrants were issued in
consideration for the cancellation of $5.2 million in bridge notes and an
additional $23.3 million cash investment by existing and new investors. We did
not participate in this financing either.
Beacon Power's class D preferred stock, class E preferred stock and class F
preferred stock accrue quarterly dividends in arrears at a rate of 12.5% through
May 23, 2000 and 6% thereafter. Beacon Power also has consulting arrangements
with Perseus, DQE Enterprises and Micro pursuant to which Beacon Power must pay
consulting fees in shares of its class A preferred stock.
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In November 2000, Beacon Power completed an initial public offering of its
common stock and issued 8,000,000 shares of its common stock at $6.00 per share.
As of November 30, 2000, we beneficially owned approximately 25.3% of Beacon
Power's common stock.
BOARD COMPOSITION. Beacon Power's board of directors currently consists of
seven members. By agreement of Beacon Power's stockholders, two members are
currently designated by Perseus Capital, one member is designated by DQE
Enterprises, one member is designated by Mechanical Technology Incorporated, one
member is designated by GE Capital Equity Investments, Inc. and one member is
designated by us, which is currently David B. Eisenhaure, our chairman of the
board, president and chief executive officer. The seventh member of Beacon
Power's board of directors is William E. Stanton, Beacon Power's president and
chief executive officer.
OUR OPERATING DIVISIONS
We currently develop and market our products and services through the
following three operating segments:
ELECTRONICS PRODUCTS. Our electronics products segment consists of the
following two divisions:
ADVANCED FUEL CELL POWER PRODUCTS. Our Advanced Fuel Cell Power Products
division is establishing manufacturing facilities and processes for the
production of power electronics for the distributed power generation and
power quality markets. It also manufactures various multi-chip modules. We
acquired our Advanced Fuel Cell Power Products division's Marlborough,
Massachusetts facility in April 1999. As of September 30, 2000, we had 22
employees working in our Advanced Fuel Cell Power Products division.
FILM MICROELECTRONICS. Our Film Microelectronics division, or FMI,
designs and manufactures standard and custom microelectronic circuits for
telecommunications, commercial and government aerospace, industrial,
medical and automotive markets. We acquired FMI in April 1997. FMI is
located in North Andover, Massachusetts and, as of September 30, 2000, had
75 employees.
MOTION CONTROL PRODUCTS. Our motion control products segment consists of
the following two divisions:
MAGMOTOR. Our MagMotor division designs and manufactures standard and
custom high-performance motors for the industrial machinery, factory
automation and automotive markets. We acquired MagMotor in January 1997.
In January 1999, we acquired Inductive Components which we integrated into
our MagMotor division. MagMotor is located in Worcester, Massachusetts
and, as of September 30, 2000, had 61 employees.
LING ELECTRONICS. Our Ling Electronics division manufactures shaker
vibration test systems, power converters, amplifiers and controllers. We
acquired Ling in October 1999 from Mechanical Technology Incorporated.
Ling is located in Anaheim, California and, as of September 30, 2000, had
57 employees.
FUNDED RESEARCH AND DEVELOPMENT. Our funded research and development
segment consists of the following two divisions:
TECHNOLOGY CENTER. Our Technology Center, located in Cambridge,
Massachusetts, focuses on funded research and development. It also
supports the product development efforts of our other operating divisions.
The business of Lighthouse Software that we acquired in January 1999 has
been integrated into our Technology Center. As of September 30, 2000, our
Technology Center had 80 employees of which 31 were engineers. Our
engineers have 19 advanced degrees including 8 doctorates.
ELECTRONIC POWER PRODUCTS. Our Electronic Power Products division was
formed in connection with the acquisition of certain intellectual property
and other assets from Northrop Grumman in
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November 1999. Through this acquisition, we acquired expertise in power
electronics and the design and development of electric drivetrains for use
in electric and hybrid-electric vehicles. This division is engaged
primarily in contract research and development. The Electronic Power
Products division is located in Baltimore, Maryland and, as of
September 30, 2000, had 10 employees.
SIGNIFICANT CUSTOMERS
The U.S. Department of Defense accounted for 9.8%, 20.6% and 22.1% of our
total revenue for our fiscal years ended September 30, 2000, 1999 and 1998,
respectively. For the fiscal year ended September 30, 2000, revenue from the
U.S. Department of Energy and Applied Materials accounted for 11.5% and 10.6% of
our total revenue, respectively.
RESEARCH AND DEVELOPMENT
We believe that the continued and timely development of new products and
enhancements to our existing products are necessary to maintain our competitive
position. We use technologies developed by our Technology Center and our
Electronic Power Products division, together with information supplied by our
distributors and customers, to design and develop new products and product
enhancements and to reduce the time-to-market for our products.
$8.6 million, or 27.8%, of our revenue during the year ended September 30,
2000 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 $3.5 million, $726,000 and
$346,000 on internally-funded research and development during our years ended
September 30, 2000, 1999 and 1998, respectively. During the year ended
September 30, 2000, our most concentrated effort was directed toward building
the power inverter for a fuel cell on-site power generation system.
SALES AND MARKETING
We sell our products and services both domestically and internationally
through our direct sales force and through independent distributors and
representatives. Our direct sales staff manages our key customer accounts,
provides customer support and identifies significant market opportunities in
their respective markets.
Each of our divisions manages its own marketing organization and is
responsible for developing sales and advertising literature, such as product
announcements, catalogs, brochures and magazine articles in trade and other
publications. Publication of significant events or material information is
handled through our corporate office.
We maintain close contact with our customers' design and engineering staffs
in order to provide the appropriate products for our customers' applications. We
maintain this close working relationship with our customers throughout the life
of a product, and we believe that it has been a key component of our customers'
satisfaction.
We compete for and market our research and development contracts through
several methods, including pursuing new and existing customer relationships in
the commercial and government sectors, responding to Small Business Innovative
Research calls for proposals and calls for proposals listed in the daily
publication, COMMERCE BUSINESS DAILY, seeking to maintain a strong technical
reputation within the community, responding to unsolicited requests for
proposals and through our Internet site.
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BACKLOG
Our backlog consists primarily of research and development contracts and
orders for power electronic and motion control products. At September 30, 2000,
the backlog was $23.3 million for work to be performed and products to be
shipped during the year ending September 30, 2001 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, 1999 was $7.3 million.
COMPETITION
The market for our products is competitive and subject to rapid
technological change. The market is significantly affected by new product
introductions and other market activities of industry participants. We currently
or potentially compete with:
- manufacturers of converters and inverters for fuel cells such as Trace
Engineering, a division of Xantrex Technology, Inc., Asea Brown
Boveri Ltd., Siemens Corporation and Alstom S.A.,
- manufacturers of hybrid microcircuits such as Omnirel L.L.C.,
Aeroflex Inc., Teledyne Inc. and DDC & R, Inc.,
- manufacturers of thin film substrates such as MIC Technology, an Aeroflex
Company and Ultrasource, Inc.,
- manufacturers of electric vehicle drivetrains such as Lockheed Martin
Corp., Solectria Corporation, Delphi Automotive Systems, Corp., Siemens
Corporation and Visteon Corporation,
- manufacturers of motors such as MCG Inc., Reliance Electric CO/DE, CMC
Industries, Inc. and other regional and specialty motor manufacturers,
- manufacturers of shaker vibration test systems such as Ling Dynamics
Systems, Ltd. and Unholtz-Dickie, Corp., and
- developers of flywheel technology such as Active Power, Inc., Trinity
Flywheel Power and U.S. Flywheel Systems.
Many of our competitors have significantly greater financial resources than
we do and are able to devote greater resources to the development, promotion,
sale and support of their products and may have more manufacturing expertise and
capacity. In addition, many of our competitors have more extensive customer
bases and broader customer relationships than we do.
We believe that competitive factors for our products include:
- performance
- reliability
- efficiency
- pricing
- functionality
- reputation of the vendor
- service
- ease of use
- flexibility
- manufacturing capacity
- customization capabilities
We believe that we are positioned to compete favorably on the basis of each
of these factors in each of our markets.
MANUFACTURING
We manufacture our products in approximately 80,000 square feet of
manufacturing space at four facilities in Marlborough, Massachusetts; Worcester,
Massachusetts; North Andover, Massachusetts and Anaheim, California. We have
existing manufacturing capacity to meet our current needs. Our goal is to mass
manufacture high volume, low-cost products. We have a semi-automated production
line in our
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Marlborough, Massachusetts facility that we expect to be capable of producing up
to 25,000 of our residential fuel cell power conversion systems annually. We
intend to add additional production lines for our products in the future as
demand dictates. We have made and expect to continue to make technological
improvements that reduce the costs to manufacture our products.
We believe that most of the raw materials used in our products are readily
available from a variety of vendors. Additionally, we design and develop our
products to use commodity parts in order to simplify the manufacturing process.
INTELLECTUAL PROPERTY
Our success and competitiveness depend on our ability to develop and
maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright law and contract restrictions to
protect the proprietary aspects of our technology. We seek to limit disclosure
of our intellectual property by requiring employees, consultants, and any third
parties with access to our proprietary information to execute confidentiality
agreements and by restricting access to that information. These legal
protections afford only limited protection for our technology.
We currently own 59 U.S. patents and have 13 patent applications pending
with the U.S. patent and trademark office. In addition, 36 other patents have
been issued to our employees and assigned to DaimlerChrysler in connection with
the Chrysler Patriot racecar project. DaimlerChrysler granted us a
non-exclusive, royalty-free license to these patents for non-automotive
applications. Our 59 U.S. patents and the 36 patents assigned to DaimlerChrysler
are distributed among the following five application areas:
- motor related applications,
- magnetic levitation and magnetic bearings,
- flywheels,
- distributed power generation and hybrid-electric vehicles, and
- power electronics and controls.
The expiration dates of these patents range from 2007 to 2018. With the
exception of two patents, most of our patents expire in or after 2012, with the
majority expiring in 2014 and 2016.
In 1997, we granted Beacon Power a perpetual, worldwide, royalty-free,
exclusive right and license to our flywheel technology for stationary,
terrestrial applications. 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 to our future prospects.
Most of the 59 U.S. patents described above are the result of retaining
ownership of inventions made under U.S. government-funded research and
development programs. With respect to any invention made with government
assistance, the government has a nonexclusive, nontransferable, irrevocable,
paid-up license to use the technology or have the technology employed for or on
behalf of the U.S. government throughout the world. Under certain conditions,
the U.S. government also has "march-in rights." These rights enable the U.S.
government to require us to grant a nonexclusive, partially exclusive, or
exclusive license in any field of use to responsible applicants, upon terms that
are reasonable under the circumstances. If we refuse, the government can grant
the license itself, provided that it determines that such action is necessary
because we have not achieved practical application of the invention, or to
alleviate health or safety needs, or to meet requirements for public use
specified by federal regulations, or because products using such inventions are
not being produced substantially in the United States. The exercise of these
rights by the government could create potential competitors for us if we later
determine to further develop the technologies and utilize the inventions in
which the government has exercised these rights.
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<PAGE>
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products or
technologies is difficult. Litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. Any such resulting litigation could result
in substantial costs and diversion of resources and could have a material
adverse effect on our business, results of operations and financial condition.
We cannot assure you that third parties will not claim infringement with
respect to our current or future products. Any such claims, with or without
merit, could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all. A successful claim of intellectual property infringement against us and our
failure or inability to license the infringed technology or develop or license
technology with comparable functionality could have a material adverse effect on
our business, results of operations and financial condition.
We depend upon intellectual property developments which sometimes derive in
whole or in part from U.S. government contracts and subcontracts. Our rights to
these intellectual property developments vary by contract, depending upon such
factors as whether the government wholly or only partly funded the contract, and
the terms of the negotiation between us and the government department. Some
contracts may give us exclusive rights to commercialize the invention, reserving
to the government only those rights which it needs for government functions.
Other contracts may give broader rights to the government. At the least, most of
these contracts provide us with a non-exclusive, non-assignable license to use a
development for commercial purposes, however most of our technology developed
through government-funded contracts is protected through patents and exclusive
rights.
GOVERNMENT REGULATION
We presently are subject to various federal, state and local laws and
regulations relating to, among other things, safe working conditions, handling
and disposal of hazardous and potentially hazardous substances and emissions of
pollutants into the atmosphere. To date, we believe that we have obtained all
necessary government permits and have been in substantial compliance with all of
these applicable laws and regulations.
GOVERNMENT CONTRACTS
We act as a prime contractor or major subcontractor for many different U.S.
government programs, including those that involve the development of
electro-mechanical transportation, navigation and energy-related products. Over
its lifetime, a program may be implemented by the award of many individual
contracts and subcontracts, or contracts with option years, or partially funded
contracts.
U.S. government contracts include provisions permitting termination, in
whole or in part, without prior notice, at the U.S. government's discretion. The
U.S. government pays compensation for work actually done and commitments made at
the time of termination, and some allowance for profit on the work performed.
The U.S. government may also terminate for default in performance and pay only
the value delivered to the U.S. government. It can also hold the contractor
responsible for reprocurement costs.
Our government contract business is also subject to specific procurement
statutes and regulations and a variety of socioeconomic and other requirements.
Failure to comply with these regulations and requirements could lead to loss of
contract or suspension or debarment from U.S. government contracting or
subcontracting for a period of time. Examples of these statutes and regulations
are those related to procurement integrity, export control, employment
practices, the accuracy of records and the recording of costs.
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<PAGE>
Sales to the U.S. government may be affected by changes in research
interests in the areas in which we engage, changing government department
budgets, and changing procurement policies.
EMPLOYEES
At September 30, 2000, we had a total of 278 full-time employees, three
part-time employees and 24 contract employees. Of the total, 110 persons were
employed in engineering, 127 in manufacturing, 45 in administration and 23 in
sales and marketing. None of our employees are represented by a union. We
believe that our relations with our employees are good.
ITEM 2. PROPERTIES
We lease office, manufacturing and research and development space in the
following locations:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER EXPIRATION
LOCATION PRIMARY USE OF SQUARE FEET OF LEASE
---------------------------- ----------------------------------- ------------------ ----------
<S> <C> <C> <C>
Cambridge, Massachusetts Corporate headquarters and research
and development 33,000 2003
North Andover, Massachusetts Manufacturing 15,000 2002
Worcester, Massachusetts Manufacturing 17,000 2003
Marlborough, Massachusetts Manufacturing 20,000 2005
Baltimore, Maryland Research and development 16,000 2002
Anaheim, California Manufacturing 60,000 2003
</TABLE>
Our Cambridge, Massachusetts lease contains an additional 13,000 square feet
of space which is subleased to a third party until December 31, 2002. Our
Anaheim, California lease contains an additional 25,000 square feet of
manufacturing space for a total of 85,000 square feet. The additional space is
subleased to a third party until May 31, 2001. We also lease 8,800 square feet
in Tucson, Arizona until March 31, 2001, which we have subleased to a third
party through that lease term.
We believe our facilities are adequate for our current needs and that
adequate facilities for expansion, if required, are available. See also
"Business--Our Operating Divisions."
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 an approximately $1.6 million
contract between the Air Force and us for development of a satellite component,
unless perceived performance problems were cured. As of that date, we received
payments of approximately $1.4 million in connection with this contract. In the
event of an actual default, we could be liable for extra costs incurred by the
U.S. government in developing the component and could be required to return a
portion of the monies we received for this contract. 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. On May 11, 2000,
we contacted the Air Force again to offer to settle our differences and to
explore obtaining additional settlement amounts. On August 3, 2000, we sent a
memorandum to the Air Force explaining the basis of a settlement request of
$353,248. Also on August 3, 2000, we received from the Air Force a proposed
settlement offer. On September 15, 2000, we entered into a settlement agreement
in which the contract was to be closed and considered completed through a
contract modification with no additional payment, but without termination for
cause. The contract is still subject to normal audit and accounting of final
cost.
On November 6, 1999, APACE, Inc. commenced an action against us in the
Supreme Court of the State of New York claiming that we had been awarded a prime
contract by the U.S. Department of Energy and that we had failed or refused to
negotiate a subcontract with APACE, allegedly in breach of a contract
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<PAGE>
between us and APACE. APACE is seeking in excess of $1,000,000 in damages. We
denied the allegations, moved to stay the action and filed for arbitration with
the American Arbitration Association in Boston, Massachusetts. The American
Arbitration Association decided that the arbitration would go forward in Boston.
In the meantime, APACE requested that the court permit the action to go forward
and for the arbitration to be stayed. On March 21, 2000, the Supreme Court of
the State of New York issued an order compelling arbitration and staying APACE's
action pending arbitration to be conducted by the American Arbitration
Association in Boston.
