<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 14, 2000
REGISTRATION NO. 333-48936
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SATCON TECHNOLOGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3674 04-2857552
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
161 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142-1221
(617) 661-0540
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
DAVID B. EISENHAURE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SATCON TECHNOLOGY CORPORATION
161 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142-1221
(617) 661-0540
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
--------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
JEFFREY N. CARP, ESQ. DAVID B. WALEK, ESQ.
HALE AND DORR LLP ROPES & GRAY
60 STATE STREET ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110
TELEPHONE: (617) 526-6000 TELEPHONE: (617) 951-7000
TELECOPY: (617) 526-5000 TELECOPY: (617) 951-7050
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ________________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 14, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SHARES
[LOGO]
COMMON STOCK
$ PER SHARE
-----------------------------------------------------------------------------
SatCon Technology Corporation is offering shares of common stock with this
prospectus. All of the shares are being sold by SatCon.
The common stock is listed on the Nasdaq National Market under the symbol
"SATC." On December 13, 2000, the last reported sale price of our common stock
on the Nasdaq National Market was $13.50 per share.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Price to the public......................................... $ $
Underwriting discounts and commissions...................... $ $
Net proceeds to SatCon...................................... $ $
</TABLE>
SatCon has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of additional
shares from SatCon at the public offering price, less the underwriting discount,
within 30 days following the date of this prospectus to cover over-allotments.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares to purchasers on , 2001.
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
BANC OF AMERICA SECURITIES LLC
FAC/EQUITIES
The date of this prospectus is , 2001
<PAGE>
Description of the inside of the prospectus cover and the two-page graphical
fold-out:
At the top of the inside of the cover page is the heading "Turning Tomorrow's
Technology Into Today's Products" half on the white border and half on the blue
background of the page.
The first picture, above the caption "Manufacturing Facility at Film
Microelectronics Division," depicts two employees in sanitary clothing, gloves
and protective eyewear working with various materials in the manufacturing
process.
The second picture, above the caption "Manufacturing Facility at Magmotor
Division," depicts four employees wearing lab coats assembling products.
In the lower right hand corner of the page, half on the blue background and half
on the white border, is the SatCon logo.
The fold out contains several pictures and a graphic set on a white background
with blue borders at the top and bottom of the pages. Reading right to left
across both pages and printed in gray on the white background are the words "IPS
System" (near the top of the pages), "Fuel Cells" (near the center of the pages)
and "Microturbines" (near the bottom of the pages).
At the top of the foldout is the heading "SatCon Technology Corporation." Just
below is the heading "The Future of Power and Energy Management." The foldout is
divided by a blue vertical line on the right page. The pictures on the left of
the blue line are under the heading "our products." The artistic rendition and
pictures on the right of the blue line are under the heading "end uses."
Under the heading "our products" and above the caption "Beacon Power Flywheel
Energy Storage System" is a picture of a flywheel and the flywheel cover. Below
that picture on the left page, and above the caption "High Performance Motors"
are pictures of six motors of varying size. On the right half of the left page,
and at the vertical center, above the caption "Hybrid Microcircuits" is a
picture of a rectangular circuit board. Two pictures are centered on the fold of
the two pages. The top picture, above the caption "Power Conversion Systems"
depicts a power conversion system with various electronic components, wires, and
metal framework, bearing the SatCon logo. The bottom picture, above the caption
"100hp Electric Drivetrain" is a electric motor bearing the name "Chrysler
Electric."
Under the heading "end uses" is an artistic rendition depicting a residential
fuel cell and surrounding landscaping. To the right of the rendition is the
caption "Residential Fuel Cell Distributed Power Generation Systems." Below are
side-by-side photographs of a cellular telephone and a satellite with the
caption "Wireless Telecommunications Products." At the bottom of the page is a
photograph of a Chrysler minivan with a caption to the right reading "Chrysler's
EPIC (Electric Powered Intraurban Commuter) Minivan."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Forward-Looking Statements; Market Data..................... 19
Use of Proceeds............................................. 20
Price Range of Common Stock................................. 21
Dividend Policy............................................. 21
Capitalization.............................................. 22
Dilution.................................................... 23
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 35
Management.................................................. 55
Certain Transactions........................................ 58
Principal Stockholders...................................... 61
Description of Capital Stock................................ 63
Underwriting................................................ 65
Legal Matters............................................... 67
Experts..................................................... 67
Where You Can Find More Information......................... 68
Index to Financial Statements............................... F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE MAKING AN INVESTMENT DECISION. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE SECTION TITLED "RISK FACTORS" AND THE
FINANCIAL STATEMENTS AND NOTES RELATING TO THOSE STATEMENTS.
SATCON TECHNOLOGY CORPORATION
OVERVIEW
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 and our affiliate, Beacon Power Corporation, are focusing our development and
manufacturing efforts on products for high-growth markets in the following
categories:
<TABLE>
<CAPTION>
PRODUCT CATEGORY PRODUCTS MARKETS
---------------- -------- -------
<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>
MARKET OPPORTUNITY
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.
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,
1
<PAGE>
- Growing demand for high-quality power, as more mission-critical and
sensitive electronics are connected to the electric utility grid,
- Capacity constraints on the electric utility grid that have resulted in
decreased reliability in certain power markets, and
- Heightening environmental concerns regarding transportation vehicles and
conventional power generation.
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.
Assuming sustained investment, according to the Electric Power Research
Institute's, or EPRI's, July 1999 ELECTRICITY TECHNOLOGY ROADMAP, at least 20
gigawatts of distributed resources are forecast for installation in the United
States in the coming decade.
We are focused on selling our enabling products into the markets 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, GridLink-TM- utility interface,
high-performance motors and electric drivetrains and a flywheel energy storage
system being developed by Beacon Power. We believe our solution encompasses the
following key attributes demanded by the emerging distributed power and power
quality markets:
- PERFORMANCE. We 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.
- EFFICIENCY. We apply our power electronics expertise to design and
manufacture our products to meet the efficiency needs of our customers.
- LOW-COST. We design our products to be low-cost by making them as compact
and as easy to manufacture as possible.
- HIGH POWER DENSITY. We engineer our products to convert, condition and
manage large amounts of energy within a compact design.
- FLEXIBILITY. We develop and manufacture products for use in various
distributed power generation systems and many of our products 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
2
<PAGE>
multiple applications, our success should be less dependent upon the adoption of
a specific application or on the 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.
- ESTABLISH OUR PRODUCTS AS INDUSTRY STANDARDS. We believe that our
engineering expertise, high-reliability manufacturing and industry
relationships will position us to establish the industry standards for our
products.
- INSTALL LOW-COST, HIGH-VOLUME MANUFACTURING CAPABILITIES. We are
developing and installing semi-automated manufacturing processes and
expanding our manufacturing capacity in order to reduce costs as
production volumes increase.
- 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.
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 their residential fuel cell power generation
systems. In addition, we have received an order from Nuvera Fuel Cells, Inc. 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 their industrial fuel cell power generation system. A major
automotive manufacturer is evaluating our high-performance motors for auxiliary
uses in fuel cell hybrid-electric vehicles. Beacon Power has received a sales
commitment for 100 flywheel energy storage systems from TLER Associates, Ltd., a
Mexican telephone company, and a sales commitment for flywheels from Cox
Communications, Inc. In addition, Beacon Power 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 CORPORATION
SatCon has been developing flywheels for energy storage and other applications
since 1985. In May 1997, we formed Beacon Power to develop stationary,
terrestrial flywheel energy storage systems for commercial applications. These
systems are designed to offer customers an environmentally cleaner, more
reliable alternative to lead-acid batteries for energy storage and power quality
management. 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 initial market focus is to provide
a flywheel energy storage system to telecommunication service providers who must
maintain electricity during power outages. We believe that the economics of a
flywheel energy storage system will compare favorably to lead-acid batteries in
many applications. As of November 30, 2000, we beneficially owned approximately
25.3% of Beacon Power's common stock.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by SatCon.............................. shares
Common stock to be outstanding after the offering........... shares
Use of proceeds............................................. We intend to use the net proceeds from
this offering for manufacturing
equipment, manufacturing facilities and
other capital expenditures, for general
corporate purposes, including research
and development and working capital,
and for acquisitions that could provide
additional product offerings,
additional industry expertise, a
broader client base or an expanded
geographic presence. See "Use of
Proceeds."
Nasdaq National Market symbol............................... SATC
</TABLE>
The number of shares outstanding after this offering is based on our shares of
common stock outstanding as of September 30, 2000 and excludes:
- 1,877,105 shares subject to options outstanding as of September 30, 2000
at a weighted average exercise price of $11.89 per share,
- 276,450 additional shares reserved for issuance under our stock option
plans, and
- 977,000 shares subject to warrants outstanding as of September 30, 2000 at
a weighted average exercise price of $8.61.
------------------------
Except as otherwise noted, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option and all references to years,
or year end, refer to our fiscal year end of September 30.
SatCon was organized as a Massachusetts corporation in February 1985 and
reincorporated as a Delaware corporation in 1992. Our principal office is
located at 161 First Street, Cambridge, Massachusetts 02142, and our telephone
number is (617) 661-0540.
GridLink-TM-, MagLev-TM-, MegaVerter-TM- and PowerGate-TM- are trademarks of
SatCon. All other trademarks or trade names referred to in this prospectus are
the property of their respective owners.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Set forth below are our summary consolidated statements of operations data for
the years ended September 30, 1998, 1999 and 2000, and summary balance sheet
data as of September 30, 2000, on an actual basis and on an as adjusted basis to
give effect to the sale of shares of our common stock in this
offering at an assumed public offering price of $ per share, after
deducting underwriting discounts and commissions and the estimated offering
expenses payable by us.
Our financial statements for the years ended September 30, 1998 and 1999 have
been restated. All financial information included in this prospectus reflects
the restatements. For a discussion of the restatements, see our financial
statements and related notes included elsewhere in this prospectus.
The statement of operations for the year ended September 30, 2000 includes the
results of Ling Electronics beginning from October 21, 1999, the date on which
we acquired Ling Electronics. Unaudited pro forma combined consolidated
statements of operations for the years ended September 30, 1999 and 2000 that
give effect to the acquisition as if it had occurred as of October 1, 1998
appear elsewhere in this prospectus.
This information should be read in conjunction with our consolidated financial
statements and related notes and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Product revenue........................................... $ 7,520 $ 9,123 $ 22,427
Funded research and development revenue................... 8,011 6,355 8,628
------- -------- --------
Total revenue............................................. 15,531 15,478 31,055
Cost of product revenue................................... 5,474 9,511 19,069
------- -------- --------
Gross margin.............................................. 10,057 5,967 11,986
------- -------- --------
Research and development expenses......................... 6,794 6,554 10,301
Selling, general and administrative expenses.............. 4,523 8,819 9,970
Amortization of intangibles............................... 291 371 1,217
------- -------- --------
Total operating expenses.................................. 11,608 15,744 21,488
------- -------- --------
Operating loss............................................ (1,551) (9,777) (9,502)
Other income (expense), net............................... 170 (224) 460
------- -------- --------
Net loss before income taxes and loss from Beacon Power
Corporation............................................. (1,381) (10,001) (9,042)
Provision for income taxes................................ (4) -- --
Loss from Beacon Power Corporation........................ (3,473) (4,341) (899)
------- -------- --------
Net loss.................................................. (4,858) (14,342) (9,941)
Accretion of redeemable convertible preferred stock
discount................................................ -- (51) (3,106)
------- -------- --------
Net loss attributable to common stockholders.............. $(4,858) $(14,393) $(13,047)
======= ======== ========
Net loss per share, basic and diluted..................... $ (0.54) $ (1.57) $ (1.03)
======= ======== ========
Weighted average number of common shares, basic and
diluted................................................. 8,957 9,176 12,630
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................. $ 8,814
Total assets.............................................. 44,487
Working capital........................................... 18,390
Total long term liabilities, net of current portion....... 214
Contingent obligation to class D preferred stockholders of
Beacon Power Corporation................................ 5,794
Stockholders' equity...................................... 31,118
</TABLE>
6
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISKS BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. ADDITIONAL RISKS NOT
PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS. ANY OF THESE RISKS COULD HAVE A MATERIAL AND NEGATIVE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS
WE EXPECT TO GENERATE A SIGNIFICANT PORTION OF OUR FUTURE REVENUES FROM SALES OF
OUR PRODUCTS TO THE DISTRIBUTED POWER AND POWER QUALITY MARKETS, AND NO
ASSURANCE CAN BE GIVEN THAT WE WILL REALIZE ANY OF THESE REVENUES.
On-site distributed power and power quality solutions, such as fuel cells and
microturbines, which utilize our products are relatively new methods of
producing electricity and have not historically accounted for much revenue in
the electricity generation market. We have no experience manufacturing large
volumes of our products for mass marketed fuel cell and microturbine systems,
and, as a result, we currently generate only limited revenues from these
products. Additionally, the existing market for these alternative distributed
power products is limited, and there can be no assurance that this market will
develop or that our products will be demanded in sufficient quantities to
generate our expected revenues. If any of the foregoing were to occur, we would
not achieve our anticipated levels of profitability and growth, and we may have
to refocus our business on other new or existing product lines.
WE CANNOT ASSURE MARKET ACCEPTANCE OR COMMERCIAL VIABILITY OF OUR DISTRIBUTED
POWER AND POWER QUALITY PRODUCTS.
We intend to continue to expand development of our products for the distributed
power generation and power quality markets. However, we cannot assure you that
manufacturers of these distributed power solutions will select our products to
be incorporated into their solutions. Additionally, we cannot assure you that
our customers' products will realize market acceptance, that they will meet the
technical demands of their end users or that they will offer cost-effective
advantages over existing utilities. Our marketing efforts to date involve
development contracts with several customers, identification of specific market
segments for power and energy management systems and the continuation of
marketing efforts of recently acquired businesses. We cannot know if our
commercial marketing efforts will be successful in the future. Furthermore, we
cannot assure you that our products, in their current form, will be suitable for
specific commercial applications or that further design modifications, beyond
anticipated changes to accommodate different markets, will not be necessary.
Additionally, we may not be able to develop competitive products, our products
may not receive market acceptance, and we may not be able to profitably compete
in this market even if market acceptance is achieved. If our products do not
gain market acceptance or commercial viability, we will not achieve our
anticipated levels of profitability and growth.
WE HAVE NO EXPERIENCE MANUFACTURING PRODUCTS FOR DISTRIBUTED POWER AND POWER
QUALITY SYSTEMS ON A COMMERCIAL BASIS.
To date, we have focused primarily on research and development and have no
experience manufacturing products for distributed power and power quality
systems on a commercial basis. We have 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. We are
also continuing to develop our manufacturing capabilities and processes. We do
not know whether or when we will be able to fully develop efficient, low-cost
manufacturing capability and processes that will enable us to meet the quality,
price, engineering, design and production standards or production volumes
required to successfully mass market our distributed power and power quality
products. Even if we are successful in developing our manufacturing
7
<PAGE>
capability and processes, we do not know whether we will do so in time to meet
our product commercialization schedule or to satisfy the requirements of our
customers.
WE HAVE RECENT AND ANTICIPATED OPERATING LOSSES.
We have recorded net losses for the fiscal years ended September 30, 1995, 1996,
1997, 1998, 1999 and 2000. In order to achieve profitability, we must achieve
all or some combination of the following:
- successfully compete in the market for distributed power and power quality
products,
- develop new products for our existing markets,
- sell these products to existing and new customers,
- increase gross margins through higher volumes and manufacturing efficiencies,
- control our operating expenses, and
- develop and manage our distribution capability.
If our revenue does not increase significantly or the increase in our expenses
is greater than expected, we may not achieve or sustain profitability or
generate positive cash flow in the future. We cannot assure you that we will
accomplish these objectives or be profitable in the future. We expect to
continue to incur operating losses at least through fiscal year 2001, and we may
never become profitable.
WE MAY NOT BE ABLE TO DEVELOP OR SELL OUR DISTRIBUTED POWER, POWER QUALITY AND
OTHER PRODUCTS UNDER DEVELOPMENT.
We have a number of potential products under development including our
residential fuel cell power conversion system and the converter, inverter and
controller contained in this conversion system. We face many technological
challenges that we must successfully address to complete our development
efforts. Our product development involves a high degree of risk and may require
significant capital resources to enable us to be a low-cost, high-volume
manufacturer of reliable products meeting our customers' needs. Returns to our
investors are dependent upon successful development and commercialization of our
potential products. For example, the successful development of our distributed
power and power quality products will require significant investment in research
and development before we can determine whether the development of our
technology was successful and whether the resulting products will be
commercially viable and accepted by the marketplace. In addition, many proposed
products based on our technologies will require significant additional
expenditures for research and development. We cannot assure you that any of the
products we are developing, or those that we develop in the future, will be
technologically feasible or accepted by the marketplace. Also, we cannot assure
you that any of our product development will be completed on schedule, or at all
and, as a result, you may lose all or part of your investment.
WE ARE HEAVILY DEPENDENT ON CONTRACTS WITH THE U.S. GOVERNMENT, AND PARTICULARLY
THE U.S. DEPARTMENT OF ENERGY, FOR REVENUE TO DEVELOP OUR DISTRIBUTED POWER AND
POWER QUALITY PRODUCTS, AND THE LOSS OF ONE OF OUR GOVERNMENT CONTRACTS COULD
PRECLUDE US FROM ACHIEVING OUR ANTICIPATED LEVELS OF GROWTH AND REVENUES.
Our ability to develop and market our products is heavily dependent upon
maintaining our U.S. government contract revenue and research grants. Most of
our U.S. government contracts are funded incrementally on a year-to-year basis.
Approximately 21% of our revenue during fiscal year 2000 was derived from
government contracts and subcontracts. Any change in our relationship with the
U.S. government or its agencies whether as a result of market, economic, or
competitive pressures, including any decision by the U.S. government to alter
its commitment to our research and development efforts could harm our business
and financial condition by depriving us of the resources necessary to develop
our distributed power and power quality products. Furthermore, contracts with
the U.S. government may be terminated or suspended by the U.S. government at any
time, with or without cause. There can be no assurance that our U.S. government
contracts will not be terminated or suspended in the future, or that contract
suspensions or terminations will not result in unreimbursable expenses or
charges or other adverse effects on us. See "Business--Government Contracts."
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The accuracy and appropriateness of our direct and indirect costs and expenses
under our contracts with the U.S. government are subject to extensive regulation
and audit by the Defense Contract Audit Agency or by other appropriate agencies
of the U.S. government. These agencies have the right to challenge our cost
estimates or allocations with respect to any such contract. Additionally, a
substantial portion of the payments to us under U.S. government contracts are
provisional payments that are subject to potential adjustment upon audit by such
agencies. Adjustments that result from inquiries or audits of our contracts
could have a material adverse impact on our financial condition or results of
operations. Since our inception, we have not experienced any material
adjustments as a result of any inquiries or audits, but there can be no
assurance that our contracts will not be subject to material adjustments in the
future.
In the event that any of our government contracts are terminated for cause, it
could significantly affect our ability to obtain future government contracts
which could seriously harm our ability to develop our technologies and products.
In addition, our participation in various government business programs depends
upon our continuing eligibility under the regulations of the United States Small
Business Administration. Qualification under these regulations is based upon the
standard industrial classification of the product or service that is the subject
of the program and the level of our revenues and the number of our employees.
Although our current awards under government programs such as the Small Business
Innovative Research, or SBIR, program and small business procurement set-asides
and preferences will not be affected by increases in the level of our revenues
or the number of our employees, as we grow, we may lose our ability to
participate in these programs in the future. Under these circumstances, although
we will still be able to participate in general government contract and
cooperative agreement programs, we will lose our ability to benefit in the
future from many of the programs in which we have historically participated.
During our fiscal years ended September 30, 1999 and 2000, 11.9% and 5.8%,
respectively, of our revenues have been obtained under the SBIR program.
A SIGNIFICANT PORTION OF OUR REVENUE IS DERIVED FROM CONTRACTS WITH THE U.S.
GOVERNMENT AND ITS AGENCIES OR FROM SUBCONTRACTS WITH THE U.S. GOVERNMENT'S
PRIME CONTRACTORS AND A SLOWDOWN IN GOVERNMENT SPENDING MAY ADVERSELY AFFECT OUR
ABILITY TO OBTAIN ANTICIPATED REVENUES.
Changes in government policies, priorities or funding levels through agency or
program budget reductions by the U.S. Congress or executive agencies or the
imposition of budgetary constraints could significantly impair our ability to
achieve this level of revenue going forward. Any reductions or slowdowns in
government spending could also severely inhibit our ability to successfully
complete the development and commercialization of our products.
THE U.S. GOVERNMENT HAS CERTAIN RIGHTS RELATING TO OUR INTELLECTUAL PROPERTY.
Many of our patents 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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IF WE ARE UNABLE TO MAINTAIN OUR TECHNOLOGICAL EXPERTISE IN DESIGN AND
MANUFACTURING PROCESSES, WE WILL NOT BE ABLE TO SUCCESSFULLY COMPETE.
We believe that our future success will depend upon our ability to develop and
provide distributed power and power quality products that meet the changing
needs of our customers. This requires that we successfully anticipate and
respond to technological changes in design and manufacturing processes in a
cost-effective and timely manner. As a result, we continually evaluate the
advantages and feasibility of new product design and manufacturing processes. We
cannot, however, assure you that our process development efforts will be
successful. The introduction of new products embodying new technologies and the
emergence of shifting customer demands or changing industry standards could
render our existing products obsolete and unmarketable which would have a
significant impact on our ability to generate revenue. Our future success will
depend upon our ability to continue to develop and introduce a variety of new
products and product enhancements to address the increasingly sophisticated
needs of our customers. This will require us to continue to make substantial
product development investments. We may experience delays in releasing new
products and product enhancements in the future. Material delays in introducing
new products or product enhancements may cause customers to forego purchases of
our products and purchase those of our competitors.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR PATENTS
AND PROPRIETARY TECHNOLOGY.
We currently own 58 U.S. patents which expire between 2007 and 2018. We also
have 14 patent applications pending with the U.S. Patent and Trademark Office.
As a qualifying small business from our inception to date, we have retained
commercial ownership rights to proprietary technology developed under various
U.S. government contracts and grants.
Our patent and trade secret rights are of significant importance to us and to
our future prospects. Our ability to compete effectively against other companies
in our industry will depend, in part, on our ability to protect our proprietary
technology and systems designs relating to our distributed power and power
quality products. Although we have attempted to safeguard and maintain our
proprietary rights, we do not know whether we have been or will be successful in
doing so. Further, our competitors may independently develop or patent
technologies that are substantially equivalent or superior to ours. No assurance
can be given as to the issuance of additional patents or, if so issued, as to
their scope. Patents granted may not provide meaningful protection from
competitors. Even if a competitor's products were to infringe patents owned by
us, it would be costly for us to pursue our rights in an enforcement action, it
would divert funds and resources which otherwise could be used in our operations
and there can be no assurance that we would be successful in enforcing our
intellectual property rights. Because we intend to enforce our patents,
trademarks and copyrights and protect our trade secrets, we may be involved from
time to time in litigation to determine the enforceability, scope and validity
of these rights. This litigation could result in substantial costs to us and
divert efforts by our management and technical personnel. In addition, effective
patent, trademark, service mark, copyright and trade secret protection may not
be available in every country where we operate or sell our products.
WE MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF OUR PROPRIETARY KNOWLEDGE.