On June 26, 2000, APACE served us with an amended answering statement and
counterclaim, including additional allegations that we have engaged in unfair
and deceptive trade practices and that our actions were willful and knowing.
Based on these allegations, APACE is seeking multiple damages, as well as
attorneys' fees and expenses. On July 19, 2000, we filed an answer to APACE's
amended answering statement and counterclaim, denying the allegations and
asserting various affirmative defenses.
An arbitrator has been selected and the arbitration is scheduled to go
forward in Boston for nine days in February, March and April of 2001. The
parties have exchanged some discovery, and expect to make a further exchange
early in 2001.
Sean F. Moran, our Chief Financial Officer, is named as a defendant in three
shareholder class action complaints filed in the United States District Court
for the District of Massachusetts. The complaints, captioned RO NEMETH-COSLETT
V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN (filed on or about
June 8, 2000), MARK CASAZZA V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND
SEAN MORAN (filed on or about June 26, 2000), and RODNEY M. ROCKEFELLER AND LARA
LEE ROCKEFELLER V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN
(filed on or about August 2, 2000), allege violations of the federal securities
laws by Anika Therapeutics, Inc., J. Melville Engle, who serves as Anika's Chief
Executive Officer, and Sean F. Moran, who served as Anika's Chief Financial
Officer from February 1993 to January 2000. The complaints allege a two-year
putative class period through May 30, 2000, and allege that Anika and the
individual defendants violated the federal securities laws by making material
misrepresentations and omissions that relate to Anika's press releases and
historical financial statements for 1998 and the first three quarters of 1999.
Anika has previously reported publicly that it was the subject of an
informal investigation by the SEC as disclosed by Anika in March 2000, which
later became a formal investigation by the SEC as disclosed by Anika in May
2000. Anika has reported that in connection with the formal investigation, the
SEC has required Anika to provide information in connection with certain revenue
recognition matters. Anika has reported that these matters related to Anika's
historical accounting for sales of its product under a long-term supply and
distribution agreement. In March 2000, Anika restated its financial results for
1998 and the first three quarters of 1999 to change its revenue recognition
policy under this long-term supply contract.
From time to time, we are a party to routine litigation and proceedings in
the ordinary course of business. We are not aware of any current or pending
litigation to which we are or may be a party that we believe could materially
adversely affect our results of operations or financial condition.
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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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is publicly traded on the Nasdaq National Market under the
symbol "SATC."
The following table sets forth the range of high and low sales prices of our
common stock as reported on the Nasdaq National Market for fiscal years 1999 and
2000:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
YEAR ENDED SEPTEMBER 30, 1999
First Quarter............................................... $ 7.75 $ 3.69
Second Quarter.............................................. 6.56 3.63
Third Quarter............................................... 9.88 4.50
Fourth Quarter.............................................. 10.44 7.06
YEAR ENDED SEPTEMBER 30, 2000
First Quarter............................................... $10.44 $ 7.31
Second Quarter.............................................. 44.75 8.00
Third Quarter............................................... 28.81 10.50
Fourth Quarter.............................................. 41.00 23.50
</TABLE>
On December 20, 2000, the last reported sale price of our common stock as
reported on the Nasdaq National Market was $9.3438 per share. As of
December 12, 2000, there were 13,877,185 shares of our common stock outstanding
held by approximately 190 holders of record.
DIVIDEND POLICY
We have never paid dividends on our common stock. We currently intend to
retain earnings, if any, to fund the development and growth of our business and
do not anticipate paying cash dividends for the foreseeable future. Payment of
future dividends, if any, will be at the discretion of our board of directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
RECENT SALES OF UNREGISTERED SECURITIES
On September 27, 2000, we issued 100,000 shares of our common stock to
Northrop Grumman Corporation in connection with the exercise by Northrop Grumman
Corporation of a warrant we issued to Northrop Grumman Corporation at an
exercise price of $9.75 per share. 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 any public offering.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our financial statements for the years ended September 30, 1999, 1998, 1997
and 1996 have been restated. All financial information included in this Annual
Report on Form 10-K reflect the restatements. For a discussion of the
restatements, see our financial statements and related notes included elsewhere
in this Annual Report on Form 10-K.
You should read the data set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes appearing elsewhere in
this Annual Report on Form 10-K. The selected consolidated financial data set
forth below for the fiscal years ended September 30, 2000, 1999 and 1998 and the
consolidated balance sheet data as of September 30, 2000 and 1999 are derived
from our audited consolidated financial statements appearing elsewhere in this
Annual Report on Form 10-K. The selected consolidated statement of operations
data for the fiscal years ended September 30, 1997 and 1996 and the consolidated
balance sheet data as of September 30, 1998, 1997 and 1996 are derived from our
audited consolidated financial statements that are not included in this Annual
Report on Form 10-K. The statement of operations for the fiscal year ended
September 30, 2000 includes the results of Ling Electronics beginning from
October 21, 1999, the date on which we acquired Ling Electronics.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Product revenue..................................... $ 22,427 $ 9,123 $ 7,520 $ 3,728 $ --
Funded research and development revenue............. 8,628 6,355 8,011 8,738 9,385
-------- -------- ------- ------- -------
Total revenue....................................... 31,055 15,478 15,531 12,466 9,385
Cost of product revenue............................. 19,069 9,511 5,474 2,683 --
-------- -------- ------- ------- -------
Gross margin........................................ 11,986 5,967 10,057 9,783 9,385
-------- -------- ------- ------- -------
Research and development expenses................... 10,301 6,554 6,794 11,443 8,213
Selling, general and administrative expenses........ 9,970 8,819 4,523 6,198 5,569
Amortization of intangibles......................... 1,217 371 291 120 --
-------- -------- ------- ------- -------
Total operating expenses............................ 21,488 15,744 11,608 17,761 13,782
-------- -------- ------- ------- -------
Operating loss...................................... (9,502) (9,777) (1,551) (7,978) (4,397)
Other income (expense), net......................... 460 (224) 170 269 464
-------- -------- ------- ------- -------
Net loss before income taxes and loss from Beacon
Power............................................. (9,042) (10,001) (1,381) (7,709) (3,933)
Benefit/(provision) for income taxes................ -- -- (4) -- 144
Loss from Beacon Power Corporation.................. (899) (4,341) (3,473) -- --
-------- -------- ------- ------- -------
Net loss............................................ (9,941) (14,342) (4,858) (7,709) (3,789)
Accretion of redeemable convertible preferred stock
discount.......................................... (3,106) (51) -- -- --
-------- -------- ------- ------- -------
Net loss attributable to common stockholders........ $(13,047) $(14,393) $(4,858) $(7,709) $(3,789)
======== ======== ======= ======= =======
Net loss per share, basic and diluted............... $ (1.03) $ (1.57) $ (0.54) $ (0.97) $ (0.52)
======== ======== ======= ======= =======
Weighted average number of common shares, basic and
diluted........................................... 12,630 9,176 8,957 7,959 7,286
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents............................... $ 8,814 $ 2,533 $ 1,202 $ 4,257 $ 3,771
Assets transferred to Beacon Power Corporation.......... -- -- 577 -- --
Total assets............................................ 44,487 17,815 16,689 18,219 16,354
Working capital......................................... 18,390 7,714 7,905 10,595 11,011
Liabilities transferred to Beacon Power Corporation..... -- -- 1,564 -- --
Total long-term liabilities, net of current portion..... 214 64 239 323 --
Contingent obligation to Class D preferred stockholders
of Beacon Power Corporation........................... 5,794 5,309 -- -- --
Redeemable convertible preferred stock.................. -- 4,894 -- -- --
Stockholders' equity.................................... 31,118 4,421 12,372 15,589 15,175
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On four separate occasions since January 1, 1999, we have restated our
financial results. These restatements, announced on January 13, 1999, August 16,
1999, August 8, 2000 and September 12, 2000, affected various reporting periods
during our fiscal years ended September 30, 1996 through 1999 and our nine-month
period ended June 30, 2000. The restatements primarily related to the accounting
for our investment in Beacon Power, and other various accounting matters
including accounting for stock options and warrants, providing additional
reserves for accounts receivable, inventory, warranty and sales returns and
writing off certain property and equipment. On September 18, 2000, the SEC's
enforcement division requested that we meet with them to explain the
circumstances surrounding the restatements announced on August 8, 2000 and
September 12, 2000. On September 22, 2000, David B. Eisenhaure and Sean F.
Moran, our President and Chief Financial Officer, respectively, along with our
independent public accountants and outside counsel, met with various
representatives of the SEC in response to their inquiry. We explained the
circumstances surrounding our August 2000 and September 2000 restatements and
responded to the SEC's questions. We expect that the SEC will have additional
questions. The SEC may seek to meet with individuals, which may include our
employees as well as representatives of Beacon Power and our former and current
independent accountants. We will cooperate fully with any further SEC inquiry.
The following discussion reflects the restatement of our financial
statements for fiscal years 1998 and 1999. For a discussion of the restatements,
see our financial statements and related notes included elsewhere in this Annual
Report on Form 10-K.
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.
- 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
26
<PAGE>
Corporation enabling us to manufacture and sell electric drivetrains. See
Note O to our Consolidated Financial Statements in this Annual Report on
Form 10-K for more information regarding our acquisitions.
In May 1997, we formed Beacon Power Corporation to develop stationary,
terrestrial flywheel energy storage systems for commercial applications. On
October 23, 1998, Beacon Power completed a $4.8 million private placement of its
class D redeemable preferred stock and warrants to third-party investors, and we
relinquished significant control of Beacon Power. As of October 23, 1998, we
owned 0.1% of Beacon Power's voting stock and 67.0% of Beacon Power's
outstanding capital stock. From June 1999 through March 31, 2000, Beacon Power
was financed through the issuance of approximately $4.7 million of bridge notes
and warrants to its investors, including $1.0 million from us. On April 7, 2000,
Beacon Power issued 1,226,141 shares of its class E redeemable preferred stock
and warrants to purchase 306,535 shares of its class E preferred stock in
exchange for the conversion of all of its outstanding bridge notes of which we
received 347,407 shares of Beacon Power's class E redeemable preferred stock and
a warrant to purchase 86,852 shares of its class E preferred stock. As of
April 7, 2000, we owned 11.0% of Beacon Power's voting stock and 61.0% of Beacon
Power's outstanding capital stock. On April 21, 2000, Beacon Power raised an
additional $4.1 million through the sale of additional bridge notes and warrants
to purchase 41,000 shares of Beacon Power's common stock. We did not participate
in this financing. On May 23, 2000, Beacon Power issued 6,785,711 shares of its
class F preferred stock and additional warrants to purchase shares of Beacon
Power's common stock. The shares of class F preferred stock and the additional
warrants were issued in consideration for the cancellation of $5.2 million in
bridge notes and an additional $23.3 million cash investment by existing and new
investors. We did not participate in this financing either. As of May 23, 2000,
we owned 3.5% of Beacon Power's voting stock and 33.0% of Beacon Power's
outstanding capital stock. As of September 30, 2000, we owned approximately 3.5%
of the outstanding voting stock of Beacon Power and 32.1% of the capital stock
of Beacon Power on a common equivalent basis after taking all dividend accruals
into account.
The results of our operations include a $3.1 million loss of Beacon Power
from May 8, 1997 to December 24, 1997 under the consolidation method of
accounting. On December 24, 1997, we began accounting for our investment in
Beacon Power in accordance with SEC Staff Accounting Bulletin No. 30/Topic 5.E.
(SAB) "Accounting for Divesture of a Subsidiary or Other Business Operation" and
have included 100% of Beacon Power's $7.1 million loss for the period from
December 25, 1997 through May 1999 in a manner similar to the equity method of
accounting, at which time, our initial investment of $1.9 million, the $30,000
additional investment and the additional deemed investment of $4.8 million and
accrued dividends of $410,000 had been written down to zero. In June 1999, we
committed up to $1.0 million of additional financing to Beacon Power,
representing a minority share of a funding commitment received by Beacon Power
and we began accounting for our investment in Beacon Power under the equity
method of accounting and have included in our results through September 30, 2000
our share of Beacon Power's losses of $1.9 million. As of September 30, 2000,
our additional investment in Beacon Power had been reduced to zero and our
contingent obligation to Beacon Power's class D preferred stockholders was
$5.8 million. We will continue to record additional losses from Beacon Power to
the extent of additional dividends accrued on the contingent obligation to the
class D preferred stockholders of Beacon Power.
In November 2000, Beacon Power completed an initial public offering of its
common stock and issued 8,000,000 shares of common stock at $6.00 per share.
Upon the closing of Beacon Power's initial public offering, we owned
approximately 25% of Beacon Power's voting stock. In connection with the closing
of the initial public offering, the put right, as described in Note E to our
financial statements, was terminated and the contingent obligation to class D
preferred stockholders of Beacon Power will be reclassified as additional paid
in capital. In addition, our preferred stock in Beacon Power was converted into
9,694,812 shares of Beacon Power's common stock. In accordance with SEC Staff
Accounting Bulletin No. 51, our investment and additional paid in capital will
be written up during the first quarter of fiscal 2001 to reflect our beneficial
interest in the book value of the stockholders' equity of Beacon Power, which
27
<PAGE>
we estimate to be approximately $15.0 million. After the write-up of our
investment in Beacon Power, we will continue to account for our investment in
Beacon Power under the equity method of accounting and record our share of
losses from Beacon Power on a one-quarter trailing basis until our investment in
Beacon Power has been reduced to zero. If in the future, our ownership interest
in Beacon Power's outstanding capital stock is reduced to below 20% and we
determine that we do not have the ability to exercise significant influence over
the operating and financial policies of Beacon Power, our investment in Beacon
Power will be accounted for using the fair value method as set forth in SFAS No.
115 based upon the carrying value of our investment in Beacon Power at the time
our interest is reduced to below 20%. At that time, we will no longer be
required to record our share of any losses from Beacon Power. Under the fair
value method, the value of the investment will be carried at fair market value
with any unrealized holding gains or losses to be included in stockholders'
equity as a component of other accumulated comprehensive income.
We recognize revenue from product sales in accordance with Staff Accounting
Bulletin No. 101 "Revenue Recognition." Product revenue is recognized when there
is persuasive evidence of an arrangement, delivery of the product to the
customer has occurred, at which time title generally is passed to the customer,
and we have determined that collection of a fixed fee is probable, all of which
occur upon shipment of the product. If the product requires installation to be
performed by us, all revenue related to the product is deferred and recognized
upon the completion of the installation. We provide for a warranty reserve at
the time the product revenue is recognized.
We perform funded research and development and product development for
commercial companies and government agencies 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 type 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 for
commercial product development contracts indicate a loss, a provision for the
entire loss on the contract is recorded. Any losses incurred in performing
funded research and development projects are recognized as research and
development expense as incurred.
Cost of revenue includes cost of product revenue, including materials, labor
and overhead. 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 for the fiscal years ended 2000, 1999, 1998, 1997 and 1996. As of
September 30, 2000, we had an accumulated deficit of $40.2 million. 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 at least through the next two years.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains or incorporates forward-looking
statements within the meaning of section 27A of the Securities Act of 1933 and
section 21E of the Securities Act of 1934. You can identify these
forward-looking statement by our use of the words "believes," "anticipates,"
"plans," "expects," "may," "will," "intends," "estimates," and similar
expressions, whether in the negative or in the
28
<PAGE>
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 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 statements we make.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1999
PRODUCT REVENUE. Product revenue increased by $13.3 million or 146% from
$9.1 million to $22.4 million. This increase was attributable to $7.4 million in
revenue from Ling Electronics, $2.3 million from increased volume in our
microelectronics products, primarily from radio frequency amplifiers that are
currently used in satellite uplink systems, satellite television and wireless
Internet service, $2.3 million from increased volume in our magnetic levitation
products and $1.3 million from increased volume from high performance motors.
FUNDED RESEARCH AND DEVELOPMENT REVENUE. Funded research and development
revenue increased by $2.3 million or 36% from $6.4 million to $8.6 million. This
increase was attributable to an additional $2.4 million in funded research and
development revenue from a Department of Energy program to develop low-cost
power conversion modules for electric and hybrid-electric vehicles and was
partially offset by our increased focus on internally funded research projects
including the development of power conversion products for the distributed power
generation market.
GROSS MARGIN. Gross margin increased by $6.0 million or 101% from
$6.0 million to $12.0 million. Gross margin from products increased by
$3.7 million and funded research and development increased by $2.3 million.