In addition to our patent rights, we also rely on treatment of our technology as
trade secrets and upon confidentiality agreements, which all of our employees
are required to sign, assigning to us all patent rights and technical or other
information developed by the employees during their employment with us. We also
rely, in part, on contractual provisions to protect our trade secrets and
proprietary knowledge. Our employees have also agreed not to disclose any trade
secrets or confidential information without our prior written consent. These
agreements may be breached, and we may not have adequate remedies for any
breach. Our trade secrets may also be known without breach of these agreements
or may be independently developed by competitors. Our inability to maintain the
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proprietary nature of our technology and information could harm our business,
results of operations and financial condition by adversely affecting our ability
to compete in our markets.
OTHERS MAY ASSERT THAT OUR TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY
RIGHTS.
We believe that we do not infringe the proprietary rights of others and, to
date, no third parties have asserted an infringement claim against us, but we
may be subject to infringement claims in the future. The defense of any claims
of infringement made against us by third parties could involve significant legal
costs and require our management to divert time from our business operations. If
we are unsuccessful in defending any claims of infringement, we may be forced to
obtain licenses or to pay royalties to continue to use our technology. We may
not be able to obtain any necessary licenses on commercially reasonable terms or
at all. If we fail to obtain necessary licenses or other rights, or if these
licenses are costly, our operating results may suffer either from reductions in
revenues through our inability to serve customers or from increases in costs to
license third-party technologies.
WE HAVE EXCLUSIVELY LICENSED OUR INTELLECTUAL PROPERTY RIGHTS FOR OUR FLYWHEEL
TECHNOLOGY FOR STATIONARY, TERRESTRIAL APPLICATIONS TO OUR AFFILIATE, BEACON
POWER, WHOM WE NO LONGER CONTROL, AND BEACON POWER'S DECISIONS REGARDING THE USE
OR DEVELOPMENT OF THIS INTELLECTUAL PROPERTY MAY NOT BE IN OUR BEST INTEREST.
In 1997, we granted Beacon Power a perpetual, worldwide, royalty-free, exclusive
right and license to our flywheel technology for stationary, terrestrial
applications. In the future, we may not agree with strategic decisions made by
Beacon Power, including decisions relating to product development, marketing and
market focus, and we will be unable to alter any strategic decisions with which
we do not agree. There can be no assurance that Beacon Power will pursue market
opportunities that complement our products in a timely manner, or at all. As a
result, even though we developed the technology used by Beacon Power, we may not
be able to address the market demand for stationary, terrestrial flywheel energy
storage systems unless we develop or license alternative technology to meet the
needs of our customers. There can be no assurance that any alternative
technology will be developed or will be available to us under a license on
acceptable terms, or at all. In addition, we may not agree with the terms and
conditions of any future Beacon Power financings. We anticipate that our
economic stake in Beacon Power will continue to be substantially diluted in the
future as Beacon Power obtains additional public or private funding to pursue
its business plan.
WE CANNOT ASSURE MARKET ACCEPTANCE OR COMMERCIAL VIABILITY OF BEACON POWER'S
STATIONARY FLYWHEEL ENERGY STORAGE SYSTEM OR ANY OF ITS OTHER PRODUCTS.
The existing market for Beacon Power's alternative distributed power products is
limited, and there can be no assurance that this market will develop or that
Beacon Power's products will realize market acceptance or be demanded in
sufficient quantities to generate anticipated revenues. Even if market
acceptance is achieved, there can be no assurance that Beacon Power can
profitably compete in this market. In addition, Beacon Power's products may not
function as anticipated or may not compete effectively with other products
produced by their competitors, and we cannot assure you that Beacon Power's
products will meet the technical demands of their end-users or that they will
offer cost-effective advantages over existing technologies. If any of the
foregoing were to occur, Beacon Power would not achieve its anticipated levels
of profitability and growth which would diminish the value of our investment in
Beacon Power.
Many proposed products based on technologies owned by or licensed to Beacon
Power will require significant additional capital expenditures for research and
development. We cannot assure you that any of the products Beacon Power is
developing, or those that they develop in the future, will be technologically
feasible, suitable for specific commercial applications without design
modifications beyond anticipated changes to accommodate different markets or
accepted by the marketplace. In addition, we cannot assure you that Beacon
Power's product development will be completed on schedule, or at all. If Beacon
Power is unable to successfully develop and market, on a commercially viable
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basis, its flywheel products, the value of our investment in Beacon Power could
be significantly diminished.
LOSS OF ANY OF OUR KEY PERSONNEL, AND PARTICULARLY OUR CHIEF EXECUTIVE OFFICER,
COULD HURT OUR BUSINESS BECAUSE OF THEIR EXPERIENCE, CONTACTS AND TECHNOLOGICAL
EXPERTISE.
The loss of the services of one or several of our key employees or an inability
to attract, train and retain qualified and skilled employees, specifically
engineering and sales personnel, could result in the loss of customers or
otherwise inhibit our ability to operate and grow our business successfully. In
addition, our ability to successfully integrate acquired facilities or
businesses depends, in part, on our ability to retain and motivate key
management and employees hired by us in connection with these acquisitions. We
are particularly dependent upon the services of David B. Eisenhaure, our
president, chief executive officer, chairman of the board and founder as a
result of his business and academic relationships, understanding of government
contracts and technical expertise. The loss of Mr. Eisenhaure's services would
have a material adverse effect on our business and results of operations,
including our ability to attract employees and obtain future contract research
and development.
WE EXPECT SIGNIFICANT COMPETITION FOR OUR PRODUCTS AND SERVICES.
To date, we have faced only limited competition in providing research services,
prototype development and custom and limited quantity manufacturing. We expect
competition to intensify greatly as commercial applications increase for our
products under development. Many of our competitors and potential competitors
are well established and have substantially greater financial, research and
development, technical, manufacturing and marketing resources than we do. Some
of our competitors and potential competitors are much larger than we are. If
these larger competitors decide to focus on the development of distributed power
and power quality products, they have the manufacturing, marketing and sales
capabilities to complete research, development and commercialization of these
products more quickly and effectively than we can. There can also be no
assurance that current and future competitors will not develop new or enhanced
technologies perceived to be superior to those sold or developed by us. There
can be no assurance that we will be successful in this competitive environment.
PRICE INCREASES OF MATERIALS OR COMPONENTS USED BY US COULD ADVERSELY AFFECT THE
VOLUME OF OUR SALES.
We use materials and components obtained from third-party suppliers to
manufacture many of our products. We expect this to continue as we increase our
manufacturing capabilities and move into high volume production. If prices of
materials and components that we use were to increase, we may not be able to
afford them or to pass these costs on to our customers. In addition, if we were
required to raise the price of our products as a result of increases in the
price of materials or components that we use, demand for our products may
decrease which would reduce our sales. To date, we have not entered into
long-term contracts which fix prices or limit price increases for materials or
components during the term of the contract and we do not expect to do so in the
future.
WE ARE DEPENDENT ON THIRD-PARTY SUPPLIERS FOR THE DEVELOPMENT AND SUPPLY OF KEY
COMPONENTS FOR OUR PRODUCTS.
From time to time, shipments can be delayed because of industry-wide or other
shortages of necessary materials and components from third-party suppliers. A
supplier's failure to develop and supply components in a timely manner, or to
supply components that meet our quality, quantity or cost requirements, or our
inability to obtain substitute sources of these components on a timely basis or
on terms acceptable to us, could impair our ability to manufacture our products.
In addition, to the extent the processes that our suppliers use to manufacture
components are proprietary, we may be unable to obtain comparable components
from alternative suppliers.
LONG-TERM CONTRACTS ARE NOT TYPICAL IN OUR BUSINESS, AND REDUCTIONS,
CANCELLATIONS OR DELAYS IN CUSTOMER ORDERS WOULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
We do not usually obtain long-term purchase orders or commitments from our
customers. Instead, we work closely with our customers to
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develop non-binding forecasts of the future volume of orders. Customers may
cancel their orders, change production quantities from forecasted volumes or
delay production for a number of reasons beyond our control. Significant or
numerous cancellations, reductions or delays in orders by our customers would
reduce our net sales. From time to time we make capital investments in
anticipation of future business opportunities like the significant investment we
are making to install a semi-automated production line in our Marlborough,
Massachusetts facility for residential fuel cell power conversion systems. There
can be no assurance that we will receive the anticipated business that supports
these investments. If we are unable to obtain this anticipated business, we may
not be able to successfully compete in our markets.
IF WE EXPERIENCE A PERIOD OF SIGNIFICANT GROWTH OR EXPANSION, IT COULD PLACE A
SUBSTANTIAL STRAIN ON OUR RESOURCES.
If we are successful in obtaining rapid market penetration of our products, we
will be required to deliver large volumes of quality products or components to
our customers and licensees on a timely basis and at reasonable costs to us. We
have limited experience in delivering large volumes of our products and have
limited capacity to meet wide-scale production requirements. We cannot assure
you that our efforts to expand our manufacturing and quality assurance
activities will be successful, that we will be able to satisfy large-scale
commercial production on a timely and cost-effective basis or that growth will
not strain our management, operational and technical resources. We will also be
required to continue to improve our operational, management and financial
systems and controls to meet anticipated growth. Failure to manage our growth
could damage our relationships with our customers and our investors and be
extremely costly to try to resolve.
WE MAY NEED ADDITIONAL FINANCING FOR OUR FUTURE CAPITAL NEEDS AND MAY NOT BE
ABLE TO RAISE ADDITIONAL FUNDS ON TERMS ACCEPTABLE TO US, OR AT ALL.
If we are unable to increase our revenues and achieve positive cash flow, we
will need to raise additional funds. We may also need additional financing if
we:
- need additional cash to fund research and development costs of products
currently under development,
- decide to expand faster than currently planned,
- develop new or enhanced services or products ahead of schedule,
- need to respond to competitive pressures, or
- decide to acquire complementary products, businesses or technologies.
We cannot assure you that we will be able to raise additional funds on terms
acceptable to us, if at all. If future financing is not available or is not
available on acceptable terms, we may not be able to fund our future needs which
would significantly limit our ability to implement our business plan. In
addition, we may have to issue securities that may have rights, preferences and
privileges senior to our common stock.
WE INTEND TO PURSUE STRATEGIC ACQUISITIONS, AND FAILURE TO SUCCESSFULLY
INTEGRATE ACQUIRED BUSINESSES OR ASSETS MAY ADVERSELY AFFECT OUR FINANCIAL
PERFORMANCE.
A component of our business strategy is to seek the acquisition of businesses,
products, assets and technologies that complement or augment our existing
businesses, products, assets and technologies. Since 1997, we have expanded our
business and capabilities through the acquisition of six businesses and
intellectual property, tooling and other assets from another entity.
Acquisitions are difficult to identify and complete for a number of reasons,
including competition among prospective buyers and the need for regulatory
approvals, including antitrust approvals. We cannot assure you that we will be
able to successfully identify acquisition candidates or complete future
acquisitions. We cannot assure you that we will be able to operate acquired
businesses profitably or otherwise implement our growth strategy successfully.
The successful combination of companies in a rapidly changing industry such as
ours may be more difficult to accomplish than in other industries. Our ability
to integrate any newly acquired entities will require us to continue to improve
our operational, financial and management
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information systems and to motivate and effectively manage our employees. If our
management is unable to manage growth effectively, the quality of our products,
our ability to identify, hire and retain key personnel and our results of
operations could be materially and adversely affected.
Although successfully completing future acquisitions is an important part of our
overall business strategy, any future acquisitions that we make could result in:
- difficulty in integrating our operations, technologies, systems, products and
services with those of the acquired facility,
- difficulty in operating in foreign countries, in the case of acquisitions that
we make outside the United States, and over significant geographical
distances,
- diversion of our capital and our management's attention away from other
business issues,
- an increase in our expenses and our working capital requirements,
- potential loss of our key employees and customers of facilities or businesses
we acquire, and
- financial risks, such as:
- potential liabilities of the facilities and businesses we acquire,
- our need to incur additional indebtedness, and
- dilution if we issue additional equity securities.
OUR BUSINESS COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
Our business exposes us to potential product liability claims which are inherent
in the manufacturing, marketing and sale of our products, and we may face
substantial liability for damages resulting from the faulty design or
manufacture of products or improper use of products by end users. We currently
maintain a low level of product liability insurance, and there can be no
assurance that this insurance will provide sufficient coverage in the event of a
claim. Also, we cannot predict whether we will be able to maintain such coverage
on acceptable terms, if at all, or that a product liability claim would not harm
our business or financial condition. In addition, negative publicity in
connection with the faulty design or manufacture of our products would adversely
affect our ability to market and sell our products.
WE ARE SUBJECT TO A VARIETY OF ENVIRONMENTAL LAWS THAT EXPOSE US TO POTENTIAL
FINANCIAL LIABILITY.
Our operations are regulated under a number of federal, state and foreign
environmental and safety laws and regulations that govern, among other things,
the discharge of hazardous materials into the air and water as well as the
handling, storage and disposal of these materials. These laws and regulations
include the Clean Air Act, the Clean Water Act, the Resource, Conservation and
Recovery Act, and the Comprehensive Environmental Response, Compensation and
Liability Act, as well as analogous state and foreign laws. Because we use
hazardous materials in our manufacturing processes, we are required to comply
with these environmental laws. In addition, because we generate hazardous
wastes, we, along with any other person who arranges for the disposal of our
wastes, may be subject to potential financial exposure for costs associated with
an investigation and any remediation of sites at which we have arranged for the
disposal of hazardous wastes if those sites become contaminated and even if we
fully comply with applicable environmental laws. In the event of a violation of
environmental laws, we could be held liable for damages and for the costs of
remedial actions. Environmental laws could also become more stringent over time,
imposing greater compliance costs and increasing risks and penalties associated
with any violation.
RISKS RELATING TO OUR INDUSTRY
BUSINESSES AND CONSUMERS MIGHT NOT ADOPT ALTERNATIVE DISTRIBUTED POWER SOLUTIONS
AS A MEANS FOR OBTAINING THEIR ELECTRICITY AND POWER NEEDS.
On-site distributed power generation solutions, such as fuel cell and
microturbine products, which utilize our products, provide an alternative means
for obtaining electricity, and are relatively new methods of obtaining
electricity and other forms of power that businesses and consumers may not adopt
at levels sufficient to sustain our business. Traditional electricity
distribution is based on the regulated industry model whereby
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businesses and consumers obtain their electricity from a government regulated
utility. For alternative methods of distributed power to succeed, businesses and
consumers must adopt new purchasing practices and must be willing to rely less
upon traditional means of purchasing electricity, and market participants must
be willing to produce products for alternative methods of power distribution. We
cannot assure you that businesses, consumers or market participants will choose
to utilize or service this on-site distributed power market at levels sufficient
to sustain our business. The development of a mass market for our products may
be impacted by many factors which are out of our control, including:
- market acceptance of fuel cell and microturbine systems that incorporate our
distributed power and power quality products,
- the cost competitiveness of fuel cell and microturbine systems that
incorporate our distributed power and power quality products,
- the future costs of natural gas, propane and other fuels used by our
customers' products versus future costs of other forms of fuel and/or power,
- consumer reluctance to try a new product,
- consumer perceptions regarding the safety of our customers' products,
- regulatory requirements, and
- the emergence of newer, more competitive technologies and products.
If a mass market fails to develop or develops more slowly than we anticipate, we
may be unable to recover the losses we will have incurred to develop these
products.
A MASS MARKET FOR HYBRID-ELECTRIC VEHICLES MAY NEVER DEVELOP OR MAY TAKE LONGER
TO DEVELOP THEN WE ANTICIPATE.
If a mass market fails to develop or develops more slowly than we anticipate for
hybrid-electric automobiles, we may be unable to recover the expenditures we
will have incurred to develop our products and may be unable to achieve
profitability in that portion of our business which could negatively impact our
overall profitability. Many factors which are out of our control may have a
negative effect on the development of a mass market for our hybrid-electric
vehicle components. These factors include:
- the competitiveness of alternative fuel vehicles,
- the availability, future costs and safety of hydrogen, natural gas or other
potential alternative fuels,
- consumer reluctance to adopt alternative fuel products,
- original equipment manufacturer reluctance to replace current technology,
- consumer perceptions,
- regulatory requirements, and
- the emergence of newer, breakthrough technologies and products by our
competitors in the alternative fuel vehicle market.
THE DISTRIBUTED POWER GENERATION INDUSTRY MAY BECOME SUBJECT TO FUTURE
GOVERNMENT REGULATION WHICH MAY IMPACT OUR ABILITY TO MARKET OUR PRODUCTS.
We do not believe that our products will be subject to existing federal and
state regulations governing traditional electric utilities and other regulated
entities. We do believe that our products will be subject to oversight and
regulation at the local level in accordance with state and local ordinances
relating to building codes, safety, pipeline connections and related matters.
Such regulation may depend, in part, upon whether an on-site distributed power
system is placed outside or inside a home. At this time, we do not know which
jurisdictions, if any, will impose regulations upon our products. We also do not
know the extent to which any existing or new regulations may impact our ability
to sell and service our products. Once our customers' products reach the
commercialization stage and they begin distributing systems to their target
markets, federal, state or local government entities may seek to impose
regulations. Any new government regulation of our products, whether at the
federal, state or local level, including any regulations relating to
installation and servicing of our products, may increase our costs and the price
of our products, and may have a negative impact on our revenue and
profitability.
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UNCERTAINTIES AND ADVERSE TRENDS AFFECTING THE DEREGULATION OF THE ELECTRIC
UTILITY INDUSTRY OR ANY OF OUR MAJOR CUSTOMERS MAY HARM OUR OPERATING RESULTS.
The growth of our distributed power generation business depends in large part on
the continued deregulation of the electric utility industry. Existing utility
companies, which have historically operated without competition, may attempt to
deter or delay the deregulation process. In addition, our customers may not be
able to compete effectively against existing utility companies in a deregulated
market. Changes in federal and state regulation may also have the effect of
deterring further investment in research and development of alternative energy
sources, including fuel cells and microturbines. Any changes in the deregulation
process or procedures, the inability of our customers to compete effectively
against existing utility companies or changes in federal or state regulation
which deter further investment in alternative energy sources would significantly
limit the demand for our products and our ability to generate anticipated levels
of revenue.
RISKS RELATING TO THIS OFFERING
OUR SHARE PRICE HAS BEEN SUBJECT TO EXTREME PRICE FLUCTUATIONS.
The markets for equity securities in general, and for those of other companies
in our industry, have been volatile, and the market price of our common stock,
which is traded on the Nasdaq National Market under the symbol SATC, may be
subject to significant fluctuations. This could be in response to operating
results, announcements of technological innovations or new products by us, our
competitors or our customers, patent or proprietary rights developments and
market conditions for distributed energy and high technology stocks in general.
In addition, the stock market in recent years has experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of individual companies. These market fluctuations, as
well as general economic conditions, may adversely affect the market price of
our common stock. Past fluctuations have coincided with fluctuations of other
public companies in the alternative energy sector, market responses to national
issues, public release of information regarding the introduction of new
products, the award of significant contracts, analyst downgrades of our
projected stock price and investment community enthusiasm for the alternative
energy sector. There can be no assurance that the trading price of our common
stock will remain at or near its current level.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS, AND IF WE FAIL TO
MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR SHARE PRICE MAY
DECREASE SIGNIFICANTLY.
Our annual and quarterly results may vary significantly depending on various
factors, many of which are beyond our control and may not meet the expectations
of securities analysts or investors. If this occurs, the price of our stock
could decline. Past material quarterly fluctuations have been caused by:
- variations in the timing and volume of customer orders relative to our
manufacturing capacity and staffing levels,
- the timing of our expenditures in anticipation of future orders,
- introduction and market acceptance of our customers' new products, and
- the level of research and development expenses incurred by us which are
unreimbursed.
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Future quarterly fluctuations could be caused by these factors and:
- our effectiveness in managing our manufacturing processes,
- changes in competitive and economic conditions generally or in our customers'
markets,
- the timing of, and the price we pay for, acquisitions and related integration
costs,
- changes in the cost or availability of components or skilled labor, and
- general economic conditions.
Because our operating expenses are based on anticipated revenue levels, our
sales cycle for development work is relatively long and a high percentage of our
expenses are fixed for the short term, a small variation in the timing of
recognition of revenue can cause significant variations in operating results
from quarter to quarter.
EXISTING STOCKHOLDERS CAN EXERT CONSIDERABLE CONTROL OVER US.
As of September 30, 2000, our officers and directors, and their affiliates,
beneficially held approximately 39.3% of our outstanding common stock of which
approximately 32.5% is beneficially held by Mr. Eisenhaure, our president, chief
executive officer, chairman of the board and founder. If all of these
stockholders were to vote together as a group, they would have the ability to
exert significant influence over our board of directors and its policies. As a
practical matter, Mr. Eisenhaure may have the ability to elect our directors and
to determine the outcome of corporate actions requiring stockholder approval,
including votes concerning director elections, by-law amendments and possible
mergers, corporate control contests and other significant corporate
transactions, irrespective of how some of our other stockholders may vote.
Accordingly, such concentration of ownership may have the effect of delaying,
deterring or preventing a change in control, impeding a merger, consolidation,
takeover or other business combination involving us, or discouraging a potential
acquirer from making a tender offer or otherwise attempting to obtain control of
us, which in turn could have an adverse effect on the market price of our common
stock.
WE COULD ISSUE ADDITIONAL COMMON STOCK, WHICH MIGHT DILUTE THE BOOK VALUE OF OUR
COMMON STOCK.
We have authorized 25,000,000 shares of our common stock, of which 13,841,185
shares were issued and outstanding as of September 30, 2000. In connection with
this offering, we will issue an additional [ ] shares of our common stock.
Our board of directors has the authority, without action or vote of our
stockholders, to issue all or part of the authorized but unissued shares. These
issuances would dilute your percentage ownership interest, which will have the
effect of reducing your influence on matters on which our stockholders vote, and
might dilute the book value of our common stock. See "Description of Capital
Stock--Common Stock."
THE SALE OF LARGE NUMBERS OF SHARES OF OUR COMMON STOCK COULD DEPRESS OUR STOCK
PRICE.
[ ] shares of common stock will be outstanding immediately following this
offering. In addition, as of September 30, 2000, we have reserved
2,854,105 shares of common stock for issuance upon exercise of stock options and
warrants and 276,450 shares for future issuances under our stock plans. All the
[ ] shares of common stock sold in this offering, plus any shares issued upon
exercise of the underwriters' over-allotment option in this offering, will be
freely transferable, unless they are held by our "affiliates" as that term is
used under the Securities Act. Of the [ ] remaining shares of common stock that
will be outstanding immediately following this offering, [ ] shares will be
transferable without restriction, [ ] shares will be transferable subject to
Rule 144 and lock-up agreements that prohibit any sales until 90 days following
this offering without the consent of the underwriters, and [ ] shares not
subject to lock-up agreements will be transferable pursuant to Rule 144. In
addition, as of September 30, 2000, holders of warrants and options to purchase
an aggregate of 1,340,764 shares of our common stock may exercise those
securities and transfer the underlying common stock at any time subject, in some
cases, to Rule 144. In accordance with registration rights that we have granted
to various individuals and entities
17
<PAGE>
requiring us to register their shares for public resale, we also have resale
registration statements in effect registering 4,935,322 shares of our common
stock.