Gross margin from product revenue as a percentage of product revenue increased
to 15% from (4%). The improvement in gross margin from product revenue as a
percentage of product revenue is due to improved plant utilization at MagMotor
and Film Microelectronics and the inclusion of revenue and gross margin from
Ling Electronics.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $3.7 million or 57% from $6.6 million to $10.3 million. The
increase was primarily attributable to an additional $2.9 million in funded
research and development expenses related to the Department of Energy contract
as well as our increased focus on internally funded research projects including
the development of power conversion products for the distributed power
generation market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.2 million or 13% from $8.8 million to
$10.0 million. The increase was primarily due to the inclusion of $2.9 million
of costs from Ling Electronics, $800,000 of costs for facilities and staffing in
an effort to meet expected growth and demand for our products and the inclusion
of a full year of expenses related to Inductive Components and Lighthouse
Software which were acquired in January 1999 and HyComp which was acquired in
April 1999. These increases were offset by the recording of $2.2 million of
non-cash stock-based compensation expense related to the issuance of stock
options and warrants to consultants and $1.0 million of additional reserves for
unbilled contract costs and fees and accounts receivable in 1999. Based on the
facts and circumstances during 1999, we established a reserve of $521,000 for
unbilled contract costs and fees related to a contract with the Department of
the Air Force which was terminable by the Department of the Air Force if it
determined that we were in default under the contract. In addition, we provided
$513,000 in reserve for unbilled contract costs and fees and accounts receivable
to properly reflect the reserve requirements.
29
<PAGE>
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $846,000
or 228% from $371,000 to $1.2 million. This increase was the result of
amortization of intangibles recorded in connection with the acquisitions of
Inductive Components and Lighthouse Software in January 1999, Ling Electronics
in October 1999 and certain intellectual property and other intangible assets
from Northrop Grumman in November 1999.
OTHER INCOME (EXPENSE), NET. Other income, net increased to $460,000 from
$224,000 of other expense, net. The increase was the result of an increase in
cash and cash equivalents being maintained in interest-bearing accounts and a
decrease of interest expense associated with our line of credit.
LOSS FROM BEACON POWER CORPORATION. Loss from Beacon Power decreased by
$3.4 million or 79% from $4.3 million to $899,000. During the year ended
September 30, 2000, we recorded our share of Beacon Power's losses of $899,000,
under the equity method of accounting. As of December 31, 1999, our investment
in Beacon Power had been reduced to zero, however, we continued to record losses
from Beacon Power to the extent of additional interest accrued on the contingent
obligation to the class D preferred stockholders of Beacon Power. During the
year ended September 30, 1999, we recorded 100% of Beacon Power's losses of
$3.6 million in accordance with SAB Topic 5.E., in a manner similar to the
equity method of accounting through May 1999 and in June 1999, we began
accounting for our investment in Beacon Power under the equity method of
accounting and recorded our share of Beacon Power's losses of $734,000 from June
1999 to September 1999.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1998
PRODUCT REVENUE. Product revenue increased $1.6 million or 21% from
$7.5 million to $9.1 million. This increase was attributable to $1.0 million
from the introduction of our magnetic levitation products and $396,000 from
increased volume in our microelectronics products, primarily from radio
frequency amplifiers that are currently used in satellite uplink systems,
satellite television and wireless Internet service and $202,000 from increased
volume from high performance motors.
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 accounting for our investment in Beacon Power as of December 24, 1997
in accordance with SAB 30 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 began accounting for our investment in
Beacon Power in accordance with SAB 30. 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
30
<PAGE>
consultants in 1999, $1.0 million of additional reserves for unbilled contract
costs and fees and accounts receivable and $800,000 in costs for facilities and
staffing in an effort to meet expected growth and demand for our products. Based
on the facts and circumstances during 1999, we established a reserve against
$521,000 of unbilled contract costs and fees related to a contract with the
Department of the Air Force which was terminable by the Department of the Air
Force if it determined that we were in default under the contract. In addition,
we provided $513,000 in reserves for unbilled contract costs and fees and
accounts receivable to properly reflect the reserve requirements.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $80,000
or 27% from $291,000 to $371,000. This increase was the result of the
acquisition of Inductive Components and Lighthouse Software in January 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.
LOSS FROM BEACON POWER CORPORATION. Loss from Beacon Power increased
$868,000 or 25% from $3.5 million to $4.3 million. As of December 24, 1997, we
began accounting for our investment in Beacon Power in accordance with SAB
Topic 5.E. and we have included 100% of Beacon Power's net loss of $3.5 million
in our results during the year ended September 30, 1998 in a manner similar to
the equity method of accounting. During 1999, we continued to account for our
investment in Beacon Power in accordance with SAB Topic 5.E. until May 1999 and
have included $3.6 million of Beacon Power's net loss in our results during that
period. In June 1999, we began accounting for our investment in Beacon Power
under the equity method of accounting and have recorded an additional $734,000
of our share of losses from Beacon Power during June 1999 to September 1999.
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly statement of operations
data for the eight quarters ended September 30, 2000. This data has been
prepared on a basis consistent with our 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 presentation of this
31
<PAGE>
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,
2000 2000 2000 1999 1999 1999 1999 1998
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Product revenue....................... $ 8,159 $ 5,459 $ 5,648 $ 3,161 $ 2,733 $ 2,623 $ 1,772 $ 1,995
Funded research and development
revenue............................. 2,102 3,235 1,896 1,395 1,266 1,469 1,890 1,730
------- ------- ------- ------- ------- ------- ------- -------
Total revenue......................... 10,261 8,694 7,544 4,556 3,999 4,092 3,662 3,725
Cost of product revenue............... 6,583 4,599 4,886 3,001 2,784 3,288 1,915 1,524
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.......................... 3,678 4,095 2,658 1,555 1,215 804 1,747 2,201
------- ------- ------- ------- ------- ------- ------- -------
Research and development expenses..... 2,741 3,944 1,893 1,723 1,526 2,136 1,465 1,428
Selling, general and administrative
expenses............................ 2,963 2,555 2,420 2,032 1,624 5,176 1,029 990
Amortization of intangibles........... 322 323 329 243 98 101 94 78
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 6,026 6,822 4,642 3,998 3,248 7,413 2,588 2,496
------- ------- ------- ------- ------- ------- ------- -------
Operating loss........................ (2,348) (2,727) (1,984) (2,443) (2,033) (6,609) (841) (295)
Other income (expense), net........... 185 146 99 30 (31) (186) (26) 20
------- ------- ------- ------- ------- ------- ------- -------
Net loss before loss from Beacon Power
Corporation......................... (2,163) (2,581) (1,855) (2,413) (2,064) (6,795) (867) (275)
Loss from Beacon Power Corporation.... (72) (116) (148) (563) (512) (1,006) (1,383) (1,440)
------- ------- ------- ------- ------- ------- ------- -------
Net loss.............................. (2,235) (2,697) (2,033) (2,976) (2,576) (7,801) (2,250) (1,715)
Accretion of redeemable convertible
preferred stock discount............ -- -- (2,950) (156) (51) -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net loss attributable to common
stockholders........................ $(2,235) $(2,697) $(4,983) $(3,132) $(2,627) $(7,801) $(2,250) $(1,715)
======= ======= ======= ======= ======= ======= ======= =======
Net loss per share, basic and
diluted............................. $ (0.16) $ (0.20) $ (0.40) $ (0.29) $ (0.28) $ (0.85) $ (0.25) $ (0.19)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of common
shares, basic and diluted........... 13,685 13,642 12,398 10,793 9,488 9,177 9,059 8,980
======= ======= ======= ======= ======= ======= ======= =======
</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, 2000, our cash and cash equivalents were $8.8 million,
an increase of $6.3 million from September 30, 1999. Cash used in operating
activities for the year ended September 30, 2000 was $5.5 million as compared to
$5.6 million in 1999. Cash used in operating activities during the year ended
September 30, 2000 was primarily attributable to our net loss and an increase in
accounts receivable and inventory partially offset by non-cash items such as
depreciation and amortization, loss from Beacon Power and compensation expense
related to issuance of stock options and warrants to non-employees.
Cash used in investing activities during the year ended September 30, 2000
was $2.9 million as compared to $1.4 million in 1999. Net cash used in investing
activities during the year ended September 30, 2000 included capital
expenditures of $2.5 million and an investment in Beacon Power of $333,000. We
estimate that we will spend an additional $9.6 million on capital expenditures
through fiscal year 2001 primarily at our Advanced Fuel Cell Power Products
division to expand our capacity to manufacture our power conversion products. We
expect these additions will be financed principally from lease financing and, to
a lesser extent, cash on hand. If we are unable to obtain lease financing, our
capital expenditures would be expected to be approximately $1.0 million.
Cash provided by financing activities for the year ended September 30, 2000
was $14.7 million as compared to $8.4 million in 1999. Net cash provided by
financing activities during the year ended
32
<PAGE>
September 30, 2000 includes net proceeds of $7.0 million from the sale of our
common stock and $8.4 million from the exercise of common stock options and
warrants.
On October 23, 1998, we granted the purchasers of Beacon Power's class D
redeemable preferred stock the right to cause us under certain circumstances to
purchase all of Beacon Power's shares of class D redeemable preferred stock
issued to those purchasers and upon exercise of this put right, we must pay
$4.8 million plus cumulative dividends at 12.5% per year since October 23, 1998
through May 22, 2000, and 6% per year thereafter, in our common stock. We have
recorded as of September 30, 2000, the face value of the put right of
$4.8 million plus cumulative dividends of $1.0 million as a liability. If the
put right is exercised, we would reclassify the value of the contingent
obligation to the class D preferred stockholders of Beacon Power to common stock
and additional paid-in capital.
In November 2000, Beacon Power completed an initial public offering of its
common stock and issued 8,000,000 shares of common stock at $6.00 per share. In
connection with the initial public offering, the put right was terminated and
the contingent obligation to class D preferred stockholders of Beacon Power will
be reclassified as additional paid in capital. In addition, our preferred stock
in Beacon Power was converted into 9,694,812 shares of Beacon Power's common
stock. In accordance with SEC Staff Accounting Bulletin No. 51, our investment
and additional paid in capital will be written up during the first quarter of
fiscal 2001 to reflect our beneficial interest in the book value of the
stockholders' equity of Beacon Power, which we estimate to be approximately
$15.0 million.
We anticipate that the existing $8.8 million in cash and cash equivalents at
September 30, 2000 will be sufficient to fund operations for at least the next
twelve months. 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 on Form 10-K and
presented elsewhere by management from time to time. These factors include
business conditions within the distributed power, power quality, 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 these investments will
continue or that we will be able to obtain such funds. In addition, our growth
opportunities are dependent on the introduction of new products that must
penetrate distributed power, power quality, aerospace, transportation,
industrial, utility, telecommunications, silicon wafer manufacturing, factory
automation, aircraft and automotive markets. 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 us;
or that we can achieve or maintain profits in these or any new markets. Because
of these and other factors, past financial performance should not be considered
an indicator of future performance. Investors should not use historical trends
to anticipate future results and should be aware that the market price of our
common stock experiences significant volatility.
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.
33
<PAGE>
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. Upon adoption of SFAS No. 133, we will be required to record
an unrealized loss on the fair value of the warrants to purchase shares of
Mechanical Technology Incorporated's common stock, of $1.0 million in our
results of operations as a cumulative effect of change in accounting principle,
and we will record future unrealized gains and losses on the fair value of these
warrants in our results of operations.
In September 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140 (SFAS 140), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. Under SFAS No. 140,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. SFAS No. 140 also provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 140 is effective for certain transactions occurring after
March 31, 2001 and certain disclosures for the fiscal year ending September 30,
2001. We are currently evaluating the impact of SFAS No. 140 on our financial
statements and related disclosures, but do not expect that any impact will be
material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We develop products in the United States and sell them worldwide. As a
result, our financial results could be affected by factors such as changes in
foreign exchange rates or weak economic conditions in foreign markets. Since our
sales are currently priced in U.S. dollars and are translated to local currency
amounts, a strengthening of the dollar could make our products less competitive
in foreign markets. Interest income is sensitive to changes in the general level
of U.S. interest rates, particularly since our investments are in short-term
instruments. Based on the nature and current levels of our investments, however,
we have concluded that there is no material market risk exposure.