The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market, or the perception that
such share sales could occur. These sales might also make it more difficult for
us to sell equity securities in the future at a price that we think is
appropriate, or at all.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
The public offering price is substantially higher than the net tangible book
value per share of our common stock. Therefore, you will incur immediate
dilution in net tangible book value of $ per share, based on a public
offering price of $ per share. You may incur additional dilution of net
tangible book value if holders of stock options, whether currently outstanding
or subsequently granted, exercise their options or if warrantholders exercise
their warrants to purchase our common stock.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY, DETER OR PREVENT
THE ACQUISITION OF SATCON, WHICH COULD DECREASE THE VALUE OF YOUR SHARES.
Some provisions of our certificate of incorporation and bylaws may delay, deter
or prevent a change in control of SatCon or a change in our management that you
as a stockholder may consider favorable. These provisions include:
- authorizing the issuance of "blank check" preferred stock that could be issued
by our board of directors to increase the number of outstanding shares and
deter a takeover attempt,
- a classified board of directors with staggered, three-year terms, which may
lengthen the time required to gain control of our board of directors,
- prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates, and
- limitations on who may call special meetings of stockholders.
In addition, Section 203 of the Delaware General Corporation Law and provisions
in some of our stock incentive plans may delay, deter or prevent a change in
control of SatCon. Those provisions serve to limit the circumstances in which a
premium may be paid for our common stock in proposed transactions, or where a
proxy contest for control of our board may be initiated. If a change of control
or change in management is delayed, deterred or prevented, the market price of
our common stock could suffer.
18
<PAGE>
FORWARD-LOOKING STATEMENTS; MARKET DATA
This prospectus includes forward-looking statements. Some of the forward-looking
statements can be identified by the use of forward-looking words such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates" or "anticipates" or the negative of those words
or other comparable terminology. Forward-looking statements involve risks and
uncertainties. A number of important factors could cause actual results to
differ materially from those in the forward-looking statements. These factors
include systems failures, technological changes, volatility of securities
markets, government regulations and economic conditions and competition in the
areas in which we conduct our operations. For a discussion of factors that could
cause actual results to differ, please see the discussion under "Risk Factors"
appearing elsewhere in this prospectus. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, they
relate only to events as of the date on which the statements are made, and we
cannot assure you that our future results, levels of activity, performance or
achievements will meet these expectations.
This prospectus also contains third-party estimates and data regarding the size
and growth of the power and energy management market and power generation in
general. These market data have been included in studies published by the Energy
Information Administration, the Greening Earth Society, the Electric Power
Research Institute and the U.S. Department of Energy. These data include
projections that are based on a number of assumptions, including increasing
worldwide use of power energy management, power generation, power conversion and
energy storage systems. If any of these assumptions is incorrect, actual results
may differ from the projections based on those assumptions, and these markets
may not grow at the rates projected by these data, or at all. The failure of
these markets to grow at these projected rates may have a material adverse
effect on our business and the market price of our common stock.
19
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from this offering of common stock,
after deducting the estimated underwriting discounts and offering expenses
payable by us, will be approximately $ million, or $ million if the
underwriters' over-allotment option is exercised in full, assuming a public
offering price of $ per share.
We intend to use the net proceeds from this offering as follows:
- approximately $50.0 million for manufacturing equipment, manufacturing
facilities and other capital expenditures, and
- the balance for general corporate purposes, including research and
development and working capital.
We also intend to continue to consider, from time to time, acquisitions that
could provide additional new product offerings, additional industry expertise, a
broader client base or an expanded geographic presence, and a portion of the net
proceeds from this offering may be used for such acquisitions. From time to
time, we have engaged in discussions with third parties concerning potential
acquisitions of product lines, technologies and businesses. There are no pending
negotiations or arrangements relating to any acquisitions at the present time.
Although we plan to use a large portion of the net proceeds from this offering
for manufacturing equipment and facilities, we have not yet determined the
amount of net proceeds to be used for each of the purposes indicated.
Accordingly, our board of directors and our management will have broad
discretion over the use of the net proceeds of the offering. Pending these uses,
the net proceeds will be invested in short-term, investment grade securities,
certificates of deposit or direct or guaranteed obligations of the U.S.
government.
20
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock has been publicly traded since November 12, 1992 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,
2000 and 2001 to date:
<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
YEAR ENDING SEPTEMBER 30, 2001
First Quarter (through December 12, 2000)................... $36.75 $ 9.31
</TABLE>
On December 13, 2000, the last reported sale price of our common stock as
reported on the Nasdaq National Market was $13.50 per share. As of
September 30, 2000, there were 13,841,185 shares of our common stock outstanding
held by approximately 195 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.
21
<PAGE>
CAPITALIZATION
The following table shows, as of September 30, 2000:
- our capitalization on an actual basis, and
- our capitalization on an as adjusted basis to give effect to the sale by
us of shares of our common stock at an assumed public offering price
of $ per share, after deducting underwriting discounts and
commissions and the estimated offering expenses payable by us.
This information should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 8,814 $
======== ======
Total long-term liabilities, net of current portion......... 214
Contingent obligation to class D preferred stockholders of
Beacon Power Corporation.................................. 5,794
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding............ --
Common stock, $0.01 par value, 25,000,000 shares
authorized; 13,841,185 and shares issued,
actual and as adjusted, respectively.................... 138
Additional paid-in capital................................ 72,499
Accumulated deficit and accumulated other comprehensive
loss.................................................... (41,269)
Treasury stock, at cost; 44,500 shares.................... (250)
-------- ------
Total stockholders' equity.............................. 31,118
-------- ------
Total capitalization.................................. $ 37,126 $
======== ======
</TABLE>
22
<PAGE>
DILUTION
Our net tangible book value as of September 30, 2000 was $22.0 million, or
approximately $1.59 per share. "Net tangible book value" is total assets minus
the sum of liabilities and intangible assets. "Net tangible book value per
share" is net tangible book value divided by the total number of shares
outstanding. Without taking into account any other changes in the net tangible
book value after September 30, 2000 other than the sale of the shares of common
stock offered hereby at a public offering price of $ per share, our net
tangible book value as of September 30, 2000 would have been $ million, or
$ per share. This net tangible book value amount assumes that the proceeds
to us, net of offering expenses and underwriting discounts, will be
approximately $ million.
The following table illustrates the increase in net tangible book value of
$ per share and the dilution, which is the difference between the offering
price per share and net tangible book value per share, to new investors:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $
Net tangible book value per share as of September 30,
2000.................................................. $1.59
Increase in net tangible book value per share
attributable to the offering..........................
-----
Net tangible book value per share as of September 30, 2000
after giving effect to the offering.......................
-----
Dilution per share to new investors in the offering......... $
=====
</TABLE>
The following table shows the difference between existing stockholders and new
investors with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share, after deducting
underwriting discounts and offering expenses payable by us, at a public offering
price of $ per share.
<TABLE>
<CAPTION>
TOTAL AVERAGE
SHARES PURCHASED CONSIDERATION PRICE
--------------------- ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................ 13,841,185 % $ % $
New investors....................................
---------- ------ ------ ------
Total........................................ 100.0% $ 100.0%
========== ====== ====== ======
</TABLE>
In the discussion and tables above, we assume no exercise of any stock options
or warrants to purchase shares of our common stock. As of September 30, 2000,
there were outstanding options to purchase a total of 1,877,105 shares of our
common stock at a weighted average exercise price of $11.89 per share. In
addition, there were outstanding warrants to purchase a total of 977,000 shares
of our common stock. To the extent that holders of these options and warrants
exercise their outstanding options and warrants, new investors will be further
diluted.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Our financial statements for the years ended September 30, 1996, 1997, 1998 and
1999 have been restated. All financial information included in this prospectus
reflect the restatements. For a discussion of the restatements, see our
financial statements and related notes included elsewhere in this prospectus.
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 prospectus. The selected consolidated financial data set forth below for
the fiscal years ended September 30, 1998, 1999 and 2000 and the consolidated
balance sheet data as of September 30, 1999 and 2000 are derived from our
audited consolidated financial statements appearing elsewhere in this
prospectus. The selected consolidated statement of operations data for the
fiscal years ended September 30, 1996 and 1997 and the consolidated balance
sheet data as of September 30, 1996, 1997 and 1998 are derived from our audited
consolidated financial statements that are not included in this prospectus. 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. Unaudited pro forma combined consolidated
statements of operations for the fiscal years ended September 30, 1999 and 2000
that give effect to the acquisition of Ling Electronics and the acquisition of
assets from Northrup Grumman Corporation as if they had occurred as of October
1, 1999 appear elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Product revenue........................................... $ -- $ 3,728 $ 7,520 $ 9,123 $ 22,427
Funded research and development revenue................... 9,385 8,738 8,011 6,355 8,628
-------- -------- -------- -------- --------
Total revenue............................................. 9,385 12,466 15,531 15,478 31,055
Cost of product revenue................................... -- 2,683 5,474 9,511 19,069
-------- -------- -------- -------- --------
Gross margin.............................................. 9,385 9,783 10,057 5,967 11,986
-------- -------- -------- -------- --------
Research and development expenses......................... 8,213 11,443 6,794 6,554 10,301
Selling, general and administrative expenses.............. 5,569 6,198 4,523 8,819 9,970
Amortization of intangibles............................... -- 120 291 371 1,217
-------- -------- -------- -------- --------
Total operating expenses.................................. 13,782 17,761 11,608 15,744 21,488
-------- -------- -------- -------- --------
Operating loss............................................ (4,397) (7,978) (1,551) (9,777) (9,502)
Other income (expense), net............................... 464 269 170 (224) 460
-------- -------- -------- -------- --------
Net loss before income taxes and loss from Beacon Power
Corporation............................................. (3,933) (7,709) (1,381) (10,001) (9,042)
Benefit (provision) for income taxes...................... 144 -- (4) -- --
Loss from Beacon Power Corporation........................ -- -- (3,473) (4,341) (899)
-------- -------- -------- -------- --------
Net loss.................................................. (3,789) (7,709) (4,858) (14,342) (9,941)
Accretion of redeemable convertible preferred stock
discount................................................ -- -- -- (51) (3,106)
-------- -------- -------- -------- --------
Net loss attributable to common stockholders.............. $ (3,789) $ (7,709) $ (4,858) $(14,393) $(13,047)
======== ======== ======== ======== ========
Net loss per share, basic and diluted..................... $ (0.52) $ (0.97) $ (0.54) $ (1.57) $ (1.03)
======== ======== ======== ======== ========
Weighted average number of common shares, basic and
diluted................................................. 7,286 7,959 8,957 9,176 12,630
======== ======== ======== ======== ========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................. $ 3,771 $ 4,257 $ 1,202 $ 2,533 $ 8,814
Assets transferred to Beacon Power Corporation............ -- -- 577 -- --
Total assets.............................................. 16,354 18,219 16,689 17,815 44,487
Working capital........................................... 11,011 10,595 7,905 7,714 18,390
Liabilities transferred to Beacon Power Corporation....... -- -- 1,564 -- --
Total long-term liabilities, net of current portion....... -- 323 239 64 214
Contingent obligation to class D preferred stockholders of
Beacon Power Corporation................................ -- -- -- 5,309 5,794
Redeemable convertible preferred stock.................... -- -- -- 4,894 --
Stockholders' equity...................................... 15,175 15,589 12,372 4,421 31,118
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THIS DISCUSSION TOGETHER WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES INCLUDED IN THIS PROSPECTUS.
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 prospectus.
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 four 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.
26
<PAGE>
- Ling Electronics, Inc.--a manufacturer of shaker vibration test systems,
power converters, amplifiers and controllers, acquired in October 1999.
All of these acquisitions were accounted for using the purchase method of
accounting. In addition, in November 1999, we acquired intellectual property,
tooling and other assets from Northrop Grumman Corporation, a manufacturer of
electric drivetrains. See Note O to our Consolidated Financial Statements in
this prospectus 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. As of
September 30, 2000, we owned approximately 24.8% of the capital stock of Beacon
Power on a fully diluted basis after taking all dividend accruals into account
and giving consideration to all outstanding options and warrants, other than
warrants issued on May 23, 2000 to investors in Beacon Power, the number of
shares subject to which is not ascertainable until consummation of an initial
public offering of Beacon Power's common stock. See Beacon Power's financial
statements in this prospectus for more information regarding Beacon Power's
outstanding capitalization.
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
27
<PAGE>
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 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.
28
<PAGE>
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 1996, 1997, 1998, 1999 and 2000. 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.
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 $50.3 million. The increase was
primarily attributable to an additional $2.7 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
$526,000 in reserve for unbilled contract costs and fees and accounts receivable
to properly reflect the reserve requirements.
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<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 $784,000 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
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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 $526,000 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 $784,000
of our share of losses from Beacon Power during June 1999 to September 1999.
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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 appearing elsewhere in
this prospectus. This data includes all adjustments, consisting solely of normal
recurring adjustments, that we believe necessary for a fair presentation of this
information. The operating results for any quarter are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1998 1999 1999 1999 1999 2000 2000 2000
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Product revenue....................... $ 1,995 $ 1,772 $ 2,623 $ 2,733 $ 3,161 $ 5,648 $ 5,459 $ 8,159
Funded research and development
revenue............................. 1,730 1,890 1,469 1,266 1,395 1,896 3,235 2,102
------- ------- ------- ------- ------- ------- ------- -------
Total revenue......................... 3,725 3,662 4,092 3,999 4,556 7,544 8,694 10,261
Cost of product revenue............... 1,524 1,915 3,288 2,784 3,001 4,886 4,599 6,583
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.......................... 2,201 1,747 804 1,215 1,555 2,658 4,095 3,678
------- ------- ------- ------- ------- ------- ------- -------
Research and development expenses..... 1,428 1,465 2,136 1,526 1,723 1,893 3,944 2,741
Selling, general and administrative
expenses............................ 990 1,029 5,176 1,624 2,032 2,420 2,555 2,963
Amortization of intangibles........... 78 94 101 98 243 329 323 322
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 2,496 2,588 7,413 3,248 3,998 4,642 6,822 6,026
------- ------- ------- ------- ------- ------- ------- -------
Operating loss........................ (295) (841) (6,609) (2,033) (2,443) (1,984) (2,727) (2,348)
Other income (expense), net........... 20 (26) (186) (31) 30 99 146 185
------- ------- ------- ------- ------- ------- ------- -------
Net loss before loss from Beacon Power
Corporation......................... (275) (867) (6,795) (2,064) (2,413) (1,855) (2,581) (2,163)
Loss from Beacon Power Corporation.... (1,440) (1,383) (1,006) (512) (563) (148) (116) (72)
------- ------- ------- ------- ------- ------- ------- -------
Net loss.............................. (1,715) (2,250) (7,801) (2,576) (2,976) (2,033) (2,697) (2,235)
Accretion of redeemable convertible
preferred stock discount............ -- -- -- (51) (156) (2,950) -- --
------- ------- ------- ------- ------- ------- ------- -------
Net loss attributable to common
stockholders........................ $(1,715) $(2,250) $(7,801) $(2,627) $(3,132) $(4,983) $(2,697) $(2,235)
======= ======= ======= ======= ======= ======= ======= =======
Net loss per share, basic and
diluted............................. $ (0.19) $ (0.25) $ (0.85) $ (0.28) $ (0.29) $ (0.40) $ (0.20) $ (0.16)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of common
shares, basic and diluted........... 8,980 9,059 9,177 9,488 10,793 12,398 13,642 13,685
======= ======= ======= ======= ======= ======= ======= =======
</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 release of stock from escrow, issuance, 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
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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 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 would have
been required to 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.
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.
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.
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.
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
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<PAGE>
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 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.
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<PAGE>
BUSINESS
OVERVIEW
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 and our affiliate, Beacon Power Corporation, are focusing our development and
manufacturing efforts on products for high-growth markets in the following
categories:
<TABLE>
<CAPTION>
PRODUCT CATEGORY PRODUCTS MARKETS
---------------- -------- -------
<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
35
<PAGE>
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.
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
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<PAGE>
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.
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
37
<PAGE>
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 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,
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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 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
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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 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
58 U.S. patents and 14 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.
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- 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.
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
power 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
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.
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- 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 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.
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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 1999 and 2000 for
this program totaled $1.0 million and $3.4 million, respectively. The additional
DOE funding of $4.6 million is subject to congressional appropriation and DOE
approval.
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 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
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
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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.
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.
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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 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 22.1%, 20.6% and 9.8% of our total
revenue for our fiscal years ended September 30, 1998, 1999 and 2000,
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.
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.
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.,
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- 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 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
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execute confidentiality agreements and by restricting access to that
information. These legal protections afford only limited protection for our
technology.
We currently own 58 U.S. patents and have 14 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 58
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 2008 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 58 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.
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
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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.
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.
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FACILITIES
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.
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 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.
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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.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees, and their respective ages
as of September 30, 2000, are as follows:
<TABLE>
<CAPTION>
AGE POSITION(S)
-------- -----------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
David B. Eisenhaure................ 54 President, Chief Executive Officer and Director
Michael C. Turmelle................ 41 Vice President, Chief Operating Officer, Secretary
and Director
Sean F. Moran...................... 42 Vice President of Finance, Chief Financial Officer
and Treasurer
James L. Kirtley, Jr............... 54 Vice President, Chief Scientist and Director
Marshall J. Armstrong.............. 65 Director
Alan P. Goldberg................... 55 Director
Thomas A. Hurkmans................. 34 Director
Gerald L. Wilson................... 61 Director
KEY EMPLOYEES:
Donald G. Flodin................... 44 Vice President, Corporate Development
Gary M. Colello.................... 41 General Manager, Advanced Fuel Cell Power Products
James F. O'Rourke.................. 46 General Manager, MagMotor and Ling Electronics
Laban E. Lesster................... 62 General Manager, Technology Center
Joseph A. Duncan................... 47 Director of Operations, Film Microelectronics
</TABLE>
DAVID B. EISENHAURE joined SatCon as President, Chief Executive Officer and
Chairman of the Board of Directors in 1985. Prior to founding SatCon,
Mr. Eisenhaure was associated with the Charles Stark Draper Laboratory,
Incorporated from 1974 to 1985, and with its predecessor, the Massachusetts
Institute of Technology's Instrumentation Laboratory, from 1967 to 1974.
Mr. Eisenhaure holds S.B., S.M. and an Engineer's degree in Mechanical
Engineering from the Massachusetts Institute of Technology. In addition to his
duties at SatCon, Mr. Eisenhaure holds an academic position at M.I.T., serving
as a lecturer in the Department of Mechanical Engineering. Mr. Eisenhaure also
serves on the board of directors of Mechanical Technology Incorporated and
Beacon Power.
MICHAEL C. TURMELLE joined SatCon in September 1987, where he served as
Controller from September 1987 until November 1991, as Secretary since
June 1993 and as Vice President, Chief Financial Officer and Treasurer from
November 1991 until January 2000. Mr. Turmelle became a director in June 1993.
In January 2000, Mr. Turmelle was promoted from Chief Financial Officer to Chief
Operating Officer. From July 1984 to August 1987, Mr. Turmelle held several
positions with HADCO Corporation, a manufacturer of circuit boards. From
February 1982 to June 1984, Mr. Turmelle was employed by the aerospace division
of General Electric Corporation and held several positions, including internal
auditor. Mr. Turmelle holds a B.A. degree in Economics from Amherst College.
SEAN F. MORAN joined SatCon in January 2000 and has served as Vice President of
Finance, Chief Financial Officer and Treasurer since February 2000. Prior to
joining SatCon, Mr. Moran served as Vice President of Finance, Chief Financial
Officer and Treasurer of Anika Therapeutics, Inc., a biotechnology company,
since February 1993. He served as Treasurer of MedChem Products, Inc., a
manufacturer of medical devices, from May 1991 to February 1993. Mr. Moran also
served as Controller of MedChem Products from September 1990 to May 1991.
Mr. Moran received a B.S. in Business Administration and an M.B.A. from Babson
College.
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JAMES L. KIRTLEY, JR., PH.D, joined SatCon as a consultant in 1985 and became a
director in 1992. On March 1, 1998, Dr. Kirtley commenced employment with SatCon
on a full-time basis as the Vice President and General Manager of the
Corporation's Technology Center. In February 2000, Dr. Kirtley was promoted to
Vice President and Chief Scientist at SatCon. Dr. Kirtley is also a Professor of
Electrical Engineering at M.I.T. and became a member of the M.I.T. faculty in
1971. Dr. Kirtley received his S.B., S.M., E.E. and Ph.D. degrees in Electrical
Engineering from M.I.T.
MARSHALL J. ARMSTRONG joined SatCon as a director in 1994. Mr. Armstrong
previously served as Chief Executive Officer and Chairman of the Board of Thermo
Power Corporation from 1992 through 1997. Thermo Power provides research and
development relating to engines, cogeneration and refrigeration equipment to the
marine, food processing, transportation, power generating, petrochemical and
pharmaceutical industries. From January 1998 to September 1999, Mr. Armstrong
has served as Senior Vice President of Thermo Electron Corporation, where he has
been employed since 1968 in various capacities and presently manages Thermo
Electron's government affairs. Mr. Armstrong also serves as a Director of Thermo
Sentron, Inc. Mr. Armstrong holds an M.S. degree from George Washington
University and a B.S. degree in Mechanical Engineering from the University of
Vermont.
ALAN P. GOLDBERG joined SatCon as a director in 1999. Mr. Goldberg has served as
President and Co-Chief Executive Officer and as a Director of First Albany
Companies Inc., an investment bank, since 1993. Mr. Goldberg also serves on the
board of directors of Mechanical Technology Incorporated and Beacon Power.
Mr. Goldberg is active in industry and civic organizations and serves on the
board of several non-profit institutions. He received a B.A degree in Government
from Tufts University.
THOMAS A. HURKMANS joined SatCon as a director in January 2000. Since 1995,
Mr. Hurkmans has served as the President of DQE Enterprises, Inc., a
wholly-owned subsidiary of DQE, Inc. which acquires and develops businesses
involved in energy-services and technologies, communications and electronic
commerce. From 1991 through 1995, Mr. Hurkmans served as a Vice President of DQE
Enterprises. Prior to joining DQE Enterprises, Mr. Hurkmans founded and served
as the President of Organization Technologies Group, a computer software
company. In addition, he was employed as an investment banker with Merrill
Lynch & Co., Inc., where he advised energy and communications companies on
strategic and financial matters including acquisitions, divestitures and capital
formation. Mr. Hurkmans received a B.A. degree in Economics from Bates College.
GERALD L. WILSON joined SatCon as a director in July 2000. Dr. Wilson is the
former Dean of the School of Engineering at M.I.T. and the Vannevar Bush
Professor of Engineering at M.I.T. Dr. Wilson has served on M.I.T.'s faculty
since 1965 and currently serves as a Professor of Electrical and Mechanical
Engineering. Dr. Wilson also serves as the Chairman of the Science Advisory
Boards of General Motors Corporation and Pratt and Whitney, a division of United
Technologies Corporation, and as a member of the science advisory board for
Cummins Engine Company, Inc. He is a trustee of Commonwealth Energy System and a
director of Analogic Corporation and NSTAR, a company formed by the merger of
BEC Energy and Commonwealth Energy System.
DONALD G. FLODIN joined SatCon as Director of Programs and Business Development
in September 1999 and was promoted to Vice President, Corporate Development in
July 2000. Prior to joining SatCon, Mr. Flodin was the Director of the
Anti-Submarine Warfare Business area for Northrop Grumman Corporation's Oceanic
Division, a supplier of sonar systems and equipment, from June 1996 to
September 1999. From June 1994 to June 1996, Mr. Flodin served as Director of
Engineering for Northrop Grumman's Sonar Systems Engineering Department, a
supplier of sonar systems and equipment. Mr. Flodin holds a B.S.E.E. degree from
the University of Rhode Island and an M.B.A. from Loyola College.
GARY M. COLELLO joined SatCon as General Manager of Film Microelectronics in
April 1997. In February 2000, Mr. Colello was promoted to General Manager of
Advanced Fuel Cell Power Products. Prior to joining SatCon, Mr. Colello was Vice
President of Engineering at Omnirel L.L.C., an
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electronics manufacturer, from January 1996 to April 1997, and Program Manager
at SatCon from July 1993 to January 1996. Mr. Colello holds a B.S. in Biomedical
Engineering and B.S. and B.A. degrees in Materials Engineering from Rensselear
Polytechnic Institute.
JAMES F. O'ROURKE joined SatCon in December 1994 and has served as General
Manager of MagMotor since January 1998 and General Manager of Ling Electronics
since October 1999. Prior to joining MagMotor, Mr. O'Rourke served as Manager of
Drive Systems at SatCon from December 1994 to December 1997 and as Vice
President of Manufacturing at Beacon Power from December 1997 to January 1998.
Prior to joining SatCon, Mr. O'Rourke was Director of Business Development for
Textron Automotive (McCord Winn division), a manufacturer of electronic
automotive parts, from August 1987 to December 1994. Mr. O'Rourke holds a B.S.
degree in Industrial Engineering from Lowell Technical Institute.
LABAN E. LESSTER joined SatCon as Director of Engineering of the Technology
Center in February 1999 and was promoted to General Manager in January 2000.
Prior to joining SatCon, Mr. Lesster was Director of Engineering and Chief
Scientist at the Northrop Grumman Corporation Oceanic Division, a manufacturer
of underwater systems, from April 1998 to January 1999. Mr. Lesster served as
Department Manager of Vehicle Engineering at Westinghouse Electric Corporation,
a manufacturer of electrical systems, (subsequently, Northrop Grumman following
the acquisition of Westinghouse by Northrop Grumman) from August 1992 to
March 1998. Mr. Lesster holds B.A. and M.A. degrees from Oxford University and a
DIC (research degree) from Imperial College, London University.
JOSEPH A. DUNCAN joined Film Microelectronics as Director of Operations in
January 1999. Prior to joining SatCon, Mr. Duncan was Operations Manager of the
Analogic Data Conversion Product Group at Analogic Corporation, a
microelectronics manufacturer, from November 1990 to January 1999. Mr. Duncan
holds B.S.E.E. and M.S. degrees in Engineering Management from Northeastern
University.
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CERTAIN TRANSACTIONS
BEACON POWER AND DQE ENTERPRISES
Pursuant to the terms of a securities purchase agreement, dated October 23,
1998, between Beacon Power, Perseus Capital, L.L.C., DQE Enterprises, Micro
Generation Technology Fund, L.L.C. and us:
- Beacon Power sold to these investors 1,900,000 shares of Beacon Power's
class D preferred stock,
- the investors received warrants to purchase an aggregate of 2,227,500
shares of Beacon Power's common stock, and
- we granted the investors the right to cause us, in the circumstances and
for the consideration described below, to purchase all of their shares of
Beacon Power's class D preferred stock and all of their shares of Beacon
Power's common stock issuable upon conversion of their shares of class D
preferred stock.
Upon exercise of this "put right" by a class D preferred stock investor, we were
required to pay the stated value of the shares of Beacon Power's class D
preferred stock acquired by that investor plus accrued and unpaid dividends, in
shares of our common stock. For this purpose, our common stock would have been
valued at the average fair market value for the 15 trading days before and after
notice of exercise of the put right. The put right was exercisable within
60 days of the second, third, fourth and fifth anniversary of the closing date
of the transaction, upon events relating to the bankruptcy of Beacon Power, upon
the occurrence of going private transactions involving SatCon and upon the
deregistration of our common stock by the SEC or the delisting or other removal
of our common stock from trading on the Nasdaq National Market. The put right
terminated on November 17, 2000, the date of the listing of Beacon Power's
common stock on the Nasdaq National Market.
The shares of Beacon Power's class D preferred stock were not registered under
the Securities Act, but the investors entered into registration rights
agreements with Beacon Power and us. The aggregate consideration received by
Beacon Power was $4,750,000. Of the 1,900,000 shares of Beacon Power's class D
preferred stock issued pursuant to this securities purchase agreement, DQE
Enterprises purchased 400,000 shares of Beacon Power's class D preferred stock
for an aggregate purchase price of $1,000,000. DQE Enterprises also received
warrants to purchase 450,000 shares of Beacon Power's common 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 the
investors, including $890,000 from DQE Enterprises. On April 7, 2000, pursuant
to the terms of a second securities purchase agreement, 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. In this transaction, DQE Enterprises received
204,797 shares of Beacon Power's class E preferred stock and a warrant to
purchase 51,199 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 shares of Beacon
Power's common stock. On May 23, 2000, pursuant to the terms of a third
securities purchase agreement, 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. DQE Enterprises received 476,190 shares of Beacon
Power's class F preferred stock and a warrant to purchase shares of Beacon
Power's common stock in exchange for the cancellation of a $300,000 bridge note
and an additional cash investment of $1.7 million.
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<PAGE>
Pursuant to the terms of a letter agreement, dated October 23, 1998,
Mr. Eisenhaure agreed with the purchasers that, in the event that at any time on
or prior to the full exercise or expiration of the put right, the number of
authorized shares of our common stock that were legally available for issuance
in satisfaction of the put right was less than 1,000,000 more than the total
number of shares of our common stock required to satisfy our obligations under
the put right, then Mr. Eisenhaure would take all action under his control to
increase the number of authorized shares of our common stock.
The terms of the securities purchase agreements were determined on the basis of
arms-length negotiations. Prior to the execution of the 1998 securities purchase
agreement, neither we nor Beacon Power had any material relationship with
Perseus Capital or Micro Generation Technology Fund. In May 1997, DQE
Enterprises made an investment in SatCon and received warrants to purchase
shares of Beacon Power's common stock. In connection with that transaction, DQE
Enterprises entered into agreements with us and Beacon Power pursuant to which,
among other things, DQE Enterprises acts as exclusive distributor of Beacon
Power's products, subject to certain exceptions, in seven Mid-Atlantic States
and the District of Columbia. Beacon Power also entered into a consulting
agreement with DQE Enterprises pursuant to which DQE Enterprises is compensated
by Beacon Power in the amount of $150,000 per annum in exchange for consulting
services provided by DQE Enterprises to Beacon Power. On October 23, 1998,
Beacon Power and DQE Enterprises modified this consulting arrangement so that
Beacon Power was obligated to pay for DQE Enterprises' consulting services in
shares of Beacon Power's common stock. On November 1, 1999, this agreement was
further modified to provide for payment by Beacon Power to DQE Enterprises in
shares of Beacon Power's class A preferred stock. In addition, the shares of
Beacon Power's common stock that had been issued to DQE Enterprises under the
consulting agreement were cancelled and shares of Beacon Power's class A
preferred stock were issued to DQE Enterprises.
Beacon Power was organized by us in May 1997 to continue the development and
distribution of the stationary, terrestrial applications of our flywheel energy
storage technology. DQE Enterprises owns of record more than five percent of our
common stock, and Mr. Hurkmans, the President of DQE Enterprises, serves on our
board of directors.
BEACON POWER AND MECHANICAL TECHNOLOGY INCORPORATED
On April 21, 2000, in connection with Beacon Power's bridge note and warrant
financing, Mechanical Technology Incorporated loaned $1.2 million to Beacon
Power and received a warrant to purchase 12,000 shares of Beacon Power's common
stock. On May 23, 2000, pursuant to the terms of the third securities purchase
agreement described above, Beacon Power issued 1,428,571 shares of its class F
preferred stock and an additional warrant to purchase shares of Beacon Power's
common stock to Mechanical Technology Incorporated. The exercise price and the
number of shares subject to this additional warrant were based on the initial
public offering price of Beacon Power's common stock. The shares of class F
preferred stock and the additional warrant were issued in consideration for the
cancellation of the $1.2 million represented by the bridge note and an
additional $4.8 million cash investment by Mechanical Technology Incorporated.
On August 25, 2000, Mechanical Technology Incorporated exercised its warrant for
12,000 shares of Beacon Power's common stock in full for an aggregate exercise
price of $50,400. Mechanical Technology Incorporated owns of record more than
five percent of our common stock, and Mr. Goldberg, a director of Mechanical
Technology Incorporated and co-chief executive officer of First Albany Companies
Inc., serves on our board of directors. Mr. Goldberg also serves on Beacon
Power's board of directors.
ACQUISITION OF LING ELECTRONICS AND INVESTMENT BY MECHANICAL TECHNOLOGY
INCORPORATED
In October 1999, we acquired Ling Electronics, Inc. and Ling Electronics, Ltd.
from Mechanical Technology Incorporated. In consideration for the acquisition of
Ling Electronics and an investment by Mechanical Technology Incorporated in
SatCon, Mechanical Technology Incorporated received a total of 1,800,000 shares
of our common stock and warrants to purchase an additional 100,000 shares of our
59
<PAGE>
common stock at an exercise price of $8.80 per share. On October 21, 1999,
Mechanical Technology Incorporated funded $2,570,000 of its investment in SatCon
and received 370,800 shares of common stock and issued a warrant to us to
purchase 108,000 shares of Mechanical Technology Incorporated's common stock at
an exercise price of $12.56 per share. At a second closing of Mechanical
Technology Incorporated's investment, on January 31, 2000, we issued to
Mechanical Technology Incorporated 659,200 shares of our common stock and a
warrant to purchase an additional 64,000 shares of our common stock at an
exercise price of $8.80 per share in exchange for $4,500,000 in cash and a
warrant to purchase 192,000 shares of Mechanical Technology Incorporated's
common stock at an exercise price of $12.56 per share. In connection with these
transactions, Alan P. Goldberg, a director of Mechanical Technology Incorporated
and co-chief executive officer of First Albany Companies Inc., was elected a
member of our board of directors on November 15, 1999. We have also agreed to
appoint an additional member to our board of directors based on recommendations
by Mechanical Technology Incorporated, and Mechanical Technology Incorporated
agreed to appoint Mr. Eisenhaure to its board of directors. Mr. Eisenhaure
currently serves on the board of directors of Mechanical Technology
Incorporated.
PLUG POWER AND BEACON POWER
First Albany Corporation, a wholly-owned subsidiary of First Albany
Companies, Inc., or FACI, is an NASD member and an underwriter of this offering
through its division, FAC/Equities. As of September 30, 2000, FACI owned
11,753,744 shares, or 33.2%, of Mechanical Technology Incorporated's common
stock, which owns 1,800,000 shares of our common stock and warrants to purchase
100,000 shares of our common stock. As of September 30, 2000, Mechanical
Technology Incorporated owned 13,704,315 shares, or 31.4%, of Plug Power's
common stock. We sell electronic components to Plug Power, and we believe these
transactions are on an arms-length basis. Sales transactions with Plug Power
accounted for $53,000 and $34,000 in revenues in fiscal years 1999 and 2000,
respectively. In addition, we perform funded research and development and sell
power electronic boards and components to Beacon Power, and we believe these
transactions are also on an arms-length basis. Sales transactions with Beacon
Power accounted for $424,000, $73,000 and $471,000 in revenues in fiscal years
1998, 1999 and 2000, respectively.
LOANS TO MICHAEL C. TURMELLE
In October 1999 and December 1999, we loaned an aggregate of $85,000 to
Mr. Turmelle. The loans were represented by two promissory notes for $10,000 and
$75,000, respectively. Under the terms of the promissory notes, the loans bore
interest at 5.74% per annum, and principal and interest was due and payable in
full on December 15, 2000. On April 1, 2000, Mr. Turmelle repaid to us $86,569,
the entire principal amount of the loans plus all outstanding accrued interest.
Mr. Turmelle is our vice president, chief operating officer and secretary and is
one of our directors.
CONSULTING AGREEMENT WITH MARSHALL J. ARMSTRONG
On July 19, 2000, we entered into a consulting agreement with Marshall J.
Armstrong, one of our directors. In consideration for Mr. Armstrong providing
consulting, advisory and related services under the consulting agreement, we
have agreed to pay Mr. Armstrong $2,000 per day (which amount will be
proportionately less for partial days) for services performed as well as
reimbursement of reasonable and necessary expenses incurred by Mr. Armstrong in
connection with the consulting agreement. As of September 30, 2000, we have paid
Mr. Armstrong $3,000 under the terms of the consulting agreement.
We believe that each of the transactions described above, other than the loan to
Mr. Turmelle, was carried out on terms that were no less favorable to us than
those that would have been obtained from unaffiliated third parties. We believe
that the loan to Mr. Turmelle was a reasonable employee benefit based on
Mr. Turmelle's tenure and position with us.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 30, 2000, information concerning
the beneficial ownership of our common stock by:
- each person known by us to own beneficially five percent (5%) or more of
the outstanding shares of our common stock,
- each of our executive officers and directors, and
- all executive officers and directors as a group.
The number of shares beneficially owned by each 5% stockholder, director or
executive officer is determined under rules of the SEC, and the information is
not necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares as to which the individual
or entity has sole or shared voting power or investment power and also any
shares which the individual or entity has the right to acquire on or before
November 29, 2000 through the exercise of any stock option, warrant or other
right. Unless otherwise indicated, each person or entity has sole investment and
voting power (or shares the power with his spouse) with respect to the shares
set forth in the following table. The inclusion in this table of any shares
deemed beneficially owned does not constitute an admission of beneficial
ownership of those shares.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
--------------------------------------- ------------------ --------------- ---------
<S> <C> <C> <C>
Brown Simpson Partners I, Ltd.(3)................... 1,195,800 8.2% %
152 West 57th Street, 40th Floor
New York, NY 10019
DQE Enterprises..................................... 798,138 5.8
One Northshore Center, Suite 100
12 Federal Street
Pittsburgh, PA 15212
Mechanical Technology Incorporated(4)............... 1,900,000 13.6
325 Washington Avenue Extension
Albany, NY 12205
Marshall J. Armstrong............................... 26,000 *
David B. Eisenhaure (5)............................. 4,549,255 32.5
Alan P. Goldberg (6)................................ 1,915,000 13.7
c/o Mechanical Technology Incorporated
325 Washington Avenue Extension
Albany, NY 12205
Thomas A. Hurkmans (7).............................. 813,138 5.9
c/o DQE Enterprises
One Northshore Center, Suite 100
12 Federal Street
Pittsburgh, PA 15212
James L. Kirtley, Jr. .............................. 61,400 *
Sean F. Moran....................................... 3,000 *
Michael C. Turmelle................................. 102,461 *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
--------------------------------------- ------------------ --------------- ---------
<S> <C> <C> <C>
Gerald L. Wilson.................................... 15,000 *
All executive officers and directors as a group
(eight persons) (5)(6)(7)......................... 5,585,254 39.3% %
</TABLE>
------------------------
* Less than 1%
(1) The address for all executive officers and directors, other than
Mr. Goldberg and Mr. Hurkmans, is c/o SatCon Technology Corporation, 161
First Street, Cambridge, Massachusetts 02142.
(2) Includes the following number of shares of common stock issuable upon the
exercise of outstanding stock options which may be exercised on or before
November 29, 2000: Mr. Armstrong: 26,000; Mr. Eisenhaure: 72,501;
Mr. Goldberg: 15,000; Mr. Hurkmans: 15,000; Dr. Kirtley: 58,400;
Mr. Turmelle: 69,566; Dr. Wilson: 15,000; all executive officers and
directors as a group: 271,467.
(3) Consists of 520,800 shares of common stock held by Brown Simpson Partners I,
Ltd. and 675,000 shares of common stock issuable upon exercise of a warrant
held by Brown Simpson Partners I, Ltd.
(4) Includes 100,000 shares of common stock issuable upon exercise of warrants
held by Mechanical Technology Incorporated.
(5) Includes 1,800,000 shares of common stock held by Mechanical Technology
Incorporated and 100,000 shares of common stock issuable upon exercise of
warrants held by Mechanical Technology Incorporated. Mr. Eisenhaure is a
director of Mechanical Technology Incorporated and disclaims beneficial
ownership of these shares.
(6) Includes 1,800,000 shares of common stock held by Mechanical Technology
Incorporated and 100,000 shares of common stock issuable upon exercise of
warrants held by Mechanical Technology Incorporated. Mr. Goldberg is a
director of Mechanical Technology Incorporated and disclaims beneficial
ownership of these shares.
(7) Includes 798,138 shares of common stock held by DQE Enterprises, of which
Mr. Hurkmans is the President. Mr. Hurkmans disclaims beneficial ownership
of these shares.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
We are authorized to issue up to 25,000,000 shares of common stock, of which
13,841,195 shares are issued and outstanding as of September 30, 2000. The
following summary description of the common stock is qualified in its entirety
by reference to our certificate of incorporation.
The holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, holders of
common stock are entitled to receive ratably such dividends as may be declared
by our board of directors out of funds legally available therefor, and, upon the
liquidation, dissolution or winding up of SatCon, are entitled to share ratably
in all assets remaining after payment of liabilities and payment of accrued
dividends and liquidation preference on the preferred stock, if any. Holders of
our common stock have no preemptive rights and have no rights to convert their
common stock into any other securities. Our outstanding common stock is, and the
common stock to be outstanding upon completion of the offering will be, validly
issued, fully paid, and nonassessable.
PREFERRED STOCK
We are authorized to issue up to 1,000,000 shares of preferred stock. Our
preferred stock may be issued in one or more series, the terms of which may be
determined at the time of issuance by our 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, redemption rights and sinking fund provisions. The
issuance of preferred stock could reduce the rights, including voting rights, of
the holders of common stock, and, therefore, reduce the value of our common
stock. In particular, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with or sell our assets to
a third party, thereby preserving control of SatCon by existing management.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS UNDER DELAWARE LAW
In accordance with Delaware law, our certificate of incorporation eliminates in
certain circumstances the liability of our directors for monetary damages for
breach of their fiduciary duty as directors. This provision does not eliminate
the liability of a director:
- for a breach of the director's duty of loyalty to us or our stockholders,
- for acts or omissions by the director not in good faith or which involve
intentional misconduct or a knowing violation of law,
- for a willful or negligent declaration of an unlawful dividend, stock
purchase or redemption, or
- for transactions from which the director derived an improper personal
benefit.
In addition, our bylaws include provisions to indemnify our officers and
directors and other persons against expenses, judgments, fines and amounts paid
in settlement in connection with threatened, pending or completed suits of
proceedings against such persons by reason of serving or having served as
officers, directors or in other capacities, except in relation to matters with
respect to which such persons shall be determined not to have acted in good
faith, unlawfully or in the best interests of SatCon. With respect to matters as
to which our officers and directors and others are determined to be liable for
misconduct or negligence in the performance of their duties, our bylaws provide
for indemnification only to the extent that we determine that such person acted
in good faith and in a manner not opposed to the best interests of SatCon.
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However, insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling SatCon
pursuant to Delaware state law, as well as the foregoing charter and bylaw
provisions, we have been informed that in the opinion of the SEC, such
indemnification as it relates to federal securities laws is against public
policy, and therefore, unenforceable.
Further, insofar as limitation of liabilities may be so permitted pursuant to
Delaware state law, as well as the foregoing charter and bylaw provisions, such
limitation of liabilities does not apply to any liabilities arising under
federal securities laws.
DIVIDEND POLICY
We have not paid dividends on our common stock or preferred stock since our
inception, and we have no intention of paying any dividends to our stockholders
in the foreseeable future. We intend to reinvest earnings, if any, in the
development and expansion of our business. Any declaration of dividends in the
future will be at the election of our board of directors and will depend upon
our earnings, capital requirements and financial position, general economic
conditions, requirements of any bank lending arrangements which may then be in
place and other pertinent factors.
TRANSFER AGENT AND REGISTRAR
The name and address of the transfer agent and registrar for our common stock is
EquiServe L.P., 150 Royall Street, Canton, Massachusetts 02021.
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<PAGE>
UNDERWRITING
We will enter into an underwriting agreement with the underwriters named below.
CIBC World Markets Corp., Banc of America Securities LLC and FAC/Equities, a
division of First Albany Corporation, are acting as representatives of the
underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
CIBC World Markets Corp.....................................
Banc of America Securities LLC..............................
FAC/Equities, a division of First Albany Corporation........
-------
Total...................................................
=======
</TABLE>
The underwriters have agreed to purchase all of the shares offered by this
prospectus (other than those covered by the over-allotment option described
below) if any are purchased. Under the underwriting agreement, if an underwriter
defaults in its commitment to purchase shares, the commitments of non-
defaulting underwriters may be increased or the underwriting agreement may be
terminated, depending on the circumstances.
The shares should be ready for delivery on or about , 2001 against
payment in immediately available funds. The underwriters are offering the shares
subject to various conditions and may reject all or part of any order. The
representatives have advised us that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to other securities dealers at such price less a concession of
$ per share. The underwriters may also allow, and such dealers may reallow,
a concession not in excess of $ per share to other dealers. After the
shares are released for sale to the public, the representatives may change the
offering price and other selling terms at various times.
We have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the initial public offering price
that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to public will be
$ . The total proceeds to us will be $ . The underwriters have
severally agreed that, to the extent the over-allotment option is exercised,
they will each purchase a number of additional shares proportionate to the
underwriter's initial amount reflected in the foregoing table.
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<PAGE>
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
- Stabilizing transactions--The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
- Over-allotments and syndicate covering transactions--The underwriters may
sell more shares of our common stock in connection with this offering than
the number of shares than they have committed to purchase. This
over-allotment creates a short position for the underwriters. This short
sales position may involve either "covered" short sales or "naked" short
sales. Covered short sales are short sales made in an amount not greater
than the underwriters' over-allotment option to purchase additional shares
in this offering described above. The underwriters may close out any
covered short position either by exercising their over-allotment option or
by purchasing shares in the open market. To determine how they will close
the covered short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market, as
compared to the price at which they may purchase shares through the
over-allotment option. Naked short sales are short sales in excess of the
over-allotment option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned that, in
the open market after pricing, there may be downward pressure on the price
of the shares that could adversely affect investors who purchase shares in
this offering.
- Penalty bids--If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
- Passive market making--Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject
to limitations, until the time, if ever, at which a stabilizing bid is
made.
Similar to other purchase transactions, the underwriters' purchases to cover the
syndicate short sales or to stabilize the market price of our common stock may
have the effect of raising or maintaining the market price of our common stock
or preventing or mitigating a decline in the market price of our common stock.
As a result, the price of the shares of our common stock may be higher than the
price that might otherwise exist in the open market. The imposition of a penalty
bid might also have an effect on the price of the shares if it discourages
resales of the shares.
Neither we nor the underwriters makes any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by us:
<TABLE>
<CAPTION>
TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- ------------------------- ---------------------------
<S> <C> <C> <C>
SatCon................... $ $ $
</TABLE>
We estimate that our total expenses of the offering, excluding the underwriting
discount, will be approximately $ .