34
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I: FINANCIAL STATEMENTS OF SATCON TECHNOLOGY
CORPORATION
Report of Independent Public Accountants.................... 36
Report of Independent Accountants........................... 37
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 and
1999.................................................... 38
Consolidated Statements of Operations for the Years Ended
September 30, 2000, 1999
and 1998................................................ 39
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended
September 30, 2000, 1999 and 1998....................... 40
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000, 1999
and 1998................................................ 41
Notes to Consolidated Financial Statements................ 42
Schedule II: Valuation and Qualifying Accounts for the Years
Ended
September 30, 2000, 1999 and 1998......................... 78
</TABLE>
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
SatCon Technology Corporation:
We have audited the accompanying consolidated balance sheet of SatCon
Technology Corporation and its subsidiaries (a Delaware corporation) as of
September 30, 2000 and 1999 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
then ended. These financial statements are the responsibility of SatCon
Technology Corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 audits provide 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, 2000 and 1999 and the
results of their operations and their cash flows for each of the years then
ended in conformity with auditing standards generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 28, 2000
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
SatCon Technology Corporation:
In our opinion, the consolidated statements of operations, of changes in
stockholders' equity and of cash flows for the year ended September 30, 1998
present fairly, in all material respects, the results of operations and cash
flows of SatCon Technology Corporation and its subsidiaries for the year ended
September 30, 1998, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule for the year ended
September 30, 1998 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 audit. We conducted our audit 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 audit provides 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 year ended September 30, 1998 reflect revised accounting for the
recapitalization of Beacon Power Corporation.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
December 17, 1998,
except to the restatement described
in Note A, as to which the date is
September 11, 2000
37
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,814,324 $ 2,533,072
Accounts receivable, net of allowance of $320,222 and
$386,686 at September 30, 2000 and 1999, respectively... 7,495,942 2,799,143
Unbilled contract costs and fees, net of allowance of $0
and $746,121 at September 30, 2000 and 1999,
respectively............................................ 824,829 1,462,201
Inventory................................................. 8,001,661 3,697,972
Prepaid expenses and other current assets................. 614,622 349,070
------------ -----------
Total current assets.................................. 25,751,378 10,841,458
Investment in Beacon Power Corporation...................... -- 414,729
Warrants to purchase Mechanical Technology Incorporated
common stock.............................................. 2,473,713 --
Property and equipment, net................................. 6,257,476 3,260,632
Intangibles, net............................................ 9,080,089 3,194,609
Other long-term assets...................................... 924,583 103,675
------------ -----------
Total assets........................................ $ 44,487,239 $17,815,103
============ ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,074,517 $ 1,563,605
Accrued payroll and payroll-related expenses.............. 1,284,884 479,888
Deferred revenue.......................................... 1,525,116 113,179
Funding commitment to Beacon Power Corporation............ -- 333,333
Other accrued expenses.................................... 1,459,218 620,874
Current portion of long-term debt......................... 17,494 16,226
------------ -----------
Total current liabilities............................. 7,361,229 3,127,105
Long-term debt, net of current portion...................... 16,377 33,871
Other long-term liabilities................................. 197,349 29,735
Commitments and contingencies (Note H)
Contingent obligation to Class D preferred stockholders of
Beacon Power Corporation.................................. 5,793,879 5,309,115
Series A redeemable convertible preferred stock............. -- 4,894,112
Stockholders' equity:
Preferred stock; $0.01 par value, 1,000,000 shares
authorized no shares issued and outstanding at September
30, 2000; 8,000 shares series A redeemable convertible
preferred stock issued and outstanding at September 30,
1999.................................................... --
Common stock, $0.01 par value, 25,000,000 shares
authorized; 13,841,185 and 9,617,009 shares issued at
September 30, 2000 and 1999, respectively............... 138,412 96,170
Additional paid-in capital................................ 72,498,540 37,074,161
Common stock held in escrow, at market value; 0 and 42,860
shares at September 30, 2000 and 1999, respectively..... -- (428,600)
Amounts receivable from exercise of stock options......... -- (1,816,667)
Accumulated deficit....................................... (40,195,340) (30,254,195)
Accumulated other comprehensive loss...................... (1,073,503) --
Treasury stock, at cost; 44,500 shares at September 30,
2000 and 1999........................................... (249,704) (249,704)
------------ -----------
Total stockholders' equity............................ 31,118,405 4,421,165
------------ -----------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity...................... $ 44,487,239 $17,815,103
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Product revenue...................................... $ 22,427,428 $ 9,122,498 $ 7,520,188
Funded research and development revenue.............. 8,627,601 6,355,383 8,010,735
------------ ------------ -----------
Total revenue........................................ 31,055,029 15,477,881 15,530,923
Cost of product revenue.............................. 19,069,192 9,510,941 5,474,067
------------ ------------ -----------
Gross margin......................................... 11,985,837 5,966,940 10,056,856
------------ ------------ -----------
Research and development expenses.................... 10,300,765 6,554,464 6,793,634
Selling, general and administrative expenses......... 9,969,580 8,818,706 4,523,424
Amortization of intangibles.......................... 1,217,490 371,087 290,957
------------ ------------ -----------
Total operating expenses............................. 21,487,835 15,744,257 11,608,015
------------ ------------ -----------
Operating loss....................................... (9,501,998) (9,777,317) (1,551,159)
Other income (loss).................................. 9,891 (150,464) --
Interest income...................................... 453,631 42,287 179,861
Interest expense..................................... (3,176) (115,692) (10,206)
------------ ------------ -----------
Net loss before income taxes and loss from Beacon
Power Corporation.................................. (9,041,652) (10,001,186) (1,381,504)
Provision for income taxes........................... -- -- (3,872)
Loss from Beacon Power Corporation................... (899,493) (4,340,567) (3,472,438)
------------ ------------ -----------
Net loss............................................. (9,941,145) (14,341,753) (4,857,814)
Accretion of redeemable convertible preferred stock
discount........................................... (3,105,888) (50,904) --
------------ ------------ -----------
Net loss attributable to common stockholders......... $(13,047,033) $(14,392,657) $(4,857,814)
============ ============ ===========
Net loss per share, basic and diluted................ $ (1.03) $ (1.57) $ (.54)
============ ============ ===========
Weighted average number of common shares, basic and
diluted............................................ 12,629,822 9,176,041 8,956,671
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
AMOUNTS
RECEIVABLE
COMMON COMMON FROM
ADDITIONAL SHARES STOCK EXERCISE OF
COMMON COMMON PAID-IN HELD IN HELD IN STOCK
SHARES STOCK CAPITAL ESCROW ESCROW OPTIONS
---------- -------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997....................... 8,769,146 $ 87,691 $26,576,600 -- -- --
Net loss.......................................... -- -- -- -- -- --
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 -- -- --
Net loss.......................................... -- -- -- -- -- --
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)
Net loss.......................................... -- -- -- -- -- --
Common stock issued in connection with Ling
acquisition..................................... 770,000 7,700 7,748,656 -- -- --
Common stock issued in connection with MTI
investment...................................... 1,030,000 10,300 6,964,926 -- -- --
MTI warrants received in connection with MTI
investment...................................... -- -- 3,495,438 -- -- --
Valuation adjustment for MTI warrants............. -- -- -- -- -- --
Common stock issued in connection with NGC asset
acquisition..................................... 578,761 5,788 5,465,770 -- -- --
Conversion of redeemable convertible preferred
stock into common stock......................... 1,025,641 10,256 7,989,744 -- -- --
Exercise of common stock options.................. 701,774 7,018 5,496,853 -- --
Exercise of common stock warrants................. 118,000 1,180 1,111,720 -- -- --
Payments on amounts receivable from exercise of
stock options................................... -- -- -- -- -- 1,816,667
Valuation adjustment for common stock held in
escrow.......................................... -- -- 257,160 -- (257,160) --
Common stock released from escrow................. -- -- -- (42,860) 685,760 --
Accretion of redeemable convertible preferred
stock discount.................................. -- -- (3,105,888) -- -- --
Foreign currency translation adjustment........... -- -- -- -- -- --
---------- -------- ----------- ------- --------- -----------
Balance, September 30, 2000....................... 13,841,185 $138,412 $72,498,540 -- $ -- $ --
========== ======== =========== ======= ========= ===========
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE TREASURY TREASURY
DEFICIT LOSS SHARES STOCK
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Balance, September 30, 1997....................... $(11,054,628) $ (20,215) -- --
Net loss.......................................... (4,857,814) -- -- --
Exercise of stock options......................... -- -- -- --
Exercise of warrants.............................. -- -- -- --
Treasury stock purchased.......................... -- -- 28,300 $(173,076)
Change in net unrealized losses on marketable
securities...................................... -- 9,835 -- --
------------ ----------- ------ ---------
Balance, September 30, 1998....................... $(15,912,442) $ (10,380) 28,300 $(173,076)
Net loss.......................................... (14,341,753) -- -- --
Exercise of stock options......................... -- -- -- --
Treasury stock purchased.......................... -- -- 16,200 (76,628)
Common stock issued in acquisitions............... -- -- -- --
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................ -- -- -- --
Valuation adjustment for common stock held in
escrow.......................................... -- -- -- --
Warrants issued in connection with the sale of
redeemable preferred stock...................... -- -- -- --
Change in net unrealized losses on marketable
securities...................................... -- 10,380 -- --
Accretion of redeemable convertible preferred
stock discount.................................. -- -- -- --
------------ ----------- ------ ---------
Balance, September 30, 1999....................... $(30,254,195) -- 44,500 (249,704)
Net loss.......................................... (9,941,145) -- -- --
Common stock issued in connection with Ling
acquisition..................................... -- -- -- --
Common stock issued in connection with MTI
investment...................................... -- -- -- --
MTI warrants received in connection with MTI
investment...................................... -- -- -- --
Valuation adjustment for MTI warrants............. -- (1,021,725) -- --
Common stock issued in connection with NGC asset
acquisition..................................... -- -- -- --
Conversion of redeemable convertible preferred
stock into common stock......................... -- -- -- --
Exercise of common stock options.................. -- -- -- --
Exercise of common stock warrants................. -- -- -- --
Payments on amounts receivable from exercise of
stock options................................... -- -- --
Valuation adjustment for common stock held in
escrow.......................................... -- -- -- --
Common stock released from escrow................. -- -- -- --
Accretion of redeemable convertible preferred
stock discount.................................. -- -- -- --
Foreign currency translation adjustment........... -- (51,778) -- --
------------ ----------- ------ ---------
Balance, September 30, 2000....................... $(40,195,340) $(1,073,503) 44,500 $(249,704)
============ =========== ====== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
---------------------------
<S> <C>
Balance, September 30, 1997....................... $ 15,589,448
Net loss.......................................... (4,857,814)
Exercise of stock options......................... 581,739
Exercise of warrants.............................. 1,221,873
Treasury stock purchased.......................... (173,076)
Change in net unrealized losses on marketable
securities...................................... 9,835
---------------------------
Balance, September 30, 1998....................... $ 12,372,005
Net loss.......................................... (14,341,753)
Exercise of stock options......................... 1,361,334
Treasury stock purchased.......................... (76,628)
Common stock issued in acquisitions............... 568,800
Common stock issued in connection with settlement
agreement which is held in escrow............... --
Compensation expense related to stock options and
warrants issued to non-employees................ 2,208,639
Valuation adjustment for common stock held in
escrow.......................................... --
Warrants issued in connection with the sale of
redeemable preferred stock...................... 2,369,292
Change in net unrealized losses on marketable
securities...................................... 10,380
Accretion of redeemable convertible preferred
stock discount.................................. (50,904)
---------------------------
Balance, September 30, 1999....................... $ 4,421,165
Net loss.......................................... (9,941,145)
Common stock issued in connection with Ling
acquisition..................................... 7,756,356
Common stock issued in connection with MTI
investment...................................... 6,975,226
MTI warrants received in connection with MTI
investment...................................... 3,495,438
Valuation adjustment for MTI warrants............. (1,021,725)
Common stock issued in connection with NGC asset
acquisition..................................... 5,471,558
Conversion of redeemable convertible preferred
stock into common stock......................... 8,000,000
Exercise of common stock options.................. 5,503,871
Exercise of common stock warrants................. 1,112,900
Payments on amounts receivable from exercise of
stock options................................... 1,816,667
Valuation adjustment for common stock held in
escrow.......................................... --
Common stock released from escrow................. 685,760
Accretion of redeemable convertible preferred
stock discount.................................. (3,105,888)
Foreign currency translation adjustment........... (51,778)
---------------------------
Balance, September 30, 2000....................... $ 31,118,405
===========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (9,941,145) $(14,341,753) $(4,857,814)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 2,038,391 1,013,037 625,976
Allowance for unbilled contract costs and fees...... -- 688,510 (19,065)
Allowance for doubtful accounts..................... 265,744 334,850 (94,424)
Allowance for inventory............................. 658,774 870,021 (549,765)
Loss from Beacon Power Corporation.................. 899,493 4,340,567 3,472,438
Loss on sale of marketable securities............... -- 87,535 --
Write-off impaired assets........................... -- 255,544 50,104
Compensation expense related to release of stock
from escrow, issuance of stock options and
warrants to non-employees......................... 385,760 2,208,639 --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable............................... (3,025,520) 89,858 (301,909)
Unbilled contract costs and fees.................. 637,372 (954,393) 532,573
Prepaid expenses and other assets................. 144,687 31,455 (8,529)
Inventory......................................... (628,472) (601,120) (1,550,819)
Other long-term assets............................ 8,072 517,402 (607,245)
Accounts payable.................................. 869,225 72 647,689
Accrued expenses and payroll...................... 641,266 (98,163) (291,061)
Other liabilities................................. 1,566,051 (72,763) 6,802
------------ ------------ -----------
Total adjustments....................................... 4,460,843 8,711,051 1,912,765
------------ ------------ -----------
Net cash used in operating activities....................... (5,480,302) (5,630,702) (2,945,049)
------------ ------------ -----------
Cash flows from investing activities:
Sales and maturities of marketable securities............. -- 580,144 1,340,609
Patent and intangible expenditures........................ (78,962) (102,227) (431,526)
Purchases of property and equipment....................... (2,463,777) (220,416) (601,331)
Acquisitions, net of cash acquired........................ (24,054) (995,876) --
Investment in Beacon Power Corporation.................... (333,333) (696,667) (2,007,508)
------------ ------------ -----------
Net cash used in by investing activities.................... (2,900,126) (1,435,042) (1,699,756)
------------ ------------ -----------
Cash flows from financing activities:
Repayment of capital lease obligations.................... (16,226) (100,000) (40,625)
Borrowings under line of credit........................... -- 2,657,234 --
Repayment of borrowings under line of credit.............. -- (2,657,234) --
Net proceeds from issuance of redeemable convertible
preferred stock......................................... -- 7,212,500 --
Net proceeds from issuance of common stock................ 6,975,226 -- --
Proceeds from exercise of stock options and payment of
amounts receivable from exercise of stock options....... 7,320,538 1,361,334 581,739
Proceeds from exercise of warrants........................ 1,112,900 -- 1,221,873
Purchase of treasury stock................................ -- (76,628) (173,076)
Deferred equity financing costs........................... (678,980) -- --
------------ ------------ -----------
--
Net cash provided by financing activities................... 14,713,458 8,397,206 1,589,911
------------ ------------ -----------
Effect of foreign currency exchange rates on cash and cash
equivalents............................................... (51,778) -- --
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents........ 6,281,252 1,331,462 (3,054,894)
Cash and cash equivalents at beginning of year.............. 2,533,072 1,201,610 4,256,504
------------ ------------ -----------
Cash and cash equivalents at end of year.................... $ 8,814,324 $ 2,533,072 $ 1,201,610
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION, RESTATEMENTS AND 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 develops enabling technologies for the emerging distributed power
generation and power quality markets. SatCon also manufactures power and energy
management products that convert, condition, store and manage electricity for
businesses and consumers that require high-quality, uninterruptible power.
SatCon is utilizing its 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. SatCon believes
the family of products it is developing will be integral components of
distributed power generation and power quality systems.
In the past three years, SatCon has expanded its business and capabilities
through the following acquisitions:
- K&D Magmotor Corp.--a manufacturer of custom electric motors, acquired in
January 1997.
- Film Microelectronics, Inc. ("FMI")--a manufacturer of 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 electronic multi-chip modules, acquired in
April 1999.
- Ling Electronics, Inc.--a manufacturer of test equipment, power
converters, amplifiers and converters, acquired in October 1999.
All of these acquisitions were accounted for using the purchase method of
accounting. In addition, in November 1999, the Company acquired intellectual
property, tooling and other assets from Northrop Grumman Corporation enabling
the Company to manufacture and sell electric drivetrains. See Note O.
RESTATEMENTS
During fiscal 2000, the Company has restated its financial statements on two
separate occasions. A description of each restatement is as follows:
AUGUST 2000 RESTATEMENT
In August 2000, the Company restated its financial statements for fiscal
1997, 1998 and 1999. The restatement was prompted by the initial audit of the
financial statements of its affiliate, Beacon Power Corporation ("Beacon Power")
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 (see Note E).
The Company previously had accounted for these costs either as fixed assets or
as part of the net assets of Beacon Power. The Company had capitalized
$2.9 million of costs incurred during 1996, 1997 and 1998 in developing design
documentation, tooling and test fixtures for Beacon Power's flywheel energy
storage system. At the time
42
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
these costs were capitalized, the Company believed that it had a fully
functional design that could meet customer performance requirements and that the
product could be manufactured and sold at a profit so that the capitalized costs
would be recovered. The Company believed that its flywheel energy storage
product was beyond the research and development stage. As part of the initial
audit of Beacon Power during 2000 for the period from inception (May 1997)
through December 31, 1999, the Company reviewed the audit evidence supporting
the capitalized costs and determined that these costs had not been properly
capitalized. Accordingly, the Company has expensed these costs as incurred. In
addition, as a result of the initial audit of the financial statements of Beacon
Power, additional immaterial adjustments were made to the historical financial
statements of Beacon Power. A summary of the additional adjustments is as
follows:
<TABLE>
<S> <C>
Record additional revenue during 1997....................... $ 45,000
Reclassification of certain SG&A expenses to R&D during
1997...................................................... $264,000
Write-off certain current assets including inventory and
accounts receivable....................................... $ 37,000
Write-off certain intangibles............................... $ 91,000
Record additional accrued expenses.......................... $ 73,000
</TABLE>
As a result, the Company's investment in Beacon Power was reduced by
$3.1 million as of December 24, 1997. The adjustments to the financial
statements at December 24, 1997, the date on which the Company initially 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:
43
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND 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)
Other losses................................................ (150,464) (150,464)
Interest income............................................. 42,287 42,287
Interest expense............................................ (115,692) (115,692)
------------ ------------
Net loss before loss from Beacon Power Corporation.......... (10,001,186) (10,001,186)
Loss from Beacon Power Corporation.......................... (1,030,000) (2,357,679)
------------ ------------
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>
44
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND 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)
Interest income............................................. 179,861 179,861
Interest expense............................................ (10,206) (10,206)
----------- -----------
Net loss before income taxes and loss from Beacon Power
Corporation............................................... (1,381,504) (759,812)
Loss from Beacon Power Corporation.......................... (1,888,619) (3,541,817)
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>
<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>
45
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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>
SEPTEMBER 2000 RESTATEMENT
In September 2000, the Company restated the financial statements for fiscal
years 1998 and 1999. The Company determined that the recapitalization of Beacon
Power Corporation on December 24, 1997 did not qualify as a divestiture of a
subsidiary for accounting purposes in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 30/Topic 5E (SAB Topic 5.E.)
"Accounting for Divestiture of a Subsidiary or Other Business Operation," as the
Company had not transferred the risk and other incidents of ownership of Beacon
Power with sufficient certainty. In accordance with SAB Topic 5.E., the Company
has included 100% of Beacon Power's net loss in its statements of operations
from December 24, 1997 to May 1999 in a manner similar to the equity method of
accounting and has included the assets and liabilities transferred to Beacon
Power as separate components in its September 30, 1998 balance sheet. In June
1999, in connection with a bridge note financing at Beacon Power, the Company
determined that the risks and other incidents of ownership of Beacon Power had
passed with sufficient certainty to other investors and the Company began
accounting for its investment in Beacon Power under the equity method of
accounting. The Company has recorded the face value of and cumulative dividends
on Beacon Power's Class D preferred stock issued on October 23, 1998 as an
additional investment in Beacon Power. As more fully discussed in Note E, the
Class D preferred stockholders have the right to require the Company to purchase
their shares of Class D preferred stock in certain events. The Company has
recorded the face value and the cumulative dividends as a liability.
The accompanying financial data reflect the following changes:
- The Company's share of Beacon Power's net loss for fiscal 1998 and 1999
increased by $1,583,819 and $3,310,567, respectively.
- As of September 30, 1998, the Company wrote off all of its advances to
Beacon Power of $596,453 and recorded the assets and liabilities
transferred to Beacon Power of $576,786 and $1,564,152, respectively.