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
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<PAGE>
We, our officers and directors and substantially all other stockholders have
agreed to a 90-day "lock up" with respect to shares of common stock that
they beneficially own, including securities that are convertible into shares of
common stock and securities that are exchangeable or exercisable for shares of
common stock. This means that, subject to certain exceptions for a period of
90 days after the date of the underwriting agreement, we and such persons may
not offer, sell, pledge or otherwise dispose of these securities without the
prior written consent of CIBC World Markets Corp.
Our shares of common stock are listed on the Nasdaq National Market under the
symbol "SATC."
First Albany Corporation, a wholly-owned subsidiary of First Albany
Companies Inc., or FACI, is an NASD member and an underwriter of this offering
through its division FAC/Equities. As of September 30, 2000, FACI owned
11,753,744 shares, or 33.2%, of Mechanical Technology Incorporated's common
stock. Mechanical Technology Incorporated owns 1,800,000 shares of our common
stock and owns warrants to purchase an additional 100,000 shares of our common
stock. Alan P. Goldberg, one of our directors, also serves as president,
co-chief executive officer and a director of FACI, as president, co-chief
executive officer and a director of First Albany Corporation and as a director
of Mechanical Technology Incorporated. This offering is being made pursuant to
the provisions of Rule 2720(c)(3)(B) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters in connection
with this offering will be passed upon for the underwriters by Ropes & Gray,
Boston, Massachusetts.
EXPERTS
The financial statements of SatCon Technology Corporation as of September 30,
1999 and 2000 and for each of the years then ended, included in this prospectus
and elsewhere in the Registration Statement, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The financial statements for the year ended September 30, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Ling Electronics, Inc. and Subsidiary as of
September 30, 1999 and 1998 and for each of the two years in the period ended
September 30, 1999 included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of Beacon Power as of December 31, 1998 and 1999 and
for the years then ended and the period from May 8, 1997 (date of Beacon Power's
inception) to December 31, 1997 and the period from May 8, 1997 (Date of
Inception) to December 31, 1999, included in this prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein. Such financial statements have been included herein in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, NW,
Washington, D.C. 20549, and at the SEC's regional public reference rooms located
at Seven World Trade Center, Suite 1300, New York, New York 10048 or at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please
call the SEC at 1-800-SEC-0330 for further information about the operation of
the public reference rooms. The registration statement and our other SEC filings
are also available to the public on the SEC's Internet site at
HTTP://WWW.SEC.GOV, which contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
We have filed with the SEC a registration statement on Form S-3 (including its
exhibits and schedules) under the Securities Act of 1933, as amended, with
respect to our common stock offered in connection with this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement. We have omitted certain parts of the registration statement in
accordance with the rules and regulations of the SEC. For further information
with respect to us and our common stock, you should refer to the registration
statement. Statements contained in this prospectus as to the contents of any
contract, agreement or other document are not necessarily complete and, in each
instance, you should refer to the copy of such contract, agreement or document
filed as an exhibit to, or incorporated by reference in, the registration
statement. Each statement as to the contents of such contract, agreement or
document is qualified in all respects by such reference. You may obtain copies
of the registration statement, including exhibits, from the SEC's principal
office in Washington, D.C. upon payment of the fees prescribed by the SEC, or
you may examine the registration statement without charge at the offices of the
SEC described above.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and information that we file later with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we will make with
the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934, as amended.
1. Annual Report on Form 10-K for the fiscal year ended September 30, 1999,
2. Amendment No. 1 to Annual Report on Form 10-K/A for the fiscal year ended
September 30, 1999,
3. Amendment No. 2 to Annual Report on Form 10-K/A for the fiscal year ended
September 30, 1999,
4. Current Report on Form 8-K dated October 21, 1999,
5. Current Report on Form 8-K/A dated October 21, 1999,
6. Current Report on Form 8-K dated November 16, 1999,
7. Quarterly Report on Form 10-Q for the period ended December 31, 1999,
8. Amendment No. 1 to Quarterly Report on Form 10-Q/A for the period ended
December 31, 1999,
9. Amendment No. 2 to Quarterly Report on Form 10-Q/A for the period ended
December 31, 1999,
10. Proxy statement used for our annual meeting of stockholders held on
March 15, 2000,
11. Quarterly Report on Form 10-Q for the period ended March 31, 2000,
12. Amendment No. 1 to Quarterly Report on Form 10-Q/A for the period ended
March 31, 2000,
68
<PAGE>
13. Amendment No. 2 to Quarterly Report on Form 10-Q/A for the period ended
March 31, 2000,
14. Current Report on Form 8-K dated May 23, 2000,
15. Quarterly Report on Form 10-Q for the period ended June 30, 2000,
16. Amendment No. 1 to Quarterly Report on Form 10-Q/A for the period ended
June 30, 2000, and
17. The description of our common stock contained in the Registration Statement
on Form 8-A filed on November 6, 1992, including any amendments or reports
filed for the purpose of updating that description.
You may request a copy of these filings, at no cost, by writing or telephoning
to:
SatCon Technology Corporation
161 First Street
Cambridge, MA 02142-1221
Attn: Investor Relations Department
(617) 661-0540
You should rely only on the information or representations provided in this
prospectus. We have authorized no one to provide you with different information.
We are not making an offer of these securities in any state where the offer is
not permitted. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front of the document.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
FINANCIAL STATEMENTS OF SATCON TECHNOLOGY CORPORATION AND
PART I: ITS SUBSIDIARIES
Report of Independent Public Accountants (Arthur Andersen
LLP)...................................................... F-2
Report of Independent Accountants (PricewaterhouseCoopers
LLP)...................................................... F-3
Consolidated Balance Sheets as of September 30, 1999 and
2000...................................................... F-4
Consolidated Statements of Operations for the Years Ended
September 30, 1998, 1999 and 2000......................... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended September 30, 1998, 1999 and 2000..... F-6
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1999 and 2000......................... F-7
Notes to Consolidated Financial Statements.................. F-8
FINANCIAL STATEMENTS OF LING ELECTRONICS, INC. AND ITS
PART II: SUBSIDIARY
Report of Independent Accountants (PricewaterhouseCoopers
LLP)...................................................... F-41
Consolidated Balance Sheets as of September 30, 1998
and 1999.................................................. F-42
Consolidated Statements of Operations for the Years Ended
September 30, 1998
and 1999.................................................. F-43
Consolidated Statements of Shareholder's Deficit for the
Years Ended September 30, 1998 and 1999................... F-44
Consolidated Statements of Cash Flow for the Years Ended
September 30, 1998
and 1999.................................................. F-45
Notes to Consolidated Financial Statements.................. F-46
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL
PART III: STATEMENTS
Introduction to Unaudited Pro Forma Combined Consolidated
Financial Statements...................................... F-53
Unaudited Pro Forma Combined Consolidated Statement of
Operations for the Year Ended September 30, 2000.......... F-54
Notes to Unaudited Pro Forma Combined Consolidated Financial
Statements................................................ F-55
PART IV: FINANCIAL STATEMENTS OF BEACON POWER CORPORATION
Independent Auditors' Report (Deloitte & Touche LLP)........ F-56
Balance Sheets as of December 31, 1998 and 1999............. F-57
Statements of Operations for the Period from May 8, 1997
(Date of Inception) to December 31, 1997 and for the Year
Ended December 31, 1998 and 1999 and for the Period from
May 8, 1997 (Date of Inception) to December 31, 1999...... F-58
Statements of Stockholders' Deficiency for the Period from
May 8, 1997 (Date of Inception) to December 31, 1997 and
for the Years Ended December 31, 1998 and 1999............ F-59
Statements of Cash Flows for the Period from May 8, 1997
(Date of Inception) to December 31, 1997 and for the Year
Ended December 31, 1998 and 1999 and for the Period from
May 8, 1997 (Date of Inception) to December 31, 1999...... F-60
Notes to Financial Statements............................... F-61
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
SatCon Technology Corporation:
We have audited the accompanying consolidated balance sheets of SatCon
Technology Corporation and its subsidiaries (a Delaware corporation) as of
September 30, 1999 and 2000, 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 the Company'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, 1999 and 2000, and the results of their
operations and their cash flows for each of the years then ended in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 28, 2000
F-2
<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
F-3
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,533,072 $ 8,814,324
Accounts receivable, net of allowance of $386,686 in 1999
and $320,222 in 2000.................................... 2,799,143 7,495,942
Unbilled contract costs and fees, net of allowance of
$746,121 in 1999 and $0 in 2000......................... 1,462,201 824,829
Inventory................................................. 3,697,972 8,001,661
Prepaid expenses and other current assets................. 349,070 614,622
----------- -----------
Total current assets.................................... 10,841,458 25,751,378
Investment in Beacon Power Corporation...................... 414,729 --
Warrant to purchase Mechanical Technology Incorporated
common stock.............................................. -- 2,473,713
Property and equipment, net................................. 3,260,632 6,257,476
Intangibles, net............................................ 3,194,609 9,080,089
Other long-term assets...................................... 103,675 924,583
----------- -----------
Total assets............................................ $17,815,103 $44,487,239
=========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,563,605 $ 3,074,517
Accrued payroll and payroll related expenses.............. 479,888 1,284,884
Deferred revenue.......................................... 113,179 1,525,116
Funding commitment to Beacon Power Corporation............ 333,333 --
Other accrued expenses.................................... 620,874 1,459,218
Current portion of long-term debt......................... 16,226 17,494
----------- -----------
Total current liabilities............................... 3,127,105 7,361,229
Long-term debt, net of current portion...................... 33,871 16,377
Other long-term liabilities................................. 29,735 197,349
Commitments and contingencies (Note H)
Contingent obligation to Class D preferred stockholders of
Beacon Power Corporation.................................. 5,309,115 5,793,879
Series A redeemable convertible preferred stock............. 4,894,112 --
Stockholders' equity:
Preferred stock; $0.01 par value, 1,000,000 shares
authorized; 8,000 shares series A redeemable convertible
preferred stock issued and outstanding in 1999 and no
shares issued and outstanding in 2000................... -- --
Common stock, $0.01 par value, 25,000,000 shares
authorized; 9,617,009 in 1999 and 13,841,185 in 2000
shares issued........................................... 96,170 138,412
Additional paid-in capital................................ 37,074,161 72,498,540
Common stock held in escrow, at market value; 42,860
shares in 1999 and none in 2000......................... (428,600) --
Amounts receivable from exercise of stock options......... (1,816,667) --
Accumulated deficit....................................... (30,254,195) (40,195,340)
Accumulated other comprehensive loss...................... -- (1,073,503)
Treasury stock, at cost; 44,500 shares in 1999 and 2000... (249,704) (249,704)
----------- -----------
Total stockholders' equity.............................. 4,421,165 31,118,405
----------- -----------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity...................... $17,815,103 $44,487,239
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1998 1999 2000
----------- ------------ ------------
<S> <C> <C> <C>
Product revenue...................................... $ 7,520,188 $ 9,122,498 $ 22,427,428
Funded research and development revenue.............. 8,010,735 6,355,383 8,627,601
----------- ------------ ------------
Total revenue.................................... 15,530,923 15,477,881 31,055,029
Cost of product revenue.............................. 5,474,067 9,510,941 19,069,192
----------- ------------ ------------
Gross margin..................................... 10,056,856 5,966,940 11,985,837
----------- ------------ ------------
Research and development expenses.................... 6,793,634 6,554,464 10,300,765
Selling, general and administrative expenses......... 4,523,424 8,818,706 9,969,580
Amortization of intangibles.......................... 290,957 371,087 1,217,490
----------- ------------ ------------
Total operating expenses............................. 11,608,015 15,744,257 21,487,835
----------- ------------ ------------
Operating loss....................................... (1,551,159) (9,777,317) (9,501,998)
Other (losses) income................................ -- (150,464) 9,891
Interest income...................................... 179,861 42,287 453,631
Interest expense..................................... (10,206) (115,692) (3,176)
----------- ------------ ------------
Net loss before income taxes and loss from Beacon
Power Corporation.................................. (1,381,504) (10,001,186) (9,041,652)
Provision for income taxes........................... (3,872) -- --
Loss from Beacon Power Corporation................... (3,472,438) (4,340,567) (899,493)
----------- ------------ ------------
Net loss............................................. (4,857,814) (14,341,753) (9,941,145)
Accretion of redeemable convertible preferred stock
discount........................................... -- (50,904) (3,105,888)
----------- ------------ ------------
Net loss attributable to common stockholders......... $(4,857,814) $(14,392,657) $(13,047,033)
=========== ============ ============
Net loss per share, basic and diluted................ $ (0.54) $ (1.57) $ (1.03)
=========== ============ ============
Weighted average number of common shares, basic and
diluted............................................ 8,956,671 9,176,041 12,629,822
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AMOUNTS
RECEIVABLE
COMMON COMMON FROM
ADDITIONAL SHARES STOCK EXERCISE OF
COMMON COMMON PAID-IN HELD IN HELD IN STOCK ACCUMULATED
SHARES STOCK CAPITAL ESCROW ESCROW OPTIONS DEFICIT
---------- -------- ----------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997........ 8,769,146 $ 87,691 $26,576,600 -- -- -- $(11,054,628)
Net loss........................... -- -- -- -- -- -- (4,857,814)
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 -- -- -- $(15,912,442)
Net loss........................... -- -- -- -- -- -- (14,341,753)
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) $(30,254,195)
Net loss........................... -- -- -- -- -- -- (9,941,145)
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 warrant received in connection
with MTI investment.............. -- -- 3,495,438 -- -- -- --
Valuation adjustment for MTI
warrant.......................... -- -- -- -- -- -- --
Common stock issued in connection
with NGC asset acquisition....... 578,761 5,788 5,465,770 -- -- -- --
Conversion of redeemable 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 -- $ -- $ -- $(40,195,340)
========== ======== =========== ======= =========== =========== ============
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE TREASURY TREASURY STOCKHOLDERS'
LOSS SHARES STOCK EQUITY
------------- -------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997........ $ (20,215) -- -- $15,589,448
Net loss........................... -- -- -- (4,857,814)
Exercise of stock options.......... -- -- -- 581,739
Exercise of warrants............... -- -- -- 1,221,873
Treasury stock purchased........... -- 28,300 $(173,076) (173,076)
Change in net unrealized losses on
marketable securities............ 9,835 -- -- 9,835
----------- ------ --------- -----------
BALANCE, SEPTEMBER 30, 1998........ $ (10,380) 28,300 $(173,076) $12,372,005
Net loss........................... -- -- -- (14,341,753)
Exercise of stock options.......... -- -- -- 1,361,334
Treasury stock purchased........... -- 16,200 (76,628) (76,628)
Common stock issued in
acquisitions..................... -- -- -- 568,800
Common stock issued in connection
with settlement agreement which
is held in escrow................ -- -- -- --
Compensation expense related to
stock options and warrants issued
to non-employees................. -- -- -- 2,208,639
Valuation adjustment for common
stock held in escrow............. -- -- -- --
Warrants issued in connection with
the sale of redeemable preferred
stock............................ -- -- -- 2,369,292
Change in net unrealized losses on
marketable securities............ 10,380 -- -- 10,380
Accretion of redeemable convertible
preferred stock discount......... -- -- -- (50,904)
----------- ------ --------- -----------
BALANCE, SEPTEMBER 30, 1999........ -- 44,500 $(249,704) $ 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 warrant received in connection
with MTI investment.............. -- -- -- 3,495,438
Valuation adjustment for MTI
warrant.......................... (1,021,725) -- -- (1,021,725)
Common stock issued in connection
with NGC asset acquisition....... -- -- -- 5,471,558
Conversion of redeemable 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) -- -- (51,778)
----------- ------ --------- -----------
BALANCE, SEPTEMBER 30, 2000........ $(1,073,503) 44,500 $(249,704) $31,118,405
=========== ====== ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1998 1999 2000
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,857,814) $(14,341,753) $(9,941,145)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 625,976 1,013,037 2,038,391
Allowance for unbilled contract costs and fees.......... (19,065) 688,510 --
Allowance for doubtful accounts......................... (94,424) 334,850 265,744
Allowance for inventory................................. (549,765) 870,021 658,774
Loss from Beacon Power Corporation...................... 3,472,438 4,340,567 899,493
Loss on sale of marketable securities................... -- 87,535 --
Write-off impaired assets............................... 50,104 255,544 --
Compensation expense related to release of stock from
escrow, issuance of stock options and warrants to
non-employees......................................... -- 2,208,639 385,760
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable................................... (301,909) 89,858 (3,025,520)
Unbilled contract costs and fees...................... 532,573 (954,393) 637,372
Prepaid expenses and other current assets............. (8,529) 31,455 144,687
Inventory............................................. (1,550,819) (601,120) (628,472)
Other long-term assets................................ (607,245) 517,402 8,072
Accounts payable...................................... 647,689 72 869,225
Accrued expenses and payroll.......................... (291,061) (98,163) 641,266
Other liabilities..................................... 6,802 (72,763) 1,566,051
----------- ------------ -----------
Total adjustments....................................... 1,912,765 8,711,051 4,460,843
----------- ------------ -----------
Net cash used in operating activities....................... (2,945,049) (5,630,702) (5,480,302)
----------- ------------ -----------
Cash flows from investing activities:
Sales and maturities of marketable securities........... 1,340,609 580,144 --
Patent and intangible expenditures...................... (431,526) (102,227) (78,962)
Purchase of property and equipment...................... (601,331) (220,416) (2,463,777)
Acquisitions, net of cash acquired...................... -- (995,876) (24,054)
Investment in Beacon Power Corporation.................. (2,007,508) (696,667) (333,333)
----------- ------------ -----------
Net cash used in investing activities....................... (1,699,756) (1,435,042) (2,900,126)
----------- ------------ -----------
Cash flows from financing activities:
Repayment of capital lease obligations.................. (40,625) (100,000) (16,226)
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..... 581,739 1,361,334 7,320,538
Proceeds from exercise of warrants...................... 1,221,873 -- 1,112,900
Purchase of treasury stock.............................. (173,076) (76,628) --
Deferred equity financing costs......................... -- -- (678,980)
----------- ------------ -----------
Net cash provided by financing activities................... 1,589,911 8,397,206 14,713,458
----------- ------------ -----------
Effect of foreign currency exchange rates on cash and cash
equivalents............................................... -- -- (51,778)
----------- ------------ -----------
Net (decrease)/increase in cash and cash equivalents........ (3,054,894) 1,331,462 6,281,252
Cash and cash equivalents at beginning of period............ 4,256,504 1,201,610 2,533,072
----------- ------------ -----------
Cash and cash equivalents at end of period.................. $ 1,201,610 $ 2,533,072 $ 8,814,324
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<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.
RESTATEMENT
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 1996,
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 for
an additional discussion). The Company previously had accounted for these costs
either as fixed assets or as part of the net assets of Beacon Power. As a
result, certain costs previously capitalized in 1996, 1997 and 1998 should have
been expensed as incurred, therefore reducing the Company's investment in Beacon
Power by $3.1 million as of December 24, 1997. The adjustments to the financial
statements at
F-8
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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:
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>
F-9
<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>
F-10
<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):
F-11
<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.
F-12
<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.
F-13
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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
equipment........................ 5 years
Mechanical laboratory and shop
equipment........................ 10 years
Sales and demonstration
equipment........................ 3-10 years
Furniture and fixtures............. 7-10 years
Leasehold improvements............. Lesser of the life of the lease or the useful
life of the improvement
</TABLE>
When assets are retired or otherwise disposed of, the cost and related
depreciation and amortization are eliminated from the accounts and any resulting
gain or loss is reflected in other income.
LONG-LIVED ASSETS
The Company periodically evaluates the potential impairment of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. At the occurrence of a certain event
or change in circumstances or at each balance sheet date, the Company evaluates
the potential impairment of an asset based on future undiscounted cash flows. In
the event that impairment exists, the Company will measure the amount of such
impairment based on the present value of estimated future cash flows using a
discount rate commensurate with the risks involved. Factors that management
considers in performing this assessment include current operating results,
trends and prospects and, in addition, demand, competition and other economic
factors. At September 30, 1999 and 2000, the Company determined that there had
been no impairment of its long-lived assets, except as discussed in Note D and
Note G.
F-14
<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 1999 2000
----------- ----------- ----------
<S> <C> <C> <C>
Patents................................. 15-20 years $ 676,786 $ 755,748
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
----------- ----------
4,026,531 11,141,826
Less: accumulated amortization.......... 831,922 2,061,737
----------- ----------
$ 3,194,609 $9,080,089
=========== ==========
</TABLE>
Amortization expense related to intangibles for the years ended September 30,
1998, 1999 and 2000, was $303,674, $389,685 and $1,229,815, 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
bases of assets and liabilities using statutory rates. In addition, SFAS
No. 109 requires a valuation
F-15
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
allowance against net deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized.
STOCK-BASED COMPENSATION
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 accounts for
stock-based compensation for employees under Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and related
interpretations and provides additional footnote disclosure as required 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
EITF No. 96-18 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 loss per share. Basic loss per share is computed by
dividing net loss attributable to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted loss per share
reflects the potential dilution, if any, 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 loss 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.
F-16
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION, RESTATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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 book value of such financial instruments approximate their respective fair
values.
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 140 will have a material impact on its financial statements.
F-17
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 customer. These amounts included
retained fee and unliquidated costs totaling $282,746 and $209,832 at
September 30, 1999 and 2000, respectively.
C. INVENTORY
Inventory includes material, labor and overhead and consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 2000
---------- ----------
<S> <C> <C>
Raw material................................................ $1,139,064 $3,081,265
Work-in-process............................................. 2,199,199 2,932,965
Finished goods.............................................. 359,709 1,987,431
---------- ----------
$3,697,972 $8,001,661
========== ==========
</TABLE>
D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 2000
---------- ----------
<S> <C> <C>
Machinery and equipment..................................... $4,505,287 $8,059,916
Furniture and fixtures...................................... 280,769 305,777
Computer software........................................... 621,583 744,308
Leasehold improvements...................................... 648,734 751,793
---------- ----------
6,056,373 9,861,794
Less: accumulated depreciation and amortization............. 2,795,741 3,604,318
---------- ----------
$3,260,632 $6,257,476
========== ==========
</TABLE>
Depreciation and amortization expense, relating to property and equipment, for
the years ended September 30, 1998, 1999 and 2000 was $540,213, $633,964 and
$808,577, respectively.
As of September 30, 1999 and 2000, 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.
F-18
<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 (the "Shares") of the Company's Common Stock. The
aggregate consideration received by the Company was $5,000,000. In exchange for
a capital contribution, the Company received all of the capital stock of Beacon
Power, consisting of 3,375,000 shares of Beacon Power's Common Stock and
1,125,000 shares of Beacon Power's preferred stock, par value $.01 per share, as
adjusted to reflect a 1:1.125 stock split. Duquesne also entered into agreements
pursuant to which it will act as exclusive distributor of Beacon Power's
products, subject to certain exceptions, in seven Mid-Atlantic States and the
District of Columbia.
During a recapitalization of Beacon Power on December 24, 1997, Beacon Power
obtained equity financing 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 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 convertible preferred stock
("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 30, 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
F-19
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED)
September 30, 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, $.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, $.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, $.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.
F-20
<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 is 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 is payable on the Maturity Date.
In August 1999, the Company exchanged in full the Notes and $83,333.33 for a
note with a principal amount of $333,333.33 ("Bridge Note") plus accrued
interest due and payable on the earlier of (i) the date of conversion of the
note as described below or (ii) upon the occurrence of an event of default. The
Bridge Note 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 is
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.