- As of September 30, 1999, the Company recorded its net investment balance
in Beacon Power of $414,729 and its contingent obligation to the Class D
preferred stockholders of Beacon Power of $5,309,115.
- The as restated and as reported consolidated statements of operations data
and consolidated balance sheet data follows (the as reported financial
information presented here includes the effects of the August 2000
restatement discussed above):
46
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, 1999
---------------------------
AS RESTATED AS REPORTED
------------ ------------
<S> <C> <C>
Loss from Beacon Power Corporation............... $ (4,340,567) $ (1,030,000)
Net loss......................................... (14,341,753) (11,031,186)
Net loss attributable to common stockholders..... (14,392,657) (11,082,090)
Net loss per share, basic and diluted............ (1.57) (1.21)
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, 1998
---------------------------
AS RESTATED AS REPORTED
------------ ------------
<S> <C> <C>
Loss from Beacon Power Corporation............... $ (3,472,438) $ (1,888,619)
Net loss attributable to common stockholders..... (4,857,814) (3,273,995)
Net loss per share, basic and diluted............ (.54) (.37)
</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>
Amount due from Beacon Power
Corporation.......................... $ -- $ -- $ -- $ 596,453
Investment in Beacon Power
Corporation.......................... 414,729 -- -- --
Assets transferred to Beacon Power
Corporation.......................... -- -- 576,786 --
Total assets........................... 17,815,103 17,400,374 16,688,740 16,708,407
Funding commitment to Beacon Power
Corporation.......................... 333,333 333,333 -- --
Liabilities transferred to Beacon Power
Corporation.......................... -- -- 1,564,152 --
Contingent obligation to Class D
preferred stockholders of Beacon
Power Corporation.................... 5,309,115 -- -- --
Accumulated deficit.................... (30,254,195) (25,359,809) (15,912,442) (14,328,623)
Total liabilities, redeemable
convertible preferred stock and
stockholders' equity................. 17,815,103 17,400,374 16,688,740 16,708,407
</TABLE>
The Company's financial statements as of September 30, 1999 and 2000 and for
the years ended September 30, 1998, 1999 and 2000 include the effects of the
August 2000 and September 2000 restatements.
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.
47
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiary is the local
currency. Assets and liabilities of foreign subsidiaries are translated at the
rates in effect at the balance sheet date, while stockholders' equity (deficit)
is translated at historical rates. Statements of operations and cash flow
amounts are translated at the average rate for the period. Translation
adjustments are included as a component of accumulated other comprehensive loss.
Foreign currency gains and losses arising from transactions are reflected in the
loss from operations and were not significant during the year ended
September 30, 2000.
REVENUE RECOGNITION
The Company recognizes revenue from product sales in accordance with Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition." Product revenue is
recognized when there is persuasive evidence of an arrangement, delivery of the
product to the customer has occurred, at which time title generally is passed to
the customer, and the Company has determined that collection of a fixed fee is
probable, all of which occur upon shipment of the product. If the product
requires installation to be performed by the Company, all revenue related to the
product is deferred and recognized upon the completion of the installation. The
Company provides for a warranty reserve at the time the product revenue is
recognized.
The Company performs funded research and development and product development
for commercial companies and government agencies under both cost reimbursement
and fixed-price contracts. Product development revenue is included in product
revenue. 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 fees depending on
how costs compare with a 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 the services are performed. In each
type of contract, the Company receives periodic progress payments or payments
upon reaching interim milestones. 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. When the current estimates of total contract revenue for
commercial product development contracts indicate a loss, a provision for the
entire loss on the contract is recorded. Any losses incurred in performing
funded research and development projects are recognized as research and
development expense as incurred. As of September 30, 2000, the Company has
accrued $150,000 for anticipated contract losses on commercial contracts. There
were no anticipated contract losses at September 30, 1999.
Cost of revenue includes cost of product revenue including material, labor
and overhead and costs associated with product development contracts. Costs
incurred in connection with funded research and development arrangements are
included in research and development expenses.
Deferred revenue consists of payments received from customers in advance of
services performed, product shipped or installation completed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits and highly liquid
investments with maturities of three months or less when acquired. Cash
equivalents are stated at cost, which approximates market value.
48
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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, 2000 and 1999, the Company
determined that there had been no impairment of its long-lived assets, except as
in Notes D and G.
49
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Intangibles consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
ESTIMATED ------------------------
LIVES 2000 1999
----------- ----------- ----------
<S> <C> <C> <C>
Patents................................. 15-20 years $ 755,748 $ 676,786
Identifiable intangible assets from
MagMotor acquisition.................. 5 years 44,250 44,250
Goodwill from MagMotor acquisition...... 7 years 65,198 65,198
Identifiable intangible assets from FMI
acquisition........................... 5-10 years 1,750,000 1,750,000
Goodwill from FMI acquisition........... 15 years 826,218 826,218
Identifiable intangible assets from
Inductive/ Lighthouse acquisition..... 5 years 275,000 275,000
Goodwill from Inductive/Lighthouse
acquisition........................... 10 years 389,079 389,079
Goodwill from Ling acquisition.......... 7 years 3,754,910 --
Identifiable intangible assets from NGC
acquisition........................... 3-10 years 3,281,423 --
----------- ----------
11,141,826 4,026,531
Less: accumulated amortization.......... 2,061,737 831,922
----------- ----------
$ 9,080,089 $3,194,609
=========== ==========
</TABLE>
Amortization expense related to intangibles for the years ended
September 30, 2000, 1999 and 1998 was $1,229,815, $389,685 and $303,674,
respectively.
TREASURY STOCK
The Company was authorized to repurchase up to 5% of the Company's
outstanding shares of common stock through July 2000. Under the repurchase
program, the Company purchased 44,500 shares of the Company's outstanding common
stock at a cost of $249,704.
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 Statements of
Financial Accounting Standards (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 financial reporting and
income tax basis of assets and liabilities using statutory rates. In addition,
SFAS No. 109 requires a valuation allowance
50
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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
SFAS No. 123, "Accounting for stock-based Compensation," requires the
measurement of the fair value of stock options or warrants granted to employees
to be included in the statement of operations or, alternatively, disclosed in
the notes to consolidated financial statements. The Company has determined that
it will account for stock-based compensation of employees under the intrinsic
value method of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees" and elect the disclosure-only alternative under
SFAS No. 123. The Company records the fair market value of stock options and
warrants granted to non-employees in exchange for services in accordance with
Emerging Issues Task Force (EITF) No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services," in the consolidated statement of operations.
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 principally consist of cash equivalents, trade accounts receivable,
unbilled contract costs and amounts receivable from exercise of stock options.
The Company's trade accounts receivable and unbilled contract costs and fees
are primarily from sales to U.S. government agencies and 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
primarily through a regional commercial bank 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. Research
and development expense includes costs incurred in connection with funded
research and development arrangements.
COMPREHENSIVE LOSS
Comprehensive loss includes net loss, unrealized gains and losses on
marketable securities, valuation adjustment for warrants to purchase shares of
Mechanical Technology Incorporated's common stock and foreign currency
translation adjustments.
51
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, unbilled contract costs and fees, warrants to purchase
shares of Mechanical Technology Incorporated's common stock, accounts payable,
debt instruments, contigent obligation to Class D preferred stockholders of
Beacon Power Corporation and amounts receivable from exercise of stock options.
The estimated fair values of these financial instruments approximate their
carrying values at September 30, 2000 and 1999. The estimated fair values have
been determined through information obtained from market sources and management
estimates.
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 (FASB) 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. Upon adoption of SFAS No. 133, the Company will be required
to record an unrealized loss on the fair value of the warrants to purchase
shares of Mechanical Technology Incorporated's common stock in its results of
operations as a cumulative effect of a change in accounting principle of
$1.0 million reflecting the impact of adopting this accounting standard. The
Company will be required to record future unrealized gains and losses on the
fair value of the warrants in its results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. Under SFAS No. 140,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. SFAS No. 140 also provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 140 is effective for certain transactions occurring after
March 31, 2001 and certain disclosures for the fiscal year ending September 30,
2001. The Company is currently evaluating the impact of SFAS No. 140 on its
financial statements and related disclosures, but does not expect that adoption
of SFAS No. 140 will have a material impact on its financial statements.
B. UNBILLED CONTRACT COSTS AND FEES
Unbilled contract costs and fees represent revenue recognized in excess of
amounts billed due to contractual provisions or deferred costs that have not yet
been recognized as revenue or billed to the
52
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. UNBILLED CONTRACT COSTS AND FEES (CONTINUED)
customer. These amounts included retained fee and unliquidated costs totaling
$209,832 and $282,746 at September 30, 2000 and 1999, respectively.
C. INVENTORY
Inventory includes material, labor and overhead and consisted of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Raw material......................................... $3,081,265 $1,139,064
Work-in-process...................................... 2,932,965 2,199,199
Finished goods....................................... 1,987,431 359,709
---------- ----------
$8,001,661 $3,697,972
========== ==========
</TABLE>
D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
2000 1999
----------- ----------
<S> <C> <C>
Machinery and equipment............................. $ 8,059,916 $4,505,287
Furniture and fixtures.............................. 305,777 280,769
Computer software................................... 744,308 621,583
Leasehold improvements.............................. 751,793 648,734
----------- ----------
9,861,794 6,056,373
Less: accumulated depreciation and amortization..... 3,604,318 2,795,741
----------- ----------
$ 6,257,476 $3,260,632
=========== ==========
</TABLE>
Depreciation and amortization expense relating to property and equipment for
the years ended September 30, 2000, 1999 and 1998 was $808,577, $633,964 and
$540,213, respectively.
As of September 30, 2000 and 1999, there was $19,903 and $29,910 of capital
leases that were included in machinery and equipment and computer software,
respectively.
During 1999, the Company determined that certain of its machinery and
equipment with a net book value totaling $105,544 was impaired based on a
significant change in the manner in which the asset was used, and such assets
were written-off during 1999. These assets included $86,492 of tooling costs
associated with the introduction of brushless motor products at the Company's
MagMotor Division that were impaired based on design changes in the product and
$19,052 of optics equipment at the Company's Technology Center that were
abandoned. These impairment losses have been included in cost of product revenue
and research and development expenses, respectively.
53
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. INVESTMENT IN BEACON POWER CORPORATION
On May 28, 1997, SatCon Technology Corporation entered into a Securities
Purchase Agreement, dated as of May 28, 1997, by and among the Company, Beacon
Power, ("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 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 $0.01 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 of $30,000 from private investors and the Company
converted approximately 80% of its ownership of Beacon Power to nonvoting
Class A convertible preferred stock ("Class A Stock") and transferred certain
assets and liabilities to Beacon Power. Upon completion of this
recapitalization, the Company owned 20% of the voting stock of Beacon Power and
99.9% of the capital stock of Beacon Power. Each share of Class A Stock that the
Company held was convertible into two shares of common stock at the option of
the Company. The Class A Stock was nonvoting and upon liquidation, the Company
was 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. The Company had the right to receive the
same dividends as declared by the Board of Directors of Beacon Power on common
shares on an "as-if-converted" basis. The Class A Stock would automatically be
converted into shares of common stock upon the closing of a public offering of
common stock of Beacon Power, upon a vote of the Board of Directors of Beacon
Power or upon the automatic conversion of the Class D preferred stock of Beacon
Power. Class A Stock was subordinate to Class D, E and F preferred stock of
Beacon Power and had parity with Class B and C preferred stock. The Class A
Stock did not have redemption features.
The Company has determined that the recapitalization of Beacon Power on
December 24, 1997 did not qualify as a divestiture of a subsidiary for
accounting purposes as described in SAB Topic 5.E. "Accounting for Divestiture
of a Subsidiary or Other Business Operation," as the Company had not transferred
risks and other incidents of ownership of Beacon Power with sufficient certainty
as the Company was the only stockholder of Beacon Power at risk of loss of its
investment. In accordance with SAB Topic 5.E., the Company has included 100% of
Beacon Power's net loss in its statements of operations as of December 24, 1997,
in a manner similar to the equity method of accounting and has included the
assets and liabilities transferred to Beacon Power as separate components in its
September 30,
54
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED)
1998 balance sheet. The book value of assets and liabilities transferred to
Beacon Power on December 24, 1997 was as follows:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable......................................... $ 14,487
Prepaid expenses and other assets........................... 67,147
Subscriptions receivable.................................... 2,007,508
Accounts payable............................................ (50,000)
Accrued payroll and payroll related expenses................ (32,298)
Accrued expenses............................................ (118,225)
-----------
Investment in Beacon Power Corporation...................... $ 1,888,619
===========
</TABLE>
At September 30, 1998, prior to the 1:1.25 stock split, the Company owned
19.9% of the voting stock of Beacon Power, 99.9% of the outstanding capital
stock of Beacon Power and 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.
These advances have been written off as of September 30, 1998. These advances
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"), DQE
Enterprises, Inc., Micro Generation Technology Fund, L.L.C ("Micro", and
together with Perseus and DQE Enterprises, 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 Power's Class D Redeemable Preferred Stock,
$0.01 par value per share; (ii) the Class D Redeemable Preferred Stock earns
cumulative dividends at an annual rate of 12.5% through May 23, 2000 and 6% on
and after this date; (iii) the Purchasers have the right to receive certain
warrants to purchase shares of Beacon Power's common stock, $0.01 par value per
share ("Beacon Power's Common Stock"); (iv) 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 (v) 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, $0.01 par
value per share. 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. 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
the Company requesting that the Purchasers either exercise or waive their put
rights resulting from that event. The Company has recorded the face value of and
cumulative dividends on Beacon Power's Class D Preferred Stock as a liability.
As of September 30, 1999, the contingent obligation to the Class D preferred
stockholders is $5,309,115, consisting of $4,750,000 face value and $559,115 of
cumulative dividends.
55
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED)
Upon completion of the issuance of the Class D preferred stock of Beacon
Power and at September 30, 1999, the Company owned .1% of Beacon Power's voting
stock and 67% of Beacon Power's outstanding capital stock.
In June 1999, the Company committed to provide up to $1,000,000 of
additional financing to Beacon Power representing a minority share, 33%, of a
funding commitment received by Beacon Power and, therefore, increased its
investment in Beacon Power and accrued the funding commitment of $1,000,000. As
a result of this financing, the Company determined that risks and other
incidents of ownership of Beacon Power had passed with sufficient certainty to
other investors and, therefore, began accounting for its investment in Beacon
Power under the equity method.
On June 22, 1999, the Company entered into a note with Beacon Power (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 bore interest at 12% 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 was payable on the Maturity Date.
On July 6, 1999, the Company entered into an additional note with Beacon
Power (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 bore interest at 12% 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 was 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 bore interest at 12% 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 was
payable on the Maturity Date.
Pursuant to the terms of the Note and Warrant Purchase, the Company entered
into two 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." At September 30, 1999, the Company has $333,333
payable under this $1,000,000 commitment to Beacon Power.
On January 7, 2000, the Company entered into a $200,000 convertible
promissory note with Beacon Power. This convertible promissory note is due and
payable on the earlier of (i) the maturity date, as defined, or (ii) upon the
occurrence of an event of default by Beacon Power. The note bears interest at
12 1/2% per annum. Interest on the January 7, 2000 Note is due and payable on
the maturity date. The Company did not accrue losses of $200,000 relating to its
share of Beacon Power's losses incurred through December 31, 1999, as those
amounts, including interest, were repaid on February 14, 2000.
On February 25, 2000, the Company entered into a $300,000 convertible
promissory note with Beacon Power. This convertible promissory note is due and
payable on the earlier of (i) the maturity date, as defined, or (ii) upon the
occurrence of an event of default by Beacon Power. The note bears interest at
56
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED)
12 1/2% per annum. Interest on the February 25, 2000 Note is due and payable on
the maturity date. The Company did not accrue losses up to $300,000 relating to
its share of Beacon Power's losses incurred through March 31, 2000, as those
amounts, including interest, were repaid on April 27, 2000.
On April 7, 2000, Beacon Power issued 1,226,141 shares of its class E
redeemable preferred stock and warrants to purchase 306,535 shares of its
class E preferred stock in exchange for the conversion of all of its outstanding
bridge notes of which the Company received 347,407 shares of Beacon Power's
class E redeemable preferred stock and a warrant to purchase 86,852 shares of
Beacon Power's class E redeemable preferred stock. As of April 7, 2000, the
Company owned 11.0% of Beacon Power's voting stock and 61.0% of Beacon Power's
outstanding capital stock. On April 21, 2000, Beacon Power raised an additional
$4.1 million through the sale of additional bridge notes and warrants to
purchase 41,000 shares of Beacon Power's common stock. The Company did not
participate in this financing. On May 23, 2000, Beacon Power issued 6,785,711
shares of its class F preferred stock and additional warrants to purchase shares
of Beacon Power's common stock. The shares of class F preferred stock and the
additional warrants were issued in consideration for the cancellation of
$5.2 million in bridge notes and an additional $23.3 million cash investment by
existing and new investors. The Company did not participate in this financing
either. As of May 23, 2000, the Company owned 3.5% of Beacon Power's voting
stock and 33.0% of Beacon Power's outstanding capital stock.