F-21
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED)
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 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 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 30 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 .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
F-22
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED)
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.
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 Staff
Accounting Bulletin 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 $424,418, $72,644 and $470,996 of the Company's total
revenue for the fiscal years ended September 30, 1998, 1999 and 2000,
respectively. At September 30, 1999 and 2000, the Company had $5,390 and
$346,066, respectively, of accounts receivable and unbilled contract costs and
fees from Beacon Power.
F. LINE OF CREDIT
In December 1998, the Company obtained a $3,000,000 demand discretionary line of
credit with a bank. The line of credit bore 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 had pledged all assets of the Company
as collateral against this line of credit. On August 29, 2000, the Company
terminated the line of credit.
F-23
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Capital lease obligations................................... $ 50,097 $ 33,871
Less: Current portion....................................... (16,226) (17,494)
-------- --------
$ 33,871 $ 16,377
======== ========
</TABLE>
At September 30, 2000, maturities of these obligations are as follows:
<TABLE>
<S> <C>
FISCAL YEAR
------------------------------------------------------------
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 fair market value of these securities exceeded the 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
F-24
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. LONG-TERM DEBT (CONTINUED)
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 expired as of September 30, 1999.
Future minimum annual rentals under the lease agreements at September 30, 2000
are as follows:
<TABLE>
<S> <C>
FISCAL YEAR
------------------------------------------------------------
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 $1,235,867, $1,683,749 and $2,157,506 for the years
ended September 30, 1998, 1999 and 2000, respectively.
Certain of the facility leases contain escalation clauses, effective October 1,
1998, rental expense has been recognized on a straight-line basis over the
remaining lease term. At September 30, 1999 and 2000, deferred rent expense
amounted to $110,390 and $207,739, respectively.
LITIGATION
On October 15, 1997, the Company 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 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. On September 15, 2000,
the Company entered into a settlement agreement in which the contract
F-25
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. COMMITMENTS AND CONTINGENCIES (CONTINUED)
was to be closed and considered completed 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
in 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 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 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 the Company with an amended answering statement
and counterclaim, including additional allegations that the Company has engaged
in unfair and deceptive trade practices and that the Company's 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, 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 $86,883, $218,729 and $366,264 for the years ended
September 30, 1998, 1999 and 2000, respectively.
F-26
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Current payable:
Federal.............................. -- -- (14,699)
State................................ $ 3,872 -- --
Foreign.............................. -- -- 14,699
----------- ----------- -----------
3,872 -- --
----------- ----------- -----------
Deferred tax expense/(benefit):
Federal.............................. $(1,349,519) $(3,888,031) $(2,962,183)
State................................ (404,950) (1,167,905) (890,122)
Change in valuation allowance........ 1,754,469 5,055,936 3,852,305
----------- ----------- -----------
-- -- --
----------- ----------- -----------
$ 3,872 -- --
=========== =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of September 30, 1999
and 2000, the components of the net deferred tax assets/(liabilities) are as
follows:
<TABLE>
<CAPTION>
1999 2000
------------ ------------
<S> <C> <C>
Federal net operating loss.................................. $ 5,566,879 13,385,581
State net operating loss, net of federal benefit............ 495,980 1,912,496
Credits..................................................... 499,585 421,035
Depreciation................................................ 336,038 (227,657)
Loss from Beacon Power Corporation.......................... 3,128,804 4,932,397
Other....................................................... 1,562,820 834,324
Valuation allowance......................................... (11,590,106) (21,258,448)
------------ ------------
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.
The provision for income taxes differs from the federal statutory rate due to
the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
<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.................................. (0.5) (0.7) 1.6
Change in valuation allowance.......... 40.8 40.9 38.6
----------- ----------- -----------
Effective tax rate..................... 0.1 % -- % -- %
=========== =========== ===========
</TABLE>
F-27
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INCOME TAXES (CONTINUED)
At September 30, 2000, the Company had net operating loss carry forwards of
approximately $39,370,000 and $30,599,000 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 date of issuance. The Company has valued the warrants 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 Emerging Issues Task
Force (EITF) 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
Statement 115 for that category of securities. The Company has designated that
the securities to be purchased under the warrant agreement 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
F-28
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. STOCKHOLDERS' EQUITY (CONTINUED)
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.
A summary of the Company's stock option activity is presented below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1998 1999 2000
-------------------- -------------------- ---------------------
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 period....... 700,427 $ 8.44 820,910 $9.58 1,851,227 $ 8.06
Granted................................ 319,000 11.20 1,604,000 7.03 820,050 16.62
Exercised.............................. (100,266) 5.80 (455,600) 6.98 (701,774) 7.84
Canceled............................... (98,251) 10.55 (118,083) 8.84 (92,398) 7.83
-------- ------ --------- ----- ---------- ------
Outstanding at end of period............. 820,910 $ 9.58 1,851,227 $8.06 1,877,105 $11.89
======== ====== ========= ===== ========== ======
Exercisable at end of period............. 413,403 $ 8.48 840,560 $8.57 463,764 $ 9.26
======== ====== ========= ===== ========== ======
</TABLE>
F-29
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. STOCKHOLDERS' EQUITY (CONTINUED)
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.
F-30
<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.
F-31
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION
Had compensation cost for the Company's stock-based compensation been determined
based on fair value at the grant dates as calculated in accordance with SFAS
No. 123, the Company's net loss and loss per share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
1998 1999 2000
----------------------- ------------------------------- -----------------------
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................................ $ (4,857,814) $ (.54) $ (14,392,657) $ (1.57) $(13,047,033) $(1.03)
Pro forma.................................. $ (5,433,804) $ (.61) $ (15,597,109) $ (1.70) $(17,092,280) $(1.35)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1996 and additional awards in future years are anticipated.
The fair value of each stock option is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: an expected life of seven years, expected volatility of 57.9%, no
dividends, and risk-free interest rate of 5.76% for September 30, 1998; 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 ranging from 80.1% to 112.3%, no dividends,
and risk-free interest rate of 6.17% for September 30, 2000. The weighted
average fair value of options granted for years ended September 30, 1998, 1999
and 2000 are $7.14, $5.21, and $14.05, 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.
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
F-32
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. PREFERRED STOCK (CONTINUED)
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 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 preferred stock.
The Company has valued the redeemable convertible preferred stock at issuance to
be $4,843,208 based on the relative fair market values of the financial
instruments issued in connection with this placement 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 redeemable 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.
F-33
<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 1998 1999 2000 1999 2000
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
U.S. government:
U.S. Department of Defense..................... 22.1% 20.6% * 20.4% 10.3%
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,
-----------------------------------
1998 1999 2000
-------- ---------- -----------
<S> <C> <C> <C>
Accretion of redeemable convertible preferred stock
discount................................................. $ -- $ 50,904 $ 3,105,888
======= ========== ===========
Acquisition of equipment under capital leases.............. $ -- $ 49,813 $ --
======= ========== ===========
Contingent obligation to Class D preferred stockholders of
Beacon Power Corporation................................. $ -- $5,309,115 $ 484,764
======= ========== ===========
Conversion of redeemable 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....... $ -- $ 238,409 $ 257,160
======= ========== ===========
Warrants issued in connection with MTI investment.......... $ -- $ -- $ 1,505,421
======= ========== ===========
MTI warrant received in connection with MTI investment..... $ -- $ -- $ 3,459,438
======= ========== ===========
Valuation adjustment for MTI warrants...................... $ -- $ -- $(1,021,725)
======= ========== ===========
</TABLE>
F-34
<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,
--------------------------------------
1998 1999 2000
--------- ----------- ------------
<S> <C> <C> <C>
Fair value of assets.................................... -- $ 1,742,812 $ 11,200,265
Cost in excess of net assets of companies acquired,
net................................................... -- 389,079 3,754,910
Liabilities assumed, including transaction costs........ -- (567,215) (2,476,383)
Fair value of common stock issued....................... -- (568,800) (12,408,792)
--------- ----------- ------------
Cash paid............................................... -- $ 995,876 $ 70,000
Less: Cash acquired..................................... -- -- (45,946)
--------- ----------- ------------
Net cash paid for the acquisitions...................... -- $ 995,876 $ 24,054
========= =========== ============
</TABLE>
INTEREST AND INCOME TAXES PAID
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Interest.................................................... $ 10,206 $115,692 $ 3,176
======== ======== ========
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. 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 and Lighthouse Software under the purchase
method of accounting. The purchase price has been allocated as follows:
<TABLE>
<S> <C>
Inventory................................................... $ 50,000
Property and equipment...................................... 100,597
Intangibles................................................. 275,000
Goodwill.................................................... 389,079
--------
$814,676
========
</TABLE>
The pro forma financial information has not been presented, as the acquisitions
of Inductive Components, Inc. and Lighthouse Software, Inc. are not material.
F-35
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. ACQUISITIONS (CONTINUED)
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"). 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
</TABLE>
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
F-36
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. ACQUISITIONS (CONTINUED)
occurred on the applicable dates indicated and are not intended to be indicative
of future results of operations.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1998 1999 2000
----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................................. $27,764,923 $ 23,849,881 $ 31,194,618
Operating loss.......................... $(2,433,575) $(11,316,689) $ (9,822,203)
Net loss................................ $(5,740,230) $(15,881,125) $(10,260,029)
Net loss attributable to common
stockholders.......................... $(5,740,230) $(15,932,029) $(13,365,917)
Net loss per share, basic and diluted... $ (0.59) $ (1.60) $ (1.06)
</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 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
</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
F-37
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. ACQUISITIONS (CONTINUED)
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 net loss per share computations:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Net loss attributable to common stockholders..... $ (4,857,914) $(14,392,657) $(13,047,033)
============ ============ ============
BASIC AND DILUTED:
Common shares outstanding, beginning of period... 8,769,146 8,990,249 9,529,649
Weighted average common shares issued during the
period......................................... 190,163 200,017 3,100,173
Weighted average shares repurchased during the
period......................................... (2,638) (14,225) --
------------ ------------ ------------
Weighted average shares outstanding--basic and
diluted........................................ 8,956,671 9,176,041 12,629,822
============ ============ ============
Net loss per share, basic and diluted............ $ (0.54) $ (1.57) $ (1.03)
============ ============ ============
</TABLE>
At September 30, 1998, 1999 and 2000, 28,300, 44,500 and 44,500 common shares,
respectively, were excluded from common shares outstanding, as they were held in
treasury. At September 30, 1999, 42,860 common shares were excluded from common
shares outstanding, as they were held in escrow.
At September 30, 1998, 1999 and 2000, options and warrants to purchase 884,758,
2,782,147, and 2,854,105 shares of common stock, respectively, were excluded
from the diluted weighted average common shares outstanding as their effect
would be antidilutive.
F-38
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Q. COMPREHENSIVE LOSS
The Company's total comprehensive loss is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Net loss......................................... $ (4,857,814) $(14,341,753) $ (9,941,145)
============ ============ ============
Other comprehensive income/(loss), net of tax:
Unrealized gains on securities................. $ 9,835 $ 10,380 --
Valuation adjustment for MTI warrants.......... -- -- $ (1,025,725)
Foreign currency translation adjustment........ -- -- (51,778)
------------ ------------ ------------
Other comprehensive income/(loss)................ 9,835 10,380 (1,077,503)
------------ ------------ ------------
Comprehensive loss............................... $ (4,847,979) $(14,331,373) $(11,018,648)
============ ============ ============
</TABLE>
R. SEGMENT DISCLOSURES
As of October 1, 1998, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products and services, geographical areas and
major customers. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and assess their performance.
The Company's organizational structure is based on strategic business units that
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, electronics products and motion control
products.
The Company performs research and development services in collaboration with
third parties. Film Microelectronics, Inc. designs and manufactures 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 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.
F-39
<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,
------------------------------------------------
1998 1999 2000
----------- ------------ -------------
<S> <C> <C> <C>
Research and development:
Product revenue................................. -- -- $ 31,486
Funded research and development revenue......... $ 8,010,735 $ 6,355,383 $ 8,627,601
----------- ------------ -------------
Total revenue................................. $ 8,010,735 $ 6,355,383 $ 8,659,087
----------- ------------ -------------
Loss from operations, net of amortization of
intangibles................................. $(1,454,707) $ (6,577,012) $ (3,838,907)
=========== ============ =============
Electronics products:
Product revenue............................... $ 5,909,765 $ 6,306,085 $ 8,584,446
----------- ------------ -------------
Income (loss) from operations, net of
amortization of intangibles................. $ 504,528 $ (2,073,946) $ (3,128,643)
=========== ============ =============
Motion control products:
Product revenue............................... $ 1,610,423 $ 2,816,413 $ 13,811,496
----------- ------------ -------------
Loss from operations, net of amortization of
intangibles................................. $ (310,023) $ (755,272) $ (1,316,958)
=========== ============ =============
Consolidated:
Product revenue............................... $ 7,520,188 $ 9,122,499 $ 22,427,428
Funded research and development revenue....... $ 8,010,735 $ 6,355,383 $ 8,627,601
----------- ------------ -------------
Total revenue................................. $15,530,923 $ 15,477,882 $ 31,055,029
=========== ============ =============
Loss from operations, net of amortization..... $(1,260,202) $ (9,406,230) $ (8,284,508)
Amortization of intangibles................... $ (290,957) $ (371,087) $ (1,217,490)
----------- ------------ -------------
Operating loss................................ $(1,551,159) $ (9,777,317) $ (9,501,998)
Other (losses) income......................... $ -- $ (150,464) $ 9,891
Interest income............................... $ 179,861 $ 42,287 $ 453,631
Interest expense.............................. $ (10,206) $ (115,692) $ (3,176)
----------- ------------ -------------
Net loss before income taxes and loss from
Beacon Power Corporation.................... $(1,381,504) $(10,001,186) $ (9,041,652)
=========== ============ =============
</TABLE>
F-40
<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,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Research and development:
Segment assets............................................ $ 6,283,773 $18,464,754
Electronics products:
Segment assets............................................ $ 8,643,258 $10,132,575
Motion control products:
Segment assets............................................ $ 2,473,343 $13,416,197
Consolidated:
Segment assets............................................ $17,400,374 $42,013,526
Investment in Beacon Power Corporation.................... $ 414,729 $ --
Warrants to purchase Mechanical Technology
Incorporated common stock................................. $ -- $ 2,473,713
----------- -----------
Total assets................................................ $17,815,103 $44,487,239
=========== ===========
</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,
----------------------------------------
1998 1999 2000
----------- ------------ -----------
<S> <C> <C> <C>
Revenue by geographic region:
United States...................................... $15,333,525 $ 14,627,000 $27,701,844
Rest of world...................................... 197,398 850,981 3,353,185
----------- ------------ -----------
Total revenue.................................... $15,530,923 $ 15,477,981 $31,055,029
=========== ============ ===========
</TABLE>
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of Ling Electronics, Inc. and
Subsidiary
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholder's equity and cash flows
present fairly, in all material respects, the financial position of Ling
Electronics, Inc. and its subsidiary at September 30, 1998 and 1999, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Albany, New York
December 3, 1999
F-41
<PAGE>
LING ELECTRONICS, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 44 $ 64
Accounts receivable, less allowance of $99 in 1998 and
$113 in 1999............................................ 3,698 2,377
Inventories, net.......................................... 2,524 2,807
Prepaid expenses and other assets......................... 106 122
------- -------
Total current assets.................................... 6,372 5,370
Property and equipment, net................................. 392 394
------- -------
Total assets............................................ $ 6,764 $ 5,764
======= =======
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 1,423 $ 409
Accrued liabilities....................................... 1,143 811
Advance due Parent Company................................ 5,474 6,907
------- -------
Total liabilities....................................... 8,040 8,127
------- -------
Commitments and contingencies
Shareholder's deficit:
Common stock, par value $0.01, 5,000,000 shares
authorized, 32,398 shares issued........................ -- --
Additional paid-in capital................................ 1,636 1,636
Retained deficit.......................................... (2,901) (3,988)
Accumulated other comprehensive loss...................... (11) (11)
------- -------
Total shareholder's deficit............................. (1,276) (2,363)
------- -------
Total liabilities and shareholder's deficit............. $ 6,764 $ 5,764
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-42
<PAGE>
LING ELECTRONICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Net sales................................................. $12,234 $ 8,372
Cost of sales............................................. 8,986 6,213
------- -------
Gross profit............................................ 3,248 2,159
Operating expenses:
Product development..................................... 99 188
Selling and commissions................................. 1,772 1,427
General and administrative.............................. 1,812 1,631
------- -------
Total operating expenses.............................. 3,683 3,246
------- -------
Net loss.............................................. $ (435) $(1,087)
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-43
<PAGE>
LING ELECTRONICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) DEFICIT
-------- ---------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1997.............. 32,398 $ -- $1,636 $(2,466) $ (19) $ (849)
Comprehensive income (loss):
Net loss................................ (435) (435)
Foreign currency translation
adjustment............................ 8 8
-------
Total comprehensive loss................ (427)
------ ---------- ------ ------- ------- -------
Balances, September 30, 1998.............. 32,398 -- 1,636 (2,901) (11) (1,276)
Comprehensivce income (loss):
Net loss................................ (1,087) (1,087)
Foreign currency translation
adjustment............................ -- --
-------
Total comprehensive loss................ (1,087)
------ ---------- ------ ------- ------- -------
Balances, September 30, 1999.............. 32,398 $ -- $1,636 $(3,988) $ (11) $(2,363)
====== ========== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
<PAGE>
LING ELECTRONICS, INC. AND SUBSIDARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(435) $(1,087)
Adjustments to reconcile net loss to net cash used in
operating activities:
Allowance for doubtful accounts......................... 5 14
Reserve for obsolete inventory.......................... (46) (41)
Depreciation and amortization........................... 139 135
Loss on sale of fixed asset............................. -- 4
Foreign currency translation adjustment................. 8 --
Changes in operating assets and liabilities:
Accounts receivable................................... (468) 1,307
Inventories........................................... (156) (242)
Prepaid expenses and other assets..................... 5 (16)
Accounts payable...................................... 198 (1,014)
Accrued liabilities................................... 261 (332)
----- -------
Net cash used in operating activities..................... (489) (1,272)
----- -------
Cash flows from investing activities:
Purchases of property and equipment..................... (90) (141)
----- -------
Net cash used in investing activities..................... (90) (141)
----- -------
Cash flows from financing activities:
Advances from Parent Company............................ 586 1,433
----- -------
Net cash provided by financing activities................. 586 1,433
----- -------
Increase in cash and cash equivalents....................... 7 20
Cash and cash equivalents--beginning of year................ 37 44
----- -------
Cash and cash equivalents--end of year...................... $ 44 $ 64
===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-45
<PAGE>
LING ELECTRONICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ling Electronics, Inc. (the "Company"), of Anaheim California, designs,
manufacturers and markets electro-dynamic vibration test systems, high-intensity
sound transducers, power conversion equipment and power amplifiers used to
perform reliability testing and stress screening during product development and
quality control. This mode of testing is used by industry and the military to
reveal design and manufacturing flaws in a broad range of precision products,
from satelite parts to computer components.
On October 21, 1999, SatCon Technology Corporation ("SatCon") completed its
acquisition of the Company from Mechanical Technology, Incorporated. (the
"Parent Company") in connection with an additional investment by the Parent
Company of approximately $7,000 in SatCon. In consideration for the acquisition
of the Company and the Parent Company's investment, the Parent Company will
receive 1,800,000 shares of SatCon's common stock, $.01 par value per share, and
warrants to purchase an additional 100,000 shares of SatCon's common stock. The
Parent Company funded $2,570 of its investment in SatCon on October 21, 1999,
and will make the remaining investment by the end of January 2000. In addition,
SatCon will also receive warrants to purchase 100,000 shares of the Parent
Company's common stock. In connection with the acquisition, the advances due to
the Parent Company were contributed to capital by the Parent Company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its sister company (a wholly-owned subsidiary of the Parent Company) Ling
Electronics, Ltd., after eliminating intercompany accounts and transactions.
USE OF ESTIMATES
The preparation of the consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid short-term
investments with maturities of less than three months. Cash and cash equivalents
are carried at cost, which approximates market.
INVENTORIES
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated (or amortized in the
case of leasehold improvements) using primarily the straight-line method over
their estimated useful lives ranging from
F-46
<PAGE>
LING ELECTRONICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
three to ten years. Significant additions or improvements extending assets'
useful lives are capitalized; normal maintenance and repair costs are expensed
as incurred. The cost of fully depreciated (or amortized) assets remaining in
use are included in the respective asset and accumulated depreciation (or
amortization) accounts. When items are sold or retired, related gains or losses
are included in operations.
Assessments whether there has been a permanent impairment in the value of
property and equipment are periodically performed by considering factors such as
expected future operating income, trends and prospects, as well as the effects
of demand, competition and other economic factors. Management believes no
permanent impairment has incurred.
REVENUE RECOGNITION
Sales of products are recognized when products are shipped to customers. Sales
of products under long-term contracts are recognized under the
percentage-of-completion method. Percentage-of-completion is based on the ratio
of incurred costs to current estimated total costs at completion. Total contract
losses are charged to operations during the period such losses are estimable.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiary are translated at
year-end rates of exchange, and revenues and expenses are translated at the
average rates of exchange prevailing for the year. The effects of unrealized
exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are accumulated in shareholder's equity.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on the enacted tax laws
and statutory rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the taxes payable for the period and
the change during the period in deferred tax assets and liabilities.
The Company will be included in the consolidated federal tax return filed by the
Parent Company through October 21, 1999, the date the Company was sold to SatCon
Technology Corporation. The Company's tax provision has been computed using the
separate return method for the allocation of federal income taxes. Deferred
taxes are recorded on the separate company financial statements until the
underlying temporary differences giving rise to the deferred taxes turn and the
taxes become currently payable/receivable.
F-47
<PAGE>
LING ELECTRONICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which established standards for the
reporting and display of comprehensive income. The Company has adopted SFAS No.
130 effective October 1, 1997. Comprehensive income includes such items as
foreign currency translation adjustments, etc. These amounts are presented as a
component of shareholder's deficit, consistent with the Company's previous
practice. SFAS No. 130 does not affect current principles of measurement of
revenues and expenses and accordingly, the adoption of SFAS No. 130 had no
effect on the Company's results of operations or financial position.
2. BASIS OF PRESENTATION
The Company's consolidated financial statements have been presented on the basis
that it will continue as a going-concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company reported net losses of $435 and $1,087 for the years ended
September 30, 1998 and 1999, respectively, and had a deficit in equity of $2,363
at September 30, 1999.
However, as discussed in Note 1, the Company was acquired on October 21, 1999 by
SatCon. Therefore, these financial statements do not consider whether the
Company will continue as a going concern. Continuation will be dependent on
business decision made by the management of SatCon, funding provided by SatCon
and the Company's results of operations.