As of September 30, 2000, the Company owned approximately 3% of the
outstanding voting stock of Beacon Power and 32% of the capital stock of Beacon
Power. On November 22, 2000, Beacon Power completed an initial public offering
(IPO) of its common stock and issued 8,000,000 shares of common stock at $6.00
per share. Upon completion of the initial public offering, the Company owned
approximately 25% of Beacon Power's voting and capital stock.
The results of the Company's operations included $3,111,381 loss of Beacon
Power from May 8, 1997 to December 24, 1997 under the consolidation method of
accounting. On December 24, 1997, the Company began accounting for its
investment in Beacon Power in accordance with SAB Topic 5.E. and has included
100% of Beacon Power's $7,079,297 loss for the period from December 25, 1997
through May 1999 in a manner similar to the equity method of accounting, at
which time, the Company's initial investment of $1,888,619, the $30,000
additional investment and the additional deemed investment of $4,750,000 and
accrued dividends of $410,678 had been written down to zero. In June 1999, the
Company committed up to $1,000,000 of additional financing to Beacon Power,
representing a minority share, 33%, of a funding commitment received by Beacon
Power, and the Company began accounting for its investment in Beacon Power under
the equity method. As of June 30, 1999, the Company owned approximately 0.1% of
the voting stock of Beacon Power; however, as the Company was providing 33% of
the current funding to Beacon Power, the Company has included 33% of Beacon
Power's losses in its results of operation until the $1,000,000 investment was
reduced to zero in December 1999. The Company continued to record losses from
Beacon Power after December 31, 1999 to the extent of the additional dividends
that accrued on the contingent obligation to class D preferred stockholders of
Beacon Power. From June 1999 through September 30, 2000, the Company has
included in its results from operations its share of Beacon Power's losses of
$1,633,201. At September 30, 2000, the Company's investment in Beacon Power had
been reduced to zero and the contingent obligation to Beacon Power's Class D
preferred stockholders was $5,722,629. The Company continues to record
additional losses from Beacon Power to the extent of additional interest accrued
on the contingent obligation to the Class D preferred stockholders of Beacon
Power.
57
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED)
In connection with Beacon Power's initial public offering, the Put Right was
terminated and the contingent obligation to class D preferred stockholders of
Beacon Power will be reclassified as additional paid in capital. In addition,
the Company's preferred stock holdings in Beacon Power were converted into
9,694,812 shares of Beacon Power common stock. In accordance with SEC SAB
No. 51, the Company's investment and additional paid in capital will be written
up during the first quarter of fiscal 2001 to reflect its beneficial interest in
the book value of the stockholders' equity of Beacon Power, which the Company
estimates to be approximately $15.0 million. After the write-up of the Company's
investment in Beacon Power, the Company will continue to account for its
investment in Beacon Power under the equity method of accounting and will record
its share of future losses from Beacon Power on a one-quarter trailing basis
until its investment in Beacon Power has been reduced to zero.
If in the future, the Company's ownership interest in Beacon Power's
outstanding capital stock is reduced to below 20% and the Company determines
that it does not have the ability to exercise significant influence over the
operating and financial policies over Beacon Power, the Company's investment in
Beacon Power will be accounted for using the fair value method as set forth in
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," based upon the carrying value of the Company's investment in Beacon
Power at the time the Company's interest is reduced to below 20%. At that time,
the Company will no longer be required to record its share of any losses from
Beacon Power. The value of the investment will be carried at fair market value
with any unrealized holding gains or losses to be included in stockholders'
equity as a component of other comprehensive income.
Beacon Power accounted for $470,996, $72,644 and $424,418 of the Company's
total revenue for the fiscal years ended September 30, 2000, 1999 and 1998,
respectively. At September 30, 2000 and 1999, the Company had $346,066 and
$5,390, respectively, of accounts receivable and unbilled contract costs and
fees from Beacon Power.
F. 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%. Available borrowings were 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. On August 29,
2000, the Company terminated the line of credit.
G. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
2000 1999
--------- --------
<S> <C> <C>
Capital lease obligations.............................. $ 33,871 $ 50,097
Less: Current portion.................................. (17,494) (16,226)
--------- --------
$ 16,377 $ 33,871
========= ========
</TABLE>
58
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. LONG-TERM DEBT (CONTINUED)
At September 30, 2000, maturities of these obligations are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2001........................................................ $ 17,494
2002........................................................ 10,778
2003........................................................ 5,599
--------
33,871
Less: Current Portion....................................... (17,494)
--------
$ 16,377
========
</TABLE>
On March 1, 1999, the Company reached a definitive settlement arrangement
with Albert R. Snider (the "Settlement Agreement"), the holder of a note payable
that commenced on April 16, 1997, regarding a 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 Mr. Snider, which were held
by an escrow agent. The Company has recorded these shares held in escrow at
market value and as a reduction to stockholders' equity as of September 30,
1999.
On April 26, 2000, the escrow agent, as authorized by the Company released
the 42,860 shares of common stock that were held in escrow to Mr. Snider. The
Company recorded these securities at fair value until they were released from
escrow at a market price of $16.00 per share or $685,760. The Company determined
that the value of these securities exceeded the net realizable value of the
underlying services to be received by $235,760. The Company has charged this
excess amount to selling, general and administrative expenses during the fiscal
year ended September 30, 2000. The Company is amortizing the realizable asset of
$450,000 over the three-year period of service through September 30, 2002. At
September 30, 2000, the unamortized value of this asset is $300,000.
H. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities under various operating leases that expire
through October 2005. The Company has also entered into a master leasing
agreement to lease various items of equipment not to exceed $600,000. The
availability under this facility has expired as of September 30, 1999.
59
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum annual rentals under lease agreements at September 30, 2000
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2001........................................................ $2,015,395
2002........................................................ 1,916,712
2003........................................................ 1,545,762
2004........................................................ 280,850
2005........................................................ 201,996
Thereafter.................................................. 16,833
----------
Total (not reduced by minimum sublease rentals of
$889,872)................................................. $5,977,548
==========
</TABLE>
Total rental expense including operating expenses and real estate taxes for
operating leases amounted to $2,157,506, $1,683,749 and $1,235,867 for the years
ended September 30, 2000, 1999 and 1998, 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, 2000 and 1999, deferred rent
expense amounted to $207,739 and $110,390, respectively.
LITIGATION
On October 15, 1997, the Company received a letter from the Department of
the Air Force ("the Air Force") stating that it may terminate for default an
approximately $1.6 million contract between the Air Force and the Company for
development of a satellite component, unless perceived performance problems were
cured. As of that date, the Company had received payments of approximately $1.4
million in connection with this contract. In the event of an actual default, the
Company could be liable for extra costs incurred by the U.S. government in
developing the component and could be required to return a portion of the monies
the Company received on this contract. On December 15, 1997, the Air Force
issued a "Show Cause Notice" to the Company requiring the Company to demonstrate
to the Air Force why the contract should not be terminated "for cause." On
December 31, 1997, the Company responded to the Air Force's "Show Cause Notice,"
explaining the Company's view that the Company should not be terminated for
cause. On May 11, 2000, the Company contacted the Air Force again to offer to
settle these differences and to explore obtaining additional settlement amounts.
On August 3, 2000, the Company sent a memorandum to the Air Force explaining the
basis of a settlement request of $353,248. Also on August 3, 2000, the Company
received from the Air Force a proposed settlement offer in which the contract
would be concluded through a contract modification with no additional payment,
but without termination for cause. As of September 30, 1999, the Company had
provided a full reserve of $521,000 against the unbilled contract costs and fees
to the Department of the Air Force. As of September 30, 2000, all of the
$521,000 unbilled contract costs and fees had been written off. The contract is
still subject to normal audit and accounting of final cost.
On November 6, 1999, APACE, Inc. ("APACE") commenced an action against the
Company to the Supreme Court of the State of New York claiming the Company had
been awarded a prime contract by the U.S. Department of Energy ("DOE") and that
the Company had failed or refused to negotiate a subcontract with APACE,
allegedly in breach of a contract between the Company and APACE. APACE is
seeking in excess of $1,000,000 in damages. The Company denied the allegations,
moved to stay the action
60
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. COMMITMENTS AND CONTINGENCIES (CONTINUED)
and filed for arbitration with the American Arbitration Association in Boston,
Massachusettes. The American Arbitration Association decided that the
arbitration would go forward in Boston. In the meantime, APACE requested that
the court permit the action to go forward and for the arbitration to compelling
arbitration and staying APACE's action pending arbitration to be conducted by
the American Arbitration Association in Boston.
On June 26, 2000, APACE served the Company with an amended answering
statement and counterciaim, including additional allegations that the Company
has engaged in unfair and deceptive trade practices and that the Company's
actins were willful and knowing. Based on these allegations, APACE is seeking
multiple damages, as well as attorneys' fees and expenses. On July 19, 2000, the
Company filed an answer to APACE's amended answering statement and counterclaim,
denying the allegations and asserting various defenses.
An arbitrator has been selected and the arbitration is scheduled to go
forward in Boston for nine days in February, March and April 2001. The parties
have exchanged some discovery, and expect to make a further exchange early in
2001.
The final outcome of this matter is not presently determinable and,
therefore, no provision for any liability that may result has been recorded in
the Company's financial statements.
From time to time, the Company is a party to routine litigation and
proceedings in the ordinary course of business. The Company is not aware of any
current or pending litigation to which the Company is or may be a party that the
Company believes could materially adversely affect the Company's results of
operations or financial condition.
I. EMPLOYEE BENEFIT PLAN
The Company offers a 401(k) Employee Benefit Plan (the "Plan"). Under the
Plan, any regular employee, as defined by the Plan, who has completed six months
of service and has attained the age of 21 years is eligible to participate.
Under the terms of the Plan, an employee may defer up to 15% of his or her
compensation through contributions to the Plan. During 1999, the Company
extended the Plan to its wholly-owned subsidiaries. The Company made matching
contributions to the Plan of $366,264, $218,729 and $86,883 during 2000, 1999
and 1998, respectively.
61
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current payable:
Federal.............................................. (14,699) -- --
State................................................ -- -- $ 3,872
Foreign.............................................. 14,699 -- --
----------- ----------- -----------
-- -- $ 3,872
----------- ----------- -----------
Deferred tax expense/(benefit):
Federal.............................................. $(2,962,183) $(3,888,031) $(1,349,519)
State................................................ (890,122) (1,167,905) (404,950)
Change in valuation allowance........................ 3,852,305 5,055,936 1,754,469
----------- ----------- -----------
-- -- --
----------- ----------- -----------
-- -- $ 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, 2000
and 1999, the components of the net deferred tax assets/(liabilities) are as
follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Federal net operating loss............................... $ 13,385,851 $ 5,566,879
State net operating loss, net of federal benefit......... 1,912,496 495,980
Credits.................................................. 421,035 499,585
Depreciation............................................. (227,657) 336,038
Loss from Beacon Power Corporation....................... 4,932,397 3,128,804
Other.................................................... 834,326 1,562,820
Valuation allowance...................................... (21,258,448) (11,590,106)
------------ ------------
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.
62
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. 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,
------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory rate............................... (34.0)% (34.0)% (34.0)%
State taxes--net of federal benefit................. (6.2) (6.2) (6.2)
Other............................................... 1.6 (0.7) (0.5)
Change in valuation allowance....................... 38.6 40.9 40.8
----- ----- -----
Effective tax rate.................................. -- % -- % 0.1 %
===== ===== =====
</TABLE>
At September 30, 2000, the Company had net operating loss carry-forwards of
approximately $39,370,000 and $30,590,000 for federal and state income tax
purposes, respectively. The federal net operating losses expire beginning
September 30, 2008 through 2020. The state net operating losses will expire
beginning September 30, 2000 through 2005. The use of these losses may be
limited due to ownership change limitations under Section 382 of the Internal
Revenue Code.
K. STOCKHOLDERS' EQUITY
INVESTMENT FROM MECHANICAL TECHNOLOGY INCORPORATED
On October 21, 1999, the Company received a $7,070,000 investment from
Mechanical Technology Incorporated ("MTI"). In consideration for MTI's
investment, MTI received 1,030,000 shares of the Company's Common Stock at a
discounted price of approximately $6.80 per share, and warrants to purchase an
additional 100,000 shares of the Company's Common Stock at an exercise price of
$8.80 per share and an expiration date four years from the date of issuance. MTI
funded $2,570,000 of its investment in the Company on October 21, 1999 and
received 370,800 of the 1,030,000 shares of the Company's Common Stock and a
warrant to purchase 36,000 of the 100,000 shares of the Company's Common Stock.
MTI made the remaining investment on January 31, 2000 of $4,500,000 and received
the remaining 659,200 shares of the Company's Common Stock and a warrant to
purchase the remaining 64,000 shares of the Company's Common Stock. The Company
incurred approximately $95,000 of legal, accounting, consultation and filing
fees in connection with this transaction. The Company has valued the warrants
issued to MTI on October 21, 1999 and January 31, 2000, at $231,912 and
$1,273,509, respectively using the Black-Scholes option pricing model.
In addition, the Company received a warrant to purchase 108,000 shares of
MTI's common stock on October 21, 1999 and a warrant to purchase 192,000 shares
of MTI's common stock on January 31, 2000 at exercise prices of $12.56 per
share, as adjusted to reflect a 3:1 stock split in April 2000, and expiration
dates four years from the date of issuance. The Company has valued the warrant
received on October 21, 1999 and January 31, 2000 at $568,553 and $2,926,885,
respectively, using the Black-Scholes option pricing model, and has recorded the
warrants as an asset and additional paid in capital. In accordance with EITF
No. 96-11, "Accounting for Forward Contracts and Purchased Options to Acquire
Securities Covered by FASB Statement No. 115," options that are entered into to
purchase securities that will be accounted for under SFAS 115 should, at
inception, be designated as held-to-maturity, available-for-sale, or trading and
accounted for in a manner consistent with the accounting prescribed by
SFAS No. 115 for that category of securities. The Company has designated that
the securities to be purchased under the warrant agreement
63
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. STOCKHOLDERS' EQUITY (CONTINUED)
will be available-for-sale securities and, therefore, the Company has marked to
market the fair value of the warrants at each reporting period dated and has
recorded any unrealized gains and losses as a component of accumulated other
comprehensive loss included in stockholders' equity. At September 30, 2000, the
warrants have an unrealized loss of $1,021,725, which is included in accumulated
other comprehensive loss included in stockholders' equity.
STOCK OPTIONS
Under the Company's 1992, 1994, 1996, 1998 and 1999 Stock Option Plans
(collectively, the "Plans"), both qualified and non-qualified stock options may
be granted to certain officers, employees, directors and consultants to purchase
up to 3,050,000 shares of the Company's Common Stock. At September 30, 2000,
2,773,550 of the 3,050,000 stock options available for grant under the Plans
have been granted.
The Plans are subject to the following provisions:
The aggregate fair market value (determined as of the date the option is
granted) of the common stock that any employee may purchase in any calendar year
pursuant to the exercise of qualified options may not exceed $100,000. No person
who owns, directly or indirectly, at the time of the granting of a qualified
option to him or her, more than 10% of the total combined voting power of all
classes of stock of the Company shall be eligible to receive any qualified
options under the Plans unless the option price is at least 110% of the fair
market value of the common stock subject to the option, determined on the date
of grant. Non-qualified options are not subject to this limitation.
Qualified options are issued only to employees of the Company, while
non-qualified options may be issued to non-employee directors, consultants and
others, as well as to employees of the Company. Options granted under the Plans
may not be granted with an exercise price less than 100% of fair value of the
Company's common stock, as determined by the Board of Directors on the grant
date.
Options under the Plans must be granted within 10 years from the effective
date of the Plan. Qualified options granted under the Plans cannot be exercised
more than 10 years from the date of grant, except that qualified options issued
to 10% or greater stockholders are limited to five-year terms. All options
granted under the Plans provide for the payment of the Company's exercise price
in cash, or by delivery to the Company of shares of common stock already owned
by the optionee having fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
Generally, the options vest and become exercisable ratably over a four-year
period.
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.
64
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock options as of September 30,
2000, 1999 and 1998 and changes for the years then ended are presented below.
<TABLE>
<CAPTION>
2000 1999 1998
-------------------- --------------------- --------------------
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......... 1,851,227 $ 8.06 820,910 $9.58 700,427 $8.44
Granted................................ 820,050 16.62 1,604,000 7.03 319,000 11.20
Exercised.............................. (701,774) 7.84 (455,600) 6.98 (100,266) 5.80
Canceled............................... (92,398) 7.83 (118,083) 8.84 (98,251) 10.55
--------- ------ ---------- ----- -------- -----
Outstanding at end of year............... 1,877,105 $11.89 1,851,227 $8.06 820,910 $9.58
========= ====== ========== ===== ======== =====
Options exercisable at year-end.......... 463,764 $ 9.26 840,560 $8.57 413,403 $8.48
========= ====== ========== ===== ======== =====
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 2000.
<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--$ 7.81 311,456 7.9 $ 5.67 70,509 $ 5.53
$ 8.05--$10.50 708,548 8.0 8.43 253,673 9.02
$ 11.00--$13.38 240,751 7.3 11.67 139,582 11.57
$ 16.13--$20.63 546,350 9.4 17.55 -- --
$ 31.25--$37.25 70,000 9.8 31.30 -- --
--------- ----- ------- ------- ------
1,877,105 8.4 $ 11.89 463,764 $ 9.26
========= ===== ======= ======= ======
</TABLE>
At September 30, 2000, an additional 276,450 shares were available under the
Plans for future grants.
During 1999, the Company granted fully vested and immediately exercisable
options to purchase 755,000 shares of the Company's common stock to consultants
at exercise prices ranging from $5.75 to $10.00 per share, of which 300,000
stock options were granted outside of the Plans. The Company has recorded the
fair value of the options, as determined by the Black-Scholes option pricing
model, of $2,152,277, to selling, general and administrative expenses during the
year ended September 30, 1999. As of September 30, 1999, options to purchase
450,000 shares at an exercise price of $7.00 per share were exercised. As of
September 30, 1999, the Company received $1,333,333 of cash on these exercises
and the remaining amount due from the stockholders is classified within
stockholders' equity as amounts receivable from exercise of stock options. As of
September 30, 2000, options to purchase 750,000 shares at exercise prices
ranging from $5.75 to $10.00 per share have been exercised. As of September 30,
2000, the Company has received full payment on these exercises.
During 2000, the Company granted 216,000 non-qualified stock options to
employees at an exercise price of $17.56 per share outside of the Board approved
Plans, which are included in the above table.
65
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. STOCKHOLDERS' EQUITY (CONTINUED)
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. The value of these warrants was not material to the financial
statements. 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 L), 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. The Company has valued these warrants
at $2,369,292, using the Black-Scholes option pricing model. At September 30,
1999, none of these warrants were exercised. At September 30, 2000, 18,000
shares of common stock had been purchased at an exercise price of $7.80 per
share.
On October 21, 1999, in connection with an investment by MTI, the Company
issued a warrant to purchase up to 36,000 shares of the Company's Common Stock
at an exercise price of $8.80 per share. This warrant expires on October 21,
2003. On January 31, 2000, in connection with a second closing of this
investment, the Company issued an additional warrant to purchase up to 64,000
shares of the Company's Common Stock at an exercise price of $8.80 per share.
This warrant expires on January 31, 2004. The Company valued the warrants issued
to MTI on October 12, 1999 and January 31, 2000 at $231,912 and $1,273,509,
respectively, using the Black-Scholes option pricing model. At September 30,
2000, none of these warrants had been exercised.
On November 16, 1999, in connection with the acquisition of certain
intellectual property, equipment and other assets from Northrop Grumman
Corporation, the Company issued a warrant to purchase up to 100,000 shares of
the Company's Common Stock at an exercise price of $9.725 per share. The Company
has valued this warrant at $631,000 using the Black-Scholes option pricing
model. As of September 30, 2000, all of these warrants had been exercised.
On February 4, 2000, the Company issued to Northrop Grumman Corporation an
additional warrant to purchase up to 100,000 shares of the Company's Common
Stock at an exercise price of $9.725 per share. This warrant is exercisable upon
the occurrence of certain defined events. As of September 30, 2000, this warrant
is not yet exercisable. This warrant expires on December 31, 2006. As of
September 30, 2000, the fair value of this warrant, using the Black-Scholes
option pricing model, was $936,485, which will be added to the purchase price of
the assets acquired from Northrop Grumman Corporation when it becomes
exerciseable.
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
66
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. STOCKHOLDERS' EQUITY (CONTINUED)
per share for the years ended September 30, 2000, 1999 and 1998 would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------- ----------------------- -----------------------
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 reported....................... $(13,047,033) $(1.03) $(14,392,657) $(1.57) $(4,857,814) $(.54)
Pro forma......................... $(17,092,280) $(1.35) $(15,597,109) $(1.70) $(5,433,804) $(.61)
</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 ranging from
80.1% to 112.3%, no dividends, and risk-free interest rate of 6.17% for
September 30, 2000; 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; and 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. The
weighted average price of the fair value of options granted for years ended
September 30, 2000, 1999 and 1998 are $14.05, $5.21 and $7.14, respectively.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25." This interpretation clarifies the application of APB Opinion
No. 25, including (a) the definition of employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. The
Interpretation is effective July 1, 2000, and the effects of applying the
Interpretation are recognized on a prospective basis. The adoption of this
Interpretation did not have a material impact on the Company's financial
condition or results of operations.
COMMON STOCK OFFERING
On October 30, 2000, the Company filed for a public offering of its Common
Stock. In connection with this offering, the Company has incurred $678,980 of
deferred equity financing costs that are included in other long-term assets at
September 30, 2000.
67
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, $0.01 par value per share ("Preferred Stock"). 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").
In connection with the transaction, Brown Simpson also received warrants to
purchase up to 675,000 fully vested and immediately exercisable 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 valued these
warrants at $1,818,558 based on the fair value of these warrants, as determined
by the Black-Scholes option pricing model, and has recorded this amount as a
discount to the Preferred Stock. In addition, the Company incurred direct costs
of $1,338,234 in connection with this preferred stock offering which have also
been recorded as a discount to the Series A Preferred Stock.
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 discount to the Series A Preferred Stock.
The Company has valued the Series A 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 and net of offering costs. The Company
is accreting the carrying value of the preferred stock to its redemption value
of $8,000,000 at August 25, 2003, using the effective interest method. As of
September 30, 1999, the Company accreted $50,904 and recorded this as a charge
against additional paid-in capital.
On March 7, 2000, the preferred stockholders elected to convert all 8,000
shares of the Series A Preferred Stock into 1,025,641 shares of the Company's
Common Stock, which resulted in the accretion of an additional $3,105,888 of the
discount on the redeemable preferred stock during the year ended September 30,
2000.
68
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. SIGNIFICANT CUSTOMERS
Significant customers, defined as those customers that account for 10% or
more of total net revenue in a fiscal year or 10% or more of accounts receivable
and unbilled contract costs and fees at the end of a fiscal year, were as
follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
ACCOUNTS RECEIVABLE
AND UNBILLED
CONTRACT COSTS AND
PERCENTAGE OF TOTAL REVENUE FEES AT
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------
CUSTOMER 2000 1999 1998 2000 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
U.S. government:
U.S. Department of Defense..................... * 20.6% 22.1% 10.3% 20.4%
U.S. Department of Energy...................... 11.5% * * * 20.0%
Applied Materials................................ 10.6% * * 22.3% *
</TABLE>
------------------------
* Less than 10%
N. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
2000 1999 1998
----------- ---------- -----------
<S> <C> <C> <C>
Accretion of redeemable convertible preferred stock
discount.............................................. $ 3,105,888 $ 50,904 $ --
=========== ========== ===========
Acquisition of equipment under capital leases........... $ -- $ 49,813 $ --
=========== ========== ===========
Contingent obligation to Class D preferred stockholders
of Beacon Power Corporation........................... $ 484,764 $5,309,115 $ --
=========== ========== ===========
Conversion of redeemable convertible preferred stock to
common stock.......................................... $ 8,000,000 $ -- $ --
=========== ========== ===========
Common stock held in escrow issued in connection with
settlement agreement.................................. $ -- $ 190,191 $ --
=========== ========== ===========
Valuation adjustment for common stock held in escrow.... $ 257,160 $ 238,409 $ --
=========== ========== ===========
Warrants issued in connection with MTI investment....... $ 1,505,421 $ -- $ --
=========== ========== ===========
MTI warrant received in connection with MTI
investment............................................ $ 3,495,438 $ -- $ --
=========== ========== ===========
Valuation adjustment for MTI warrants................... $(1,021,725) $ -- $ --
=========== ========== ===========
</TABLE>
69
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
Net cash paid for the acquisitions of Inductive Components Inc., Lighthouse
Software, Inc., HyComp, Inc., Ling Electronics, Inc. and certain intellectual
property, equipment and other assets from Northrop Grumman Corporation was as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Fair value of assets................................ $ 11,200,265 $ 1,742,812 --
Cost in excess of net assets of companies acquired,
net............................................... 3,754,910 389,079 --
Liabilities assumed, including transaction costs.... (2,476,383) (567,215) --
Fair value of common stock issued................... (12,408,792) (568,800) --
------------ ------------ ------------
Cash paid........................................... $ 70,000 $ 995,876 --
Less: Cash acquired................................. (45,946) -- --
------------ ------------ ------------
Net cash paid for the acquisitions.................. $ 24,054 $ 995,876 --
============ ============ ============
</TABLE>
INTEREST AND INCOME TAXES PAID
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Interest....................................... $ 3,176 $115,692 $10,206
======== ======== =======
Income taxes................................... -- -- $ 5,772
======== ======== =======
</TABLE>
O. ACQUISITIONS
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 Components, Inc. and the majority stockholder of
Lighthouse Software, Inc. The aggregate consideration paid by the Company for
the acquired assets of Inductive Components, Inc. and Lighthouse Software, Inc.
was 100,000 shares of the Company's common stock, valued at $5.6875 per share or
$568,750. In addition, the Company assumed indebtedness of approximately
$246,000. The Company has included in its consolidated results of operations the
acquisition of Inductive Components, Inc. and Lighthouse Software, Inc. 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>
70
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. ACQUISITIONS (CONTINUED)
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.
LING ELECTRONICS, INC.
On October 21, 1999, 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 valued at $9.8438 per share or $7,579,726. In
addition, the Company incurred approximately $177,000 of legal, accounting,
consultation and filing fees as a cost of this transaction. The purchase price
of the acquisition has been allocated as follows:
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 45,946
Accounts receivable......................................... 1,937,023
Inventory................................................... 3,127,991
Prepaid expenses and other assets........................... 260,239
Property and equipment...................................... 250,000
Goodwill.................................................... 3,754,910
Accounts payable............................................ (641,687)
Accrued payroll and payroll related expenses................ (334,129)
Deferred revenues........................................... (13,500)
Other accrued expenses...................................... (560,437)
----------
$7,826,356
==========
</TABLE>
71
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. ACQUISITIONS (CONTINUED)
The following unaudited pro forma financial information combines SatCon and
Ling's results of operations as if the acquisition had taken place on
October 1, 1998. 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>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................................ $ 31,194,618 $ 23,849,881 $ 27,764,923
Operating loss......................... $ (9,822,203) $(11,316,689) $ (2,433,575)
Net loss............................... $(10,260,029) $(15,881,125) $ (5,740,230)
Net loss attributable to common
stockholders......................... $(13,365,917) $(15,932,029) $ (5,740,230)
Net loss per share, basic and
diluted.............................. $ (1.06) $ (1.60) $ (0.59)
</TABLE>
NORTHROP GRUMMAN CORPORATION
On November 16, 1999, the Company purchased certain intellectual property,
equipment and other assets from Northrop Grumman Corporation ("NGC"). These
assets were used by NGC in connection with its power electronics product
business. The Company is amortizing the purchase price allocated to completed
technology on a straight-line basis over a 10-year period. The Company is
depreciating the purchase price allocated to property and equipment on a
straight-line basis over a 10-year period. The Company also entered into (i) a
sublease with NGC pursuant to which it agreed to a five-year sublease for
approximately 14,863 square feet of rentable space in the Baltimore, Maryland
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 assets and agreements, NGC received 578,761
shares of the Company's Common Stock valued at $8.3438 per share or $4,829,066.
In addition, the Company issued to NGC a warrant to purchase an additional
100,000 shares of the Company's Common Stock at an exercise price of $9.725 per
share. The Company has recorded the fair value of this warrant, as determined by
the Black-Scholes option pricing model, of approximately $631,000 and
approximately $119,000 of legal, accounting, consultation and filing fees as a
cost of this transaction. On February 4, 2000, the Company issued to NGC an
additional warrant to purchase 100,000 shares of the Company's Common Stock at
an exercise price of $9.725 per share. This warrant is exercisable upon the
occurrence of certain
72
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. ACQUISITIONS (CONTINUED)
defined events, none of which had occurred as of September 30, 2000. The
purchase price of the asset purchase has been allocated as follows:
<TABLE>
<S> <C> <C>
Inventory................................................... $1,206,000
Property and equipment...................................... 1,091,643
Intangibles:
Completed technology...................................... $3,142,882
Transition services agreement............................. 101,542
Favorable lease........................................... 36,999
----------
Total intangibles..................................... 3,281,423
----------
$5,579,066
==========
</TABLE>
The pro forma financial information has not been presented, as this
transaction is the purchase of assets rather than as a business combination. The
Company has determined that this transaction was the acquisition of assets and
not the acquisition of a business as this business ceased operations more than
12 months prior to this acquisition of assets, the Company did not acquire
facilities, employees or customer base and there is not sufficient continuity of
the acquired entity's operations prior to and after the transaction.
For the fiscal year ended September 30, 2000, the Company recognized
$413,991 of revenue, primarily related to funded research and development
arrangements, from NGC. At September 30, 2000, the Company had $62,492 of
accounts receivable and unbilled contract costs and fees from NGC.
P. LOSS PER SHARE
The following is the reconciliation of the numerators and denominators of
the basic and diluted loss per share computations:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Net loss attributable to common shareholders......... $(13,047,033) $(14,392,657) $(4,857,814)
============ ============ ===========
BASIC AND DILUTED:
Common shares outstanding, beginning of year....... 9,529,649 8,990,249 8,769,146
Weighted average common shares issued during the
year............................................. 3,100,173 200,017 190,163
Weighted average shares repurchased during the
year............................................. -- (14,225) (2,638)
------------ ------------ -----------
Weighted average shares outstanding--basic and
diluted.......................................... 12,629,822 9,176,041 8,956,671
============ ============ ===========
Net loss per share, basic and diluted.............. $ (1.03) $ (1.57) $ (.54)
============ ============ ===========
</TABLE>
At September 30, 2000, 1999 and 1998, 44,500, 44,500 and 28,300 common
shares, respectively, were excluded from common shares outstanding as they were
held in treasury. At September 30, 2000 and 1999, 42,860 common shares were
excluded from common shares outstanding as they were held in escrow.
73
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
P. LOSS PER SHARE (CONTINUED)
At September 30, 2000, 1999 and 1998, options and warrants to purchase
2,854,105, 2,782,147, and 884,758 shares of common stock, respectively, were
excluded from the diluted weighted average common shares outstanding as their
effect would be antidilutive.
Q. COMPREHENSIVE LOSS
The Company's total comprehensive loss is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Net loss............................................. $ (9,941,145) $(14,341,753) $(4,857,814)
============ ============ ===========
Other comprehensive income/(loss), net of tax:
Unrealized gains on securities................... $ -- $ 10,380 $ 9,835
Valuation adjustment for MTI warrants............ (1,021,725) -- --
Foreign currency translation adjustment.......... (51,778) -- --
------------ ------------ -----------
Other comprehensive (loss)/income................ $ (1,073,503) $ 10,380 $ 9,835
------------ ------------ -----------
Comprehensive loss................................... $(11,014,648) $(14,331,373) $(4,847,979)
============ ============ ===========
</TABLE>
R. SEGMENT DISCLOSURES
As of October 1, 1998, the Company adopted SFAS No. 131, "Disclosures 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 perform services and 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.
The Company performs research and development services in collaboration with
third parties. Film Microelectronics, Inc. designs and manufactures power
electronics products. The Magmotor and Ling Divisions specialize 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.