3. INVENTORIES
Inventories at September 30, consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Finished goods.............................................. $ 32 $ --
Work in progress............................................ 685 794
Raw materials, components and assemblies.................... 2,147 2,312
------ ------
2,864 3,106
Less, provision for obsolete inventory...................... (340) (299)
------ ------
$2,524 $2,807
====== ======
</TABLE>
F-48
<PAGE>
LING ELECTRONICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Property and equipment at September 30, consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Leasehold improvements.................................... $ 446 $ 453
Machinery and equipment................................... 1,776 1,783
Furniture and fixtures.................................... 561 560
Computer equipment and software........................... 359 374
Jigs, dies and molds...................................... 191 201
Construction in progress.................................. -- 78
Vehicles.................................................. 36 36
------- -------
3,369 3,485
Less, accumulated depreciation and amortization........... (2,977) (3,091)
------- -------
$ 392 $ 394
======= =======
</TABLE>
Depreciation and amortization expense was $139 and $135 for the years ended
September 30, 1998 and 1999, respectively. Repairs and maintenance expense was
$122 and $103 for the years ended September 30, 1998 and 1999, respectively.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION
During October 1998, a legal action brought by a group of investors against the
Parent Company related to a stock purchase agreement and side letter agreements
for the sale of the stock of the Company was determined in favor of the Parent
Company.
In February 1995, the Company made a voluntary disclosure to the United States
Department of Commerce regarding unlicensed exports of certain products shipped
in the first four months of fiscal 1995. The Company has fully cooperated with
the Office of Export Enforcement, which has not taken any action to-date.
Possible administrative sanctions include: no action; a warning letter; denial
of export privileges; and/or imposition of civil penalties. Foreign sales
represent a significant portion of the Company's total revenue. 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.
LEASE COMMITMENTS
Future minimum rental payments required under noncancelable operating leases
are: $409 in 2000; $424 in 2001; $440 in 2002; and $344 in 2003. Rent expense
under all leases was $372 for each year in the years ended September 30, 1998
and 1999.
Future minimum rental income under non-cancelable operating sub-leases are: $160
in 2000; and $92 in 2001. There was no rental income for the year ended
September 30, 1998. Rental income under all sub-leases was $164 for the year
ended September 30, 1999.
F-49
<PAGE>
LING ELECTRONICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYEE SAVINGS PLAN
The Parent Company maintains a voluntary savings and retirement plan (Internal
Revenue Code Section 401(k) Plan) covering substantially all employees. The plan
allows eligible employees to contribute a percentage of their pretax
compensation and allows the Parent Company's management to make discretionary
matching contributions. The investment of contributions to the plan is
self-directed by the participants in the plan.
6. INCOME TAXES
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates.
There was no income tax expense or benefit for the years ended September 30,
1998 or 1999.
The significant components of deferred income tax expense (benefit) for the
years ended September 30, are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax (benefit) expense............................. $ 62 $ (21)
Net operating loss carryforward--federal................... (132) (274)
Net operating loss carryforward--state..................... (18) (36)
Net operating loss carryforward--foreign................... (60) (46)
------ ------
(148) (377)
Change in valuation allowance.............................. 148 377
------ ------
$ -- $ --
====== ======
</TABLE>
The Company's effective income tax rate from continuing operations differed from
the federal statutory rate as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Federal statutory tax rate.................................. (34)% (34)%
State taxes, net of federal tax effect...................... 0% 0%
Change in valuation allowances.............................. 34% 35%
Other, net.................................................. 0% (1)%
--- ---
0% 0%
=== ===
</TABLE>
F-50
<PAGE>
LING ELECTRONICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
6. INCOME TAXES (CONTINUED)
The deferred tax assets and liabilities as of September 30, consist of the
following tax effects relating to temporary differences and carryforwards:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Current deferred tax assets:
Bad debt reserve.......................................... $ 30 $ 45
Inventory valuation....................................... 154 119
Inventory capitalization.................................. 18 23
Vacation pay.............................................. 40 29
Warranty and other sale obligations....................... 12 68
Other reserves and accruals............................... 3 8
----- -----
257 292
Valuation allowance......................................... (257) (292)
----- -----
Net current deferred tax assets........................... $ -- $ --
===== =====
</TABLE>
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Noncurrent deferred tax assets:
Net operating loss--federal............................. $ 774 $ 1,048
Net operating loss--state............................... 123 159
Net operating loss--foreign............................. 137 183
Property, plant and equipment........................... 26 12
------- -------
1,060 1,402
Valuation allowance....................................... (1,060) (1,402)
------- -------
Net noncurrent deferred tax assets...................... $ -- $ --
======= =======
</TABLE>
The valuation allowance is $1,317 and $1,694 at September 30, 1998 and 1999,
respectively. During the year ended September 30, 1999, the valuation allowance
increased by $377.
At September 30, 1999, the Company has unused federal net operating loss
carryforwards of approximately $3,083. The federal net operating loss
carryforwards, if unused, will begin to expire in 2009. The use of $1,887 of
these carryforwards is limited on an annual basis, pursuant to the Internal
Revenue Code, due to certain changes in ownership and equity transactions. At
September 30, 1999, the Company has unused state net operating loss
carryforwards of approximately $1,766. The state net operating loss
carryforwards, if unused, will begin to expire in 2000. The use of $1,163 of
these carryforwards is limited on an annual basis. At September 30, 1999, the
Company has unused foreign net operating losses of approximately $592. The
acquisition of the Company in October 1999 by SatCon will further limit the
availability of the loss carryforward.
The Company made cash payments, net of refunds, for income taxes of $2 and $3
for the years ended September 30, 1998 and 1999, respectively.
F-51
<PAGE>
LING ELECTRONICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS)
7. SEGMENT AND CONCENTRATION INFORMATION
The Company operates in a single industry segment and sells its products on a
worldwide basis with its principal markets listed in the table below:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Geographic
United States........................................... $ 8,120 $ 5,849
Europe.................................................. 1,142 1,015
Japan................................................... 1,514 531
Pacific Rim............................................. 847 543
China................................................... 466 278
Canada.................................................. 54 97
Rest World.............................................. 91 59
------- -------
Total sales............................................. $12,234 $ 8,372
======= =======
</TABLE>
Sales concentrations to individual customers consisted primarily of sales to one
and two customers, which were approximately $2,736 and $834 and represented
approximately 22% and 10% of consolidated sales for the years ended
September 30, 1998 and 1999, respectively. No other customer accounted for more
than 10% of consolidated sales for the years ended September 30, 1998 or 1999.
Financial instruments which subject the Company to concentrations of credit risk
consist principally of accounts receivable. Accounts receivable for three and
one customers were approximately $772 and $739 and represented approximately 21%
and 31% of consolidated accounts receivable at September 30, 1998 and 1999,
respectively. No other customer accounted for more than 10% of consolidated
accounts receivable at September 30, 1998 or 1999.
8. RELATED PARTY TRANSACTIONS
The Parent Company periodically advances cash to the Company to fund working
capital requirements. The Parent Company advanced the Company $586 and $1,433
for the years ended September 30, 1998 and 1999, respectively. These cash
advances have been accumulated and recorded as advances due Parent Company, do
not bear interest and are payable at the discretion of the Parent Company.
The Parent Company assesses the Company an annual charge to absorb
administrative overhead costs incurred at the Parent Company. This charge was
$484 and $524 for the years ended September 30, 1998 and 1999, and has been
recorded as a component of general and administrative expenses.
F-52
<PAGE>
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
On October 21, 1999, SatCon Technology Corporation ("SatCon") completed its
acquisition of Ling Electronics, Inc. and Ling Electronics, Ltd. (collectively,
"Ling") from Mechanical Technology Incorporated ("MTI"). In consideration for
the acquisition of Ling, MTI received $70,000 and 770,000 shares of SatCon's
common stock, $0.01 par value per share.
On November 16, 1999, SatCon purchased certain intellectual property, equipment
and other assets from Northrop Grumman Corporation ("NGC"). The Company also
entered into a (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 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, $.01 par value per share.
In addition, the Company issued to NGC a warrant to purchase an additional
100,000 shares of the Company's common stock, $.01 par value per share, at an
exercise price of $9.725.
The following unaudited pro forma combined consolidated statements of operations
for the year ended September 30, 2000 give effect to the acquisitions described
above accounted for under the purchase method of accounting. The unaudited pro
forma combined consolidated financial statements are based on historical
consolidated financial statements of SatCon and Ling under the assumptions and
adjustments set forth in the accompanying notes to the unaudited pro forma
combined consolidated financial statements.
The unaudited pro forma combined consolidated statements of operations for the
year ended September 30, 2000 assumes the acquisitions were consummated on
October 1, 1999.
The unaudited pro forma combined consolidated financial statements may not be
indicative of the results that actually would have occurred if the acquisition
had been consummated on the dates indicated or which may be obtained in the
future. The unaudited pro forma combined consolidated financial statements
should be read in conjuction with the historical consolidated financial
statements of SatCon and Ling.
F-53
<PAGE>
SATCON TECHNOLOGY CORPORATION
UNAUDITED PRO FORMA COMBINED
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------
SATCON LING/NGC PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Revenue:
Product revenue................... $ 22,427,428 $ 139,589 $ 22,567,017
Funded research and development
revenue......................... 8,627,601 -- 8,627,601
------------- ------------ ----------- -------------
Total revenue................... 31,055,029 139,589 -- 31,194,618
Cost of product revenue............. 19,069,192 236,291 13,646(3)(1) 19,319,129
------------- ------------ ----------- -------------
Gross margin........................ 11,985,837 (96,702) (13,646) 11,875,489
------------- ------------ ----------- -------------
Research and development expenses... 10,300,765 70,065 10,370,830
Selling, general and administrative
expenses.......................... 9,969,580 123,488 10,093,068
Amortization of intangibles......... 1,217,490 74,392 (2)(4) 1,291,882
------------- ------------ ----------- -------------
Total operating expenses............ 21,487,835 193,553 74,392 21,755,780
------------- ------------ ----------- -------------
Operating loss...................... (9,501,998) (290,255) (88,088) (9,880,291)
Other income, net................... 9,891 1,321 11,212
Interest income..................... 453,631 453,631
Interest expense.................... (3,176) (3,176)
------------- ------------ ----------- -------------
Net loss before income taxes and
loss from Beacon Power
Corporation....................... (9,041,652) (288,934) (88,088) (9,418,624)
Provision for income taxes.......... -- -- --
Loss from Beacon Power
Corporation....................... (899,493) -- -- (899,493)
------------- ------------ ----------- -------------
Net loss............................ (9,941,145) (288,934) (88,088) (10,318,117)
------------- ------------ ----------- -------------
Accretion of redeemable convertible
preferred stock discount.......... (3,105,888) -- -- (3,105,888)
------------- ------------ ----------- -------------
Net loss attributable to common
stockholders...................... $ (13,047,033) $ (288,934) $ (88,088) $ (13,424,005)
============= ============ =========== =============
Net loss per weighted average share,
basic and diluted................. $ (1.03) $ (1.05)
============= =============
Weighted average number of common
shares, basic and diluted......... 12,629,822 104,428 12,734,250
============= =========== =============
</TABLE>
F-54
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma combined consolidated statements of operations have been
prepared to reflect the acquisitions as if they occurred on October 1, 1999. Pro
forma net loss per share has been computed using the weighted average shares of
common stock outstanding adjusted for the issuance of 770,000 shares in
connection with the acquisition of Ling Electronics and 578,761 shares in
connection with the acquisition of assets from Northrop Grumman Corporation.
The following is a summary of adjustments reflected in the unaudited pro forma
combined consolidated statements of operations:
(1) Represents the adjustment to depreciation expense to reflect the fair
value of Ling's equipment of $250,000 being depreciated on a
straight-line basis over a 10-year period.
(2) Represents the excess of the purchase price over the fair value of the
net assets acquired of $3,754,910 being amortized on a straight-line
basis over a 7-year period associated with the acquisition of Ling.
(3) Represents the adjustment to depreciation expense to reflect the fair
value of the equipment acquired from Northrop Grumman Corporation of
$1,091,643 being depreciated on a straight-line basis over a 10-year
period.
(4) Represents the completed technology of $3,142,882 being amortized on a
straight-line basis over a 10-year period, the favorable lease of $36,999
being amortized on a straight-line basis over a 5-year period, and the
transition service agreement of $901,542 being amortized on a
straight-line basis over a 3-year period.
F-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Beacon Power Corporation:
We have audited the accompanying balance sheets of Beacon Power Corporation (the
"Company")(a development stage company) as of December 31, 1998 and 1999, and
the related statements of operations, stockholders' deficiency and cash flows
for the years then ended and for the period from May 8, 1997 (date of inception)
through December 31, 1997 and the period from May 8, 1997 (date of inception)
through December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 Beacon Power Corporation as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the years then ended and the period from May 8, 1997 (date of inception)
through December 31, 1997 and the period from May 8, 1997 (date of inception)
through December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
May 25, 2000 (September 22, 2000 as to the last paragraph of Note 15 and
November 22, 2000 as to Note 16)
F-56
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $2,491,151 $ 234,350
Prepaid expenses and other current assets................. 20,307 15,987
---------- ------------
Total current assets.................................. 2,511,458 250,337
PROPERTY AND EQUIPMENT, Net................................. 433,726 566,013
PREPAID FINANCING COSTS..................................... -- 81,934
DEPOSITS.................................................... 42,595 57,150
OTHER ASSETS................................................ 4,375 18,066
---------- ------------
TOTAL ASSETS................................................ $2,992,154 $ 973,500
========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 822,723 $ 413,146
Accrued compensation and benefits......................... 68,183 109,206
Accrued interest.......................................... -- 164,140
Accrued loss on sales commitments......................... -- 325,000
Due to related party...................................... 18,611 --
Other accrued expenses.................................... 15,622 43,222
Current portion of capital lease obligations.............. 105,406 73,291
---------- ------------
Total current liabilities............................. 1,030,545 1,128,005
---------- ------------
DIVIDENDS PAYABLE........................................... 112,153 749,005
---------- ------------
NOTES PAYABLE TO INVESTORS.................................. -- 3,150,000
---------- ------------
CAPITAL LEASE OBLIGATIONS, Net of current portion........... 76,166 2,875
---------- ------------
COMMITMENTS (Note 6)
CLASS D REDEEMABLE CONVERTIBLE
PREFERRED STOCK (Liquidation preference of $4,750,000)...... 4,493,145 4,534,816
---------- ------------
STOCKHOLDERS' (DEFICIENCY) EQUITY:
Preferred stock:
Class A Convertible, $.01 par value; 6,000,000, shares
authorized 4,622,907 and 4,767,907 shares issued and
outstanding in 1998 and 1999 respectively, (liquidation
preference, $20,571,936 and $21,217,186,
respectively).......................................... 5,378,951 5,741,451
Class B Convertible, $.01 par value; 1 share authorized;
no shares issued and outstanding....................... -- --
Class C Convertible, $.01 par value; 6 shares
authorized, issued and outstanding..................... 29,866 29,866
Common stock, $.01 par value; 110,000,000 shares
authorized; 16,848 shares issued and outstanding....... 168 168
Deferred consulting expense, net.......................... (37,500) (100,000)
Deferred stock compensation............................... -- (56,648)
Additional paid-in capital................................ -- 515,318
Deficit accumulated during the development stage.......... (8,091,340) (14,721,356)
---------- ------------
Total stockholders' deficiency........................ (2,719,855) (8,591,201)
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY.............. $2,992,154 $ 973,500
========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-57
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE FROM
MAY 8, 1997 MAY 8, 1997
(DATE OF (DATE OF
INCEPTION) TO YEAR ENDED YEAR ENDED INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
REVENUE.................................................. $ 232,316 $ -- $ 268,868 $ 501,184
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Selling, general and administrative.................... 1,168,471 1,188,165 1,558,985 3,915,621
Research and development............................... 2,291,874 3,523,572 3,506,031 9,321,477
Loss on sales commitments.............................. -- -- 325,000 325,000
Depreciation and amortization.......................... -- 78,208 218,594 296,802
----------- ----------- ----------- ------------
Total operating expenses............................. 3,460,345 4,789,945 5,608,610 13,858,900
----------- ----------- ----------- ------------
LOSS FROM OPERATIONS..................................... (3,228,029) (4,789,945) (5,339,742) (13,357,716)
----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income........................................ 116,648 11,277 25,118 153,043
Interest expense....................................... -- (14,730) (356,869) (371,599)
----------- ----------- ----------- ------------
Total other income (expense), net.................... 116,648 (3,453) (331,751) (218,556)
----------- ----------- ----------- ------------
NET LOSS................................................. (3,111,381) (4,793,398) (5,671,493) (13,576,272)
PREFERRED STOCK DIVIDENDS................................ -- (112,153) (916,852) (1,029,005)
ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK...... -- (6,908) (41,671) (48,579)
----------- ----------- ----------- ------------
LOSS TO COMMON SHAREHOLDERS.............................. $(3,111,381) $(4,912,459) $(6,630,016) $(14,653,856)
=========== =========== =========== ============
LOSS PER SHARE--BASIC AND DILUTED........................ $ (184.67) $ (291.58) $ (393.52)
=========== =========== ===========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING............... 16,848 16,848 16,848
=========== =========== ===========
PRO FORMA LOSS PER SHARE................................. $ (0.42)
===========
PRO FORMA WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING--BASIC AND DILUTED......................... 13,492,674
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-58
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
CLASS A CLASS C
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)............ -- $ -- -- $ -- -- $ --
Issuance of founder's shares........................ -- -- -- -- 6,750,000 67,500
Issuance of Class A preferred stock................. 1,125,000 5,000,000 -- -- -- --
Recapitalization.................................... 3,373,313 67,466 -- -- (6,746,626) (67,466)
Rounding for fractional shares...................... -- -- -- -- (2) --
Issuance of Class C preferred and common stock...... -- -- 6 29,933 13,476 134
Repayment of subscription receivable................
Accrual of consulting expense....................... -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- --
---------- ---------- ---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1997............................ 4,498,313 5,067,466 6 29,866 16,848 168
Issuance of Class A preferred stock for services.... 120,000 300,000 -- -- -- --
Issuance of Class A preferred stock for services and
interest on loans................................. 4,594 11,485 -- -- -- --
Dividend on Class D preferred stock................. -- -- -- -- -- --
Repayment of subscription receivable................ -- -- -- -- -- --
Amortization of deferred consulting expense, net.... -- -- -- -- -- --
Accretion of redeemable preferred stock to
redemption value.................................. -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- --
---------- ---------- ---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1998............................ 4,622,907 5,378,951 6 29,866 16,848 168
Issuance of Class A preferred stock for services.... 145,000 362,500 -- -- -- --
Dividend on Class D preferred stock................. -- -- -- -- -- --
Deferred stock compensation......................... -- -- -- -- -- --
Amortization of deferred stock compensation......... -- -- -- -- -- --
Amortization of deferred consulting expense, net.... -- -- -- -- -- --
Issuance of warrants to holders of Class D shares... -- -- -- -- -- --
Issuance of warrants for bridge loans............... -- -- -- -- -- --
Accretion of redeemable preferred stock to
redemption value.................................. -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- --
---------- ---------- ---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1999............................ $4,767,907 $5,741,451 6 $29,933 16,848 $ 168
========== ========== ========== ======= ========== ========
<CAPTION>
DEFICIT
DEFERRED ACCUMULATED
CONSULTING DEFERRED ADDITIONAL STOCK DURING THE
EXPENSE, STOCK PAID-IN SUBSCRIPTION DEVELOPMENT
NET COMPENSATION CAPITAL RECEIVABLE STAGE
---------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)............ -- $ -- $ -- $ -- --
Issuance of founder's shares........................ -- -- -- -- (67,500)
Issuance of Class A preferred stock................. -- -- -- (5,000,000) --
Recapitalization.................................... -- -- -- -- --
Rounding for fractional shares...................... -- -- -- -- --
Issuance of Class C preferred and common stock...... -- -- -- -- --
Repayment of subscription receivable................ 2,992,492 --
Accrual of consulting expense....................... 87,500 -- -- -- --
Net loss............................................ -- -- -- -- (3,111,381)
--------- -------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1997............................ 87,500 -- -- (2,007,508) (3,178,881)
Issuance of Class A preferred stock for services.... (150,000) -- -- -- --
Issuance of Class A preferred stock for services and
interest on loans................................. -- -- -- -- --
Dividend on Class D preferred stock................. -- -- -- -- (112,153)
Repayment of subscription receivable................ -- -- -- 2,007,508 --
Amortization of deferred consulting expense, net.... 25,000 -- -- -- --
Accretion of redeemable preferred stock to
redemption value.................................. -- -- -- -- (6,908)
Net loss............................................ -- -- -- -- (4,793,398)
--------- -------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1998............................ (37,500) -- -- -- (8,091,340)
Issuance of Class A preferred stock for services.... (125,000) -- -- -- --
Dividend on Class D preferred stock................. -- -- -- -- (636,852)
Deferred stock compensation......................... -- (65,318) 65,318 -- --
Amortization of deferred stock compensation......... -- 8,670 -- -- --
Amortization of deferred consulting expense, net.... 62,500 -- -- -- --
Issuance of warrants to holders of Class D shares... -- -- 280,000 -- (280,000)
Issuance of warrants for bridge loans............... -- -- 170,000 -- --
Accretion of redeemable preferred stock to
redemption value.................................. -- -- -- -- (41,671)
Net loss............................................ -- -- -- -- (5,671,493)
--------- -------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1999............................ $(100,000) $(56,648) $ 515,318 $ -- $(14,721,856)
========= ======== ========== =========== ============
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIENCY
-------------
<S> <C>
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)............ $ --
Issuance of founder's shares........................ --
Issuance of Class A preferred stock................. --
Recapitalization.................................... --
Rounding for fractional shares...................... --
Issuance of Class C preferred and common stock...... 30,000
Repayment of subscription receivable................ 2,992,492
Accrual of consulting expense....................... 87,500
Net loss............................................ (3,111,381)
------------
BALANCE, DECEMBER 31, 1997............................ (1,389)
Issuance of Class A preferred stock for services.... 150,000
Issuance of Class A preferred stock for services and
interest on loans................................. 11,485
Dividend on Class D preferred stock................. (112,153)
Repayment of subscription receivable................ 2,007,508
Amortization of deferred consulting expense, net.... 25,000
Accretion of redeemable preferred stock to
redemption value.................................. (6,908)
Net loss............................................ (4,793,398)
------------
BALANCE, DECEMBER 31, 1998............................ (2,719,855)
Issuance of Class A preferred stock for services.... 237,500
Dividend on Class D preferred stock................. (636,852)
Deferred stock compensation......................... --
Amortization of deferred stock compensation......... 8,670
Amortization of deferred consulting expense, net.... 62,500
Issuance of warrants to holders of Class D shares... --
Issuance of warrants for bridge loans............... 170,000
Accretion of redeemable preferred stock to
redemption value.................................. (41,671)
Net loss............................................ (5,671,493)
------------
BALANCE, DECEMBER 31, 1999............................ $ (8,591,201)
============
</TABLE>
F-59
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE FROM
MAY 8, 1997 MAY 8, 1997
(DATE OF (DATE OF
INCEPTION) TO YEAR ENDED YEAR ENDED INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(3,111,381) $(4,793,398) $(5,671,493) $(13,576,272)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. -- 78,208 218,594 296,802
Interest expense relating to issuance of
warrants.................................... -- -- 170,000 170,000
Amortization of deferred consulting expense,
net......................................... 87,500 175,000 300,000 562,500
Services and interest expense paid in
preferred stock............................. -- 11,485 -- 11,485
Accrued loss on sales commitments............. -- -- 325,000 325,000
Changes in operating assets and liabilities:
Accounts receivable......................... (14,487) 14,487 -- --
Prepaid expenses and other current assets... -- (20,307) 4,320 (15,987)
Accounts payable............................ 50,000 772,723 (409,577) 413,146
Accrued compensation and benefits........... 31,042 37,141 41,023 109,206
Accrued interest............................ -- -- 164,140 164,140
Due to related party........................ -- 18,611 (18,611) --
Other accrued expenses and current
liabilities............................... 31,981 (16,359) 36,270 51,892
----------- ----------- ----------- ------------
Net cash used in operating activities..... (2,925,345) (3,722,409) (4,840,334) (11,488,088)
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets........................ (27,147) (19,823) (110,180) (157,150)
Repayment (issuance) of note receivable from
officer....................................... (40,000) 40,000 -- --
Purchases of property and equipment............. -- (257,423) (350,881) (608,304)
----------- ----------- ----------- ------------
Net cash used in investing activities..... (67,147) (237,246) (461,061) (765,454)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of subscription receivable............ 2,992,492 2,007,508 -- 5,000,000
Issuance of Class C preferred stock............. 30,000 -- -- 30,000
Issuance of Class D redeemable preferred
stock......................................... -- 4,486,237 -- 4,486,237
Repayment of capital leases..................... -- (72,939) (105,406) (178,345)
Proceeds from notes payable issued to
investors..................................... -- -- 3,150,000 3,150,000
----------- ----------- ----------- ------------
Net cash provided by financing activities....... 3,022,492 6,420,806 3,044,594 12,487,892
----------- ----------- ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 30,000 2,461,151 (2,256,801) 234,350
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... -- 30,000 2,491,151 --
----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 30,000 $ 2,491,151 $ 234,350 $ 234,350
=========== =========== =========== ============
SUMMARY OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of Class A Preferred Stock for
subscription receivable....................... $ 5,000,000 $ -- $ -- $ 5,000,000
=========== =========== =========== ============
Acquisition of assets with capital leases....... $ -- $ 254,411 $ -- $ 254,411
=========== =========== =========== ============
Issuance of warrants in conjunction with
financing..................................... $ -- $ -- $ 450,000 $ 450,000
=========== =========== =========== ============
Issuance of non-qualified stock options to
consultants................................... $ -- $ -- $ 65,318 $ 65,318
=========== =========== =========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-60
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
1. NATURE OF BUSINESS AND OPERATIONS
NATURE OF BUSINESS--Beacon Power Corporation (the "Company" or "Beacon") (a
development stage company) was incorporated on May 8, 1997 as a wholly owned
subsidiary of SatCon Technology Corporation ("SatCon"). Since its inception,
Beacon has been engaged in the development of flywheel devices for storing and
transmitting kinetic energy. As of December 31, 1999, the Company has not yet
commenced its planned principal activities of marketing and manufacturing such
devices and accordingly is accounted for as a development stage company under
Statement of Financial Accounting Standards No. 7. As of December 31, 1999, a
majority of the Company's outstanding shares is owned by SatCon. However, in
conjunction with the October 1998 Class D preferred stock offering, the
Company's minority investors were granted the right to appoint a majority of the
members of the Company's Board of Directors.