74
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
R. SEGMENT DISCLOSURES (CONTINUED)
The following is a summary of the Company's operations by operating segment:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
2000 1999 1998
----------- ------------ -------------
<S> <C> <C> <C>
Research and development:
Product revenue................................. $ 31,486 -- --
Funded research and development revenue......... $ 8,627,601 $ 6,355,383 $ 8,010,735
----------- ------------ -------------
Total revenue................................. $ 8,659,087 $ 6,355,383 $ 8,010,735
----------- ------------ -------------
Loss from operations, net of amortization of
intangibles................................. $(3,838,907) $ (6,577,012) $ (1,454,707)
=========== ============ =============
Electronics products:
Product revenue............................... $ 8,584,446 $ 6,306,085 $ 5,909,765
----------- ------------ -------------
(Loss) income from operations, net of
amortization of intangibles................. $(3,128,643) $ (2,073,946) $ 504,528
=========== ============ =============
Motion-control products:
Product revenue............................... $13,811,496 $ 2,816,413 $ 1,610,423
----------- ------------ -------------
Loss from operations, net of amortization of
intangibles................................. $(1,316,958) $ (755,272) $ (310,023)
=========== ============ =============
Consolidated:
Product revenue............................... $22,427,428 $ 9,122,499 $ 7,520,188
Funded research and development revenue....... $ 8,627,601 $ 6,355,383 $ 8,010,735
----------- ------------ -------------
Total revenue................................. $31,055,029 $ 15,477,882 $ 15,530,923
=========== ============ =============
Loss from operations, net of amortization..... $(8,284,508) $ (9,406,230) $ (1,260,202)
Amortization of intangibles................... $(1,217,490) $ (371,087) $ (290,957)
----------- ------------ -------------
Operating loss................................ $(9,501,998) $ (9,777,317) $ (1,551,159)
Other income (loss)........................... $ 9,891 $ (150,464) $ --
Interest income............................... $ 453,631 $ 42,287 $ 179,861
Interest expense.............................. $ (3,176) $ (115,692) $ (10,206)
----------- ------------ -------------
Net loss before income taxes and loss from
Beacon Power Corporation.................... $(9,041,652) $(10,001,186) $ (1,381,504)
=========== ============ =============
</TABLE>
75
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
R. SEGMENT DISCLOSURES (CONTINUED)
The following is a summary of the Company's total segment assets by
operating segment:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Research and development:
Segment assets............................................ $18,464,754 $ 6,283,773
Electronics products:
Segment assets............................................ $10,132,575 $ 8,643,258
Motion-control products:
Segment assets............................................ $13,416,197 $ 2,473,343
Consolidated:
Segment assets............................................ $42,013,526 $17,400,374
Investment in Beacon Power Corporation.................... $ -- $ 414,729
Warrants to purchase Mechanical Technology
Incorporated common stock................................. $ 2,473,713 $ --
----------- -----------
Total assets................................................ $44,487,239 $17,815,103
=========== ===========
</TABLE>
The Company operates and markets its services and products on a worldwide
basis with its principal markets as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
2000 1999 1998
----------- ------------ -----------
<S> <C> <C> <C>
Revenue by geographic region:
United States...................................... $27,701,844 $ 14,627,000 $15,333,525
Rest of world...................................... 3,353,185 850,981 197,398
----------- ------------ -----------
Total revenue.................................... $31,055,029 $ 15,477,981 $15,530,923
=========== ============ ===========
</TABLE>
76
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE
To the Board of Directors of SatCon Technology Corporation:
We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated statements of SatCon Technology Corporation
and its subsidiaries for each of the years ended September 30, 2000 and 1999 and
have issued our report thereon dated November 28, 2000. Our audits were 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 for each of the years
ended September 30, 2000 and 1999 taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 28, 2000
77
<PAGE>
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO ADDITIONS BALANCE
BEGINNING COSTS AND FROM AT END
OF PERIOD EXPENSES ACQUISITIONS DEDUCTIONS OF PERIOD
----------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
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.................. $ 4,111,568 $2,689,999 -- -- $ 6,801,567
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.................. $ 6,801,567 $4,788,539 -- -- $11,590,106
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
YEAR ENDED SEPTEMBER 30, 2000:
Allowance for doubtful
accounts................... $ 386,686 $ 265,742 -- $ (332,208) $ 320,220
Allowance for unbilled
contract costs............. $ 746,121 -- -- $ (746,121) --
Deferred tax valuation
allowance.................. $11,590,106 $9,668,342 -- -- $21,258,448
Allowance for obsolete
inventory.................. $ 1,078,797 $ 658,774 -- $ (543,621) $ 1,193,950
Reserve for product warranty
expense.................... $ 36,000 $ 264,096 $195,384 $ (30,365) $ 465,115
Accrued costs for
consolidation of
facilities................. $ 100,000 -- -- -- $ 100,000
</TABLE>
78
<PAGE>
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 as 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.
79
<PAGE>
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 our proxy statement for our 2001 Annual
Meeting of Stockholders to be held on February 21, 2001. Information relating to
certain filings of Forms 3, 4 and 5 is contained in our 2001 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 our 2001 proxy
statement.
The sections entitled "Compensation Committee Report on Executive
Compensation" and "Comparative Stock Performance Graph" in our 2001 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 our 2001 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 our 2001
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 Annual Report on Form
10-K:
1. CONSOLIDATED FINANCIAL STATEMENT OF SATCON TECHNOLOGY CORPORATION AND ITS
SUBSIDIARIES:
Consolidated Balance Sheets as of September 30, 2000 and 1999
Consolidated Statements of Operations for the Years Ended September 30,
2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended September 30,
2000, 1999 and 1998
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, 2000, 1999 and 1998
All other financial statement schedules not listed have been omitted because
they are either not required, not applicable, or the information has been
included elsewhere in the consolidated financial statements or notes
thereto.
3. EXHIBITS:
The exhibits listed in the Exhibit Index immediately preceding the exhibits
are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
We did not file any reports on Form 8-K during the quarter ended
September 30, 2000.
80
<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 December 22, 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>
Chairman of the Board of
/s/ DAVID B. EISENHAURE Directors, President and
---------------------------------------- Chief Executive Officer December 22, 2000
David B. Eisenhaure (Principal Executive
Officer)
Vice President, Chief
/s/ SEAN F. MORAN Financial Officer and
---------------------------------------- Treasurer (Principal December 22, 2000
Sean F. Moran Financial and Principal
Accounting Officer)
/s/ MICHAEL C. TURMELLE Director, Vice President,
---------------------------------------- Chief Operating Officer and December 22, 2000
Michael C. Turmelle Secretary
/s/ JAMES L. KIRTLEY, JR.
---------------------------------------- Director, Vice President, and December 22, 2000
James L. Kirtley, Jr. Chief Scientist
/s/ MARSHALL J. ARMSTRONG
---------------------------------------- Director December 22, 2000
Marshall J. Armstrong
/s/ ALAN P. GOLDBERG
---------------------------------------- Director December 22, 2000
Alan P. Goldberg
/s/ THOMAS A. HURKMANS
---------------------------------------- Director December 22, 2000
Thomas A. Hurkmans
/s/ GERALD L. WILSON
---------------------------------------- Director December 22, 2000
Gerald L. Wilson
</TABLE>
81
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1 Amended and Restated Asset Purchase Agreement among SatCon
Film Microelectronics, Inc., Film Microelectronics Inc., and
Albert R. Snider, dated as of April 3, 1997, is incorporated
herein by reference to Exhibits to the Registrant's Current
Report on Form 8-K dated April 16, 1997.
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. is incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated October 21,
1999.
2.3 Asset Purchase Agreement, dated as of November 16, 1999, by
and between the Registrant and Northrop Grumman Corporation
is incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated November 16,
1999.
3.1 Certificate of Incorporation of the Registrant is
incorporated herein by reference to Exhibits to the
Registrant's Registration Statement on Form S-1 (File No.
33-49286).
3.2 Bylaws of the Registrant is incorporated herein by reference
to Exhibits to the Registrant's Registration Statement on
Form S-1 (File No. 33-49286).
3.3 Certificate of Amendment of Certificate of Incorporation of
the Registrant, as filed with the Secretary of State of the
State of Delaware on May 12, 1997, is incorporated herein by
reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the period ended March 31, 1997.
3.4 Bylaws Amendment of the Registrant is incorporated herein by
reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the period ended March 31, 1997.
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 March 17, 1999, is incorporated herein
by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated August 25, 1999.
3.6 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 is incorporated herein by
reference to Exhibits to the Registrant's Current Report on
Form 8-K dated August 25, 1999.
3.7 Certificate of Amendment of Certificate of Incorporation of
the Registrant, as filed with the Secretary of State of the
State of Delaware on March 15, 2000.
4.1 Specimen Certificate of Common Stock, $.01 par value, is
incorporated herein by reference to Exhibits to the
Registrant's Registration Statement on Form S-1 (File
No. 33-49286).
10.1(*) Employment Agreement, dated July 1, 1992, between the
Registrant and David B. Eisenhaure is incorporated herein by
reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 33-49286).
10.2(*) Employment Agreement, dated July 1, 1992, between the
Registrant and Michael C. Turmelle is incorporated herein by
reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 33-49286).
10.3 Change of Control Letter Agreement, dated March 22, 2000,
between the Registrant and Sean F. Moran is incorporated
herein by reference to Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31,
2000.
10.4(*) 1992 Stock Option Plan is incorporated herein by reference
to Exhibits to the Registrant's Registration Statement on
Form S-1 (File No. 33-49286).
10.5(*) 1994 Stock Option Plan is incorporated herein by reference
to Exhibits to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1994.
10.6(*) 1996 Stock Option Plan is incorporated herein by reference
to Exhibits to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1996.
10.7(*) 1998 Stock Incentive Plan is incorporated herein by
reference to Exhibit B to the Registrant's Definitive
Schedule 14A filed January 26, 1999.
10.8(*) 1999 Stock Incentive Plan is incorporated herein by
reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1999.
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.9 Lease, dated October 21, 1993, between the Registrant and
Gunwyn/First Street Limited Partnership is incorporated
herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 33-49286) and
First Amendment to Lease, dated June 22, 1998, by and
between the Registrant and Gunwyn/First Street Limited
Partnership is incorporated herein by reference to Exhibits
to the Registrant's Annual Report on Form 10-K for the
period ended September 30, 1998.
10.10 Manufacturing Agreement between Applied Materials, Inc. and
its wholly-owned subsidiaries and the Registrant, dated as
of February 20, 1997, is incorporated herein by reference to
Exhibits to the Registrant's Quarterly Report on Form 10-Q
for the period ended March 31, 1997.
10.11 Securities Purchase Agreement, dated as of May 28, 1997, by
and among the Registrant, Beacon Power Corporation and DQE
Enterprises, Inc. is incorporated herein by reference to
Exhibits to the Registrant's Current Report on Form 8-K
dated May 28, 1997.
10.12 Securities Purchase Agreement, dated as of October 23, 1998,
by and among Beacon Power Corporation, Perseus Capital,
L.L.C., DQE Enterprises, Inc., Micro Generation Technology
Fund, L.L.C. and the Registrant is incorporated herein by
reference to Exhibits to the Registrant's Current Report on
Form 8-K dated October 23, 1998.
10.13 Amended and Restated License Agreement, dated as of October
23, 1998, by and between the Registrant and Beacon Power
Corporation is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K dated October
23, 1998.
10.14 Registration Rights Statement, dated as of October 23, 1998,
by and among Beacon Power Corporation, Perseus Capital,
L.L.C., DQE Enterprises, Inc., Micro Generation Technology
Fund, L.L.C., and the Registrant, setting forth certain
registration rights granted by the Registrant is
incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated October 23,
1998.
10.15 Registration Rights Statement, dated as of October 23, 1998,
by and among Beacon Power Corporation, Perseus Capital,
L.L.C., DQE Enterprises, Inc., Micro Generation Technology
Fund, L.L.C. and the Registrant, setting forth certain
registration rights granted by Beacon Power Corporation is
incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated October 23,
1998.
10.16 Lease, dated February 27, 1996, by and between the
Registrant and Diamond Management, Inc. is incorporated
herein by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1998.
10.17 Lease, dated March 5, 1998, by and between the Registrant
and Harold W. Slovin is incorporated herein by reference to
Exhibits to the Registrant's Annual Report on Form 10-K for
the year ended September 30, 1998.
10.18 North America Distributor Agreement, dated June 4, 1998, by
and between SatCon Film Microelectronics, Inc., a division
of the Registrant, and Falcon Electronics, Inc. is
incorporated herein by reference to Exhibits to the
Registrant's Annual Report on Form 10-K for the year ended
September 30, 1998.
10.19 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 is
incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated January 4,
1999.
10.20 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, is incorporated
herein by reference to Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30,
1999.
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.21 Note Purchase Agreement, dated as of June 22, 1999, by and
among Beacon Power Corporation, Perseus Capital, L.L.C., DQE
Enterprises, Inc., Micro Generation Technology Fund, L.L.C.
and the Registrant is incorporated herein by reference to
Exhibits to the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 1999.
10.22 Note and Warrant Purchase Agreement, dated as of August 2,
1999, by and among Beacon Power Corporation, Perseus
Capital, L.L.C., DQE Enterprises, Inc., Micro Generation
Technology Fund, L.L.C. and the Registrant is incorporated
herein by reference to Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30,
1999.
10.23 License and Technical Assistant Agreement, dated as of June
7, 1999, by and between Delco Remy America, Inc. and the
Registrant is incorporated herein 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.
10.24 Securities Purchase Agreement, dated as of August 25, 1999,
among the Registrant and the purchasers listed on Schedule I
thereto is incorporated herein by reference to Exhibits to
the Registrant's Current Report on Form 8-K dated August 25,
1999.
10.25 Registration Rights Agreement, dated as of August 25, 1999,
among the Registrant and the investors named on the
signature pages thereof is incorporated herein by reference
to Exhibits to the Registrant's Current Report on Form 8-K
dated August 25, 1999.
10.26 Form of Warrants issued on August 25, 1999 in connection
with the sale of the Series A Preferred Stock is
incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated August 25,
1999.
10.27 Securities Purchase Agreement, dated as of October 21, 1999,
between the Registrant and Mechanical Technology
Incorporated is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K dated October
21, 1999.
10.28 SatCon Registration Rights Agreement, dated as of October
21, 1999, between the Registrant and Mechanical Technology
Incorporated is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K dated October
21, 1999.
10.29 MTI Registration Rights Agreement, dated as of October 21,
1999, between Mechanical Technology Incorporated and the
Registrant is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K dated October
21, 1999.
10.30 Form of Stock Purchase Warrant issued on October 21, 1999 by
the Registrant to Mechanical Technology Incorporated is
incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated October 21,
1999.
10.31 Form of Stock Purchase Warrant issued on October 21, 1999 by
Mechanical Technology Incorporated to the Registrant is
incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated October 21,
1999.
10.32 Sublease, dated November 16, 1999, between the Registrant
and Northrop Grumman Corporation is incorporated herein by
reference to Exhibits to the Registrant's Current Report on
Form 8-K dated November 16, 1999.
10.33 Transition Services Agreement, dated as of November 16,
1999, between the Registrant and Northrop Grumman
Corporation is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K dated
November 16, 1999.
10.34 Memorandum of Understanding, entered into on November 16,
1999, between the Registrant and Northrop Grumman
Corporation is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K dated
November 16, 1999.
10.35 Registration Rights Agreement, dated as of November 16,
1999, between the Registrant and Northrop Grumman
Corporation is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K dated
November 16, 1999.
10.36 Stock Purchase Warrant issued on February 4, 2000 by the
Registrant to Northrop Grumman Corporation is incorporated
herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the period ended December 31, 1999.
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.37 Promissory Note, dated October 6, 1999, made in favor of the
Registrant by Michael C. Turmelle in the amount of $10,000,
together with Promissory Note, dated December 6, 1999, made
in favor of the Registrant by Michael C. Turmelle in the
amount of $75,000, is incorporated herein by reference to
the Registrant's Quarterly Report on Form 10-Q for the
period ended December 31, 1999.
10.38 Demand Promissory Note, dated February 25, 2000, made in
favor of the Registrant by Beacon Power Corporation in the
amount of $300,000, together with First Amendment to Demand
Promissory Note, dated March 16, 2000 is incorporated by
reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the period ended March 31, 2000.
10.39 Consulting Agreement, dated July 19, 2000, between the
Registrant and Marshall J. Armstrong is incorporated herein
by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2000.
10.40 Agreement between the Department of Energy and the
Registrant.
16 Letter Regarding Registrant's Change in Certifying
Accountant is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K dated May 12,
1999.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
99 Risk Factors.
</TABLE>
------------------------
(*) Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to the Annual Report on Form 10-K for the year ended
September 30, 1999.
85