The Company has a single operating segment, manufacturing alternative power
sources. The Company has no organizational structure dictated by product lines,
geography or customer type.
OPERATIONS--The Company has experienced net losses since its inception and, as
of December 31, 1999, had an accumulated deficit of approximately
$14.7 million. The Company is currently facing the challenge of finalizing
development of a viable commercial product and raising adequate capital to
sustain operations. As discussed in Note 15, during the period during
January 1, 2000 to May 25, 2000, the Company secured additional financing of
approximately $32 million. Management believes that this funding is sufficient
to continue its operations as a going concern through at least December 31,
2000.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
ACCOUNTING PRINCIPLES--The accompanying financial statements have been prepared
using accounting principles generally accepted in the United States of America.
RECAPITALIZATION--The accompanying financial statements reflect a
recapitalization of the Company in 1997 when one shareholder exchanged shares of
common stock for Class A preferred stock.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES--The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include demand deposits and
highly liquid investments with a maturity of three months or less when acquired.
Cash equivalents are stated at cost, which approximates market value.
PROPERTY AND EQUIPMENT--Property and equipment, including leasehold
improvements, are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets.
F-61
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PREPAID FINANCING COSTS--Prepaid financing costs consist of legal, financing and
other related expenses incurred in connection with the Class E financing
completed during the year ending December 31, 2000 and will be amortized over
the terms of the obligations using the effective interest method.
OTHER ASSETS--Other assets consist of unamortized legal expenses related to
patents.
LOSSES ON SALES COMMITMENTS--Substantially all of the Company's sales
commitments are firm and have fixed-prices. Revenue and cost of revenue on such
sales commitments are recorded as deliveries are made. The direct costs to
manufacture products covered by the Company's firm sales commitments are in
excess of the fixed selling prices. Direct costs consist of materials and direct
labor costs. These excess costs have been estimated and accrued as losses on
sales commitments in the period in which the sales commitment is made. Estimates
of costs to manufacture products are reviewed and revised periodically and
accruals for estimated losses from such revisions are recorded in the accounting
period in which the revisions are made.
LONG-LIVED ASSETS--In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121 long-lived assets to be held and used by the Company
are reviewed to determine whether any events or changes in circumstances
indicate that the carrying value of the asset may not be recoverable. The
conditions considered include whether or not the asset is in service, has become
obsolete, or whether external market circumstances indicate that the carrying
amount may not be recoverable. The Company recognizes a loss for the difference
between the estimated fair value of the asset and the carrying amount. The fair
value of the assets is measured using either available market prices or
estimated discounted cash flows. The Company's analyses indicate that there has
been no impairment of long-lived assets.
REVENUE RECOGNITION--Revenue relates to work performed under research and
development contracts. Revenue is recognized as services are performed.
STOCK-BASED COMPENSATION--Compensation expense associated with awards of stock
or options to employees is measured using the intrinsic-value method. Deferred
compensation expense associated with awards to nonemployees is measured using
the fair-value method and is amortized over the vesting period of three years
using an accelerated calculation under FASB Interpretation No. 28, "Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award Plans."
INCOME TAXES--Deferred income tax assets and liabilities are determined based on
the differences between the financial reporting and tax bases of assets and
liabilities and tax loss and credit carryforwards using the currently enacted
tax rates and laws. A valuation allowance is provided to the extent realization
of deferred tax assets is not considered more likely than not.
RESEARCH AND DEVELOPMENT--Research and development costs are expensed as
incurred.
FINANCIAL INSTRUMENTS--The carrying amount of cash and cash equivalents,
accounts payable, accrued expenses, notes payable to investors and capital lease
obligations approximate their fair values.
F-62
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject the
Company to significant concentration of credit risk consist primarily of cash
and cash equivalents. Substantially all of the Company's cash and cash
equivalents are managed by one financial institution. At December 31, 1998 and
1999, the Company had cash balances at a financial institution in excess of
federally insured limits. However, the Company does not believe that it is
subject to unusual credit risk beyond the normal credit risk associated with
commercial banking relationships.
COMPREHENSIVE LOSS--Comprehensive loss is the same as net loss for all periods
presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The statement, as amended, is effective
for fiscal years beginning after June 15, 2000. Management is currently
evaluating the effect of adopting SFAS No. 133 on the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition" (SAB 101). SAB 101 established
guidelines for revenue recognition and is effective for periods beginning no
later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. Management does not expect that the adoption of SAB 101 will
have a material impact on the Company's financial condition or results of
operations.
NET LOSS PER SHARE
HISTORICAL LOSS PER SHARE--Historical loss per share has been computed using the
weighted-average number of shares of common stock outstanding during each
period. Diluted loss per share was computed in the same manner. The impact of
the Company's outstanding potential common shares, such as options and warrants
(computed using the treasury stock method) and convertible preferred stock, were
excluded from the calculation because such items were antidilutive.
The weighted average number of shares of common stock issuable during the years
ended December 31, 1999, and 1998, the period from May 8, 1997 to December 31,
1997 and the period from May 8, 1997 through December 31, 1999 aggregated
16,298,920, 14,495,538 and 3,700,956, and 10,676,036, respectively, upon the
exercise of options and warrants and the conversion of preferred stock
outstanding.
F-63
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES 1998 1999
---------- -------- --------
<S> <C> <C> <C>
Machinery and equipment..................... 5 years $214,635 $298,180
Furniture and fixtures...................... 7 years 19,423 41,521
Office equipment............................ 3 years 10,904 159,894
Leasehold improvements...................... lease term 12,561 108,809
Equipment under capital lease obligations... lease term 254,411 254,411
-------- --------
Total..................................... 511,934 862,815
Less accumulated depreciation and
amortization.............................. (78,208) (296,802)
-------- --------
Property and equipment, net............... $433,726 $566,013
======== ========
</TABLE>
4. NOTES PAYABLE TO INVESTORS
At December 31, 1999, notes payable to investors consists of Senior Secured
Convertible Promissory Notes (the "Senior Notes") held by the Company's primary
investors. The Senior Notes bear interest, which is payable upon conversion, at
an annual rate of 12.5%, increasing to 15% after six months if the Class E
redeemable convertible preferred stock ("Class E Stock") funding had not
occurred at that time. The notes are secured by substantially all of the assets
of the Company. In connection with the issuance of the Senior Notes, the
investors received warrants to purchase shares of the Company's common stock
(see Note 10).
On April 7, 2000, the Senior Notes and accrued interest were converted into
Class E Stock (see Note 15).
5. CAPITAL LEASE OBLIGATIONS
The Company leases equipment under capital lease agreements expiring through
2001. Future obligations under such capital leases as of December 31, 1999 are
as follows:
<TABLE>
<S> <C>
2000........................................................ $77,530
2001........................................................ 3,067
-------
80,597
Less amount representing interest........................... 4,431
-------
76,166
Less current portion of capital lease obligations........... 73,291
-------
Capital lease obligations, excluding current portion........ $ 2,875
=======
</TABLE>
F-64
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
6. COMMITMENTS
The Company leases office and light manufacturing space under operating leases
expiring through January 30, 2001 and an operating lease for office equipment
expiring October 2001.
Future minimum annual lease payments under noncancelable operating leases as of
December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $241,506
2001........................................................ 25,449
</TABLE>
Total rent expense was $146,255 and $199,405, during 1998 and 1999, and $345,660
for the period from inception to December 31, 1999.
7. PREFERRED STOCK
CLASS A CONVERTIBLE PREFERRED STOCK--Each share of Class A convertible preferred
stock ("Class A Stock") is convertible into two shares of common stock at the
option of the holder (see Note 16). The Class A Stock is nonvoting. Upon
liquidation, holders of Class A Stock are entitled to receive, out of funds then
generally available prior to any payment with respect to the holders of common
stock, $4.45 per share, plus any declared and unpaid dividends thereon. Holders
of the Class A Stock have the right to receive the same dividends as declared by
the Board of Directors on common shares on an "as-if-converted" basis. The
Class A Stock will automatically be converted into shares of common stock upon
the closing of a public offering of common stock of the Company, upon a vote of
the Board of Directors or upon the automatic conversion of the Class D preferred
stock (see Note 8). Class A Stock is subordinate to Class D, E and F preferred
stock and has parity with Class B and C preferred stock. The Class A stock does
not have redemption features.
CLASS B AND C CONVERTIBLE PREFERRED STOCK--The Company has authorized both Class
B and Class C Convertible Preferred Stock. Only Class C shares are outstanding.
Class B shares were never issued. Class B and C shares have identical conversion
and voting rights. Each share of Class C convertible preferred stock ("Class C
Stock") is convertible into two shares of common stock at the option of the
holder (See Note 16). The holders of the Class C Stock have voting rights
equivalent to the number of shares of common stock into which their shares of
Class C Stock convert. The Class C Stock has the right to receive the same
dividends as declared by the Board of Directors on common shares on an
"as-if-converted" basis. The Class C Stock will automatically be converted into
shares of common stock upon the closing of a public offering of common stock of
the Company, upon a vote of the Board of Directors, upon the automatic
conversion of the Class D preferred Stock (see Note 8), or upon conversion of
the Class A Stock. Class B and C Stock have parity with Class A in liquidation
and are subordinate to Class D, E and F preferred stock. The Class B and
C Stock do not have redemption features.
8. REDEEMABLE PREFERRED STOCK
CLASS D REDEEMABLE CONVERTIBLE PREFERRED STOCK--The Company has authorized
6,000,000 shares of Class D convertible preferred stock ("Class D Stock") with a
par value of $.01 per share. On
F-65
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
8. REDEEMABLE PREFERRED STOCK (CONTINUED)
October 23, 1998, the Company issued 1,900,000 shares of Class D Stock and
received net proceeds of approximately $4,486,000. Issuance costs totaled
approximately $264,000 and are being accreted to the carrying value of the
Class D Stock over the period to the stock's earliest redemption date. Each
share of Class D Stock is convertible into two shares of common stock at the
option of the holder (see Note 16). The holders of the Class D Stock have voting
rights equivalent to the number of shares of common stock into which their
shares of Class D Stock convert. Holders of the Class D Stock are also entitled
to appoint representatives to the Board of Directors. The Class D Stock earns
cumulative dividends at an annual rate of 12.5% through May 23, 2000 and 6% on
and after this date, payable quarterly. Dividends can be paid in shares of
Class D Stock through May 23, 2000 and after this date, are payable only in
cash. Cumulative dividends not paid on Class D Stock total $112,153 and $749,005
as of December 31, 1998 and 1999, respectively. Upon liquidation, holders of
Class D Stock are entitled to receive, out of funds then generally available,
unpaid dividends previously declared or accrued and a per share amount of $2.50.
The Class D Stock is redeemable by the holder at any time after December 31,
2004 for the stated value of $2.50 per share plus accrued, but unpaid,
dividends. The Class D Stock will automatically be converted into shares of
common stock upon a change in ownership of 50% of the Company's outstanding
voting stock, upon a merger or consolidation of the Company or upon the sale of
significant assets of the Company, or upon the closing of a qualified public
offering.
Pursuant to the Stock Purchase Agreement related to the Class D Stock (the
"Class D Agreement"), the Company is bound by certain covenants. The Class D
Stock is senior to the Class A, B and C Stock, subordinate to Class F preferred
stock and has parity with Class E preferred Stock (see Note 15).
9. COMMON STOCK
DIVIDENDS--Dividends may be declared and paid on the common stock as and when
determined by the Board of Directors subject to any preferential dividend rights
of any then outstanding shares of preferred stock.
RESERVED SHARES--At December 31, 1999, 18,260,840 shares of common stock were
reserved for issuance under the Company's stock option plan, outstanding
warrants and for the potential conversion of preferred stock.
10. STOCK WARRANTS
At its inception in 1997, the Company issued a warrant to purchase 1,125,000
shares of common stock to an investor at the price of $2.67 per share (the "1997
warrant"). The warrant expired unexercised on May 28, 1999. Value ascribed to
this warrant was not material.
Under the conditions of the Class D Stock offering, the Company issued warrants
in October 1999 to three investors to purchase 772,500 shares of common stock at
$1.67, 772,500 shares of common stock at $2.25, and 772,500 shares of common
stock at $3.00 (the "October 1999 warrants"). The estimated fair value of the
warrants at the date of their issuance was $280,000. This amount has been
recorded as
F-66
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
10. STOCK WARRANTS (CONTINUED)
a dividend to the holders of the Class D Stock and credited to additional
paid-in-capital. These warrants expire December 31, 2004. Additional warrants
were issued under the Class D agreement during April 2000 (see Note 15).
In conjunction with the issuance of the Senior Notes in August 1999, the Company
issued warrants to four investors to purchase 315,000 shares of Class E Stock
(or common stock if the warrant was exercised prior to the Class E Stock
financing (see Note 15)) at an exercise price of $2.50 per share (the "August
1999 warrants"). The estimated fair value of the warrants at the date of grant
was $170,000. This amount has been recorded as a discount on the Senior Notes
and was charged to interest expense in 1999 as the Senior Notes are demand
notes. These warrants expire on August 2, 2004.
In conjunction with the Class E conversion in April 2000 (see Note 15), the
August 1999 warrants were cancelled.
All warrants were valued on the date of grant using the Black-Scholes (common
stock) or the Binary Option Pricing Model (preferred stock). The assumptions
used to value these warrants were as follows:
<TABLE>
<CAPTION>
AUGUST OCTOBER
1997 1999 1999
WARRANT WARRANTS WARRANTS
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate.................................. 6.25% 5.62% 5.86%
Expected life of warrant................................. 24 months 30 months 27 months
Expected dividend payment rate, as a percentage of the
stock price on the date of grant....................... 0% 0.0% 0%
Assumed volatility....................................... 48% 60% 60%
</TABLE>
11. STOCK OPTIONS
The Company's option plans provide for the granting of stock options to purchase
up to 9,000,000 shares of the Company's common stock. Options may be granted to
employees, officers, directors and consultants of the Company with terms of up
to 10 years. Under the terms of the option plans, incentive stock options
("ISOs") are to be granted at fair market value of the Company's stock at the
date of grant, and nonqualified stock options ("NSOs") are to be granted at a
price determined by the Board of Directors. ISOs and NSOs generally vest ratably
over 36 months from the grant date and have contractual lives of up to
10 years.
F-67
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
11. STOCK OPTIONS (CONTINUED)
Stock option activity since inception is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE FAIR
SHARES PRICE VALUE
---------- --------- ---------
<S> <C> <C> <C>
Outstanding at inception.................................... --
Granted................................................... 647,874 $ .89 $0.35
----------
Outstanding, December 31, 1997.............................. 647,874 .89
Granted................................................... 199,126 .89 0.38
Canceled, forfeited or expired............................ (10,000) .89
----------
Outstanding, December 31, 1998.............................. 837,000 .89
Granted................................................... 1,467,000 .89 0.40
Canceled, forfeited or expired............................ (295,688) .89
---------- -----
Outstanding, December 31, 1999.............................. 2,008,312 $ .89
========== =====
</TABLE>
The following table summarized information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
VESTED
WEIGHTED- --------------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE AVERAGE
OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OF OPTIONS PRICE
-------------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$.89 2,008,312 8.64 $.89 378,244 $.89
====== ========= ==== ====== ======= ======
</TABLE>
As described in Note 2, the Company uses the intrinsic-value method to measure
compensation expense associated with grants of stock options to employees. If
the Company had used the fair value method to measure compensation, reported net
loss would have been as follows:
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE FROM
MAY 8, 1997 MAY 8, 1997
(DATE OF INCEPTION) (DATE OF INCEPTION)
TO YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
------------------- ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Net loss to common shareholders as
reported.......................... $(3,111,381) $(4,912,459) $(6,630,016) $(14,653,856)
Net loss pro forma.................. (3,336,722) (4,987,251) (7,154,362) (15,478,335)
Loss per share--as reported......... (184.67) (291.58) (393.52)
Loss per share--pro forma........... (198.05) (296.01) (424.64)
</TABLE>
F-68
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
11. STOCK OPTIONS (CONTINUED)
The fair value of the options on their grant date was measured using the
Black-Scholes option-pricing model. Key assumptions used to apply this
option-pricing model are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate..................................... 5.5% 5.75% 6.0%
Expected life of option..................................... 3 years 3 years 3 years
Expected dividend payment rate, as a percentage of the stock
price on the date of grant................................ 0% 0% 0%
Assumed volatility.......................................... 50% 58% 60%
</TABLE>
The option-pricing model used was designed to value readily tradable stock
options with relatively short lives. However, management believes that the
assumptions used to value the options and the model applied yield a reasonable
estimate of the fair value of the grants made under the circumstances (see also
Note 15).
12. INCOME TAXES
The components of the provision (benefit) for income taxes consisted of the
following:
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE FROM
MAY 8, 1997 MAY 8, 1997
(DATE OF INCEPTION) (DATE OF INCEPTION)
THROUGH YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
------------------- ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Federal--deferred................... $(1,037,870) $(1,594,955) $(1,995,158) $(4,627,983)
State--deferred..................... (181,683) (282,933) (352,087) (816,703)
Increase in valuation allowance..... 1,219,553 1,877,888 2,347,245 5,444,686
----------- ----------- ----------- -----------
Provision (benefit) for income
taxes............................. $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
Taxes during interim periods are computed using the estimated rate effective for
the entire year. Changes to the estimated rate are reflected in periods in which
the estimated charge occurs.
A reconciliation of the statutory federal rate to the effective rate for all
periods is as follows:
<TABLE>
<S> <C>
Statutory federal rate benefit.............................. (34)%
State, net of federal effect................................ (6)
Valuation allowance provided................................ 40
---
Effective rate.............................................. --%
===
</TABLE>
F-69
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
12. INCOME TAXES (CONTINUED)
The components of the Company's deferred tax assets and liabilities consisted of
the following at December 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Long-term assets:
Net operating loss carryforwards................. $ 2,643,962 $ 4,728,408
Research and development credits................. 444,513 524,958
Loss on contracts................................ -- 130,000
Other............................................ 8,966 61,320
----------- -----------
Net deferred tax assets before valuation
allowance........................................ 3,097,441 5,444,686
Less valuation allowance........................... (3,097,441) (5,444,686)
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
</TABLE>
The valuation allowance increased by $1,877,888 in 1998 and $2,347,245 in 1999,
primarily due to the generation of net operating loss carryforwards and credits
for which realization is not reasonably assured.
The Company has available for future periods federal and state tax net operating
loss carryforwards for federal and state purposes of approximately $11,850,000
and $11,616,000, respectively, as of December 31, 1999. In addition, the Company
has business credits of approximately $524,958 as of December 31, 1999. The net
operating loss carryforwards expire beginning in 2012 and 2002 for federal and
state tax purposes, respectively. The federal research and development credits
begin to expire in 2012. The Company did not pay any income taxes from inception
to December 31, 1999.
Under the provisions of the Internal Revenue Code, certain substantial changes
in the Company's ownership may have limited, or may limit in the future, the
amount of net operating loss carryforwards which could be utilized annually to
offset future taxable income and income tax liabilities. The amount of any
annual limitation is determined based upon the Company's value prior to an
ownership change.
13. BENEFIT PLAN
In 1998, the Company created a 401(k) Profit Sharing Plan (the "Plan") for its
full-time employees. Each participant in the Plan may elect to contribute a
percentage of his or her annual compensation to the Plan on a pre-tax basis up
to the annual limit established by the Internal Revenue Service ($10,200 for
1999). The Company matches employee contributions at a rate of 50% up to the
first 6% of the employee's contributions. The Company may also elect to make a
profit-sharing contribution based on the discretion of the Board of Directors.
Employee contributions are fully vested. Company matching and profit sharing
contributions vest 20% after two years of service consisting of at least
1,000 hours per calendar year and 20% annually thereafter. Company contributions
were $19,376, $41,963 and $61,339 during 1998, 1999, and the Period from
Inception to December 31, 1999, respectively.
F-70
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
14. RELATED-PARTY TRANSACTIONS
CONSULTING AGREEMENTS--The Company entered into consulting agreements with three
investors in 1998 and 1997. The contracts are seven-year agreements, renewable
annually thereafter, for consulting services to be provided by the investors in
exchange for annual issuances of shares of the Company's Class A Stock. During
1997, 1998, 1999 and the period from inception, $87,500, $175,000, $300,000, and
$562,500, respectively, was recorded as consulting expense relating to these
agreements, and 120,000 and 145,000 shares of Class A Stock in 1998 and 1999,
respectively, were issued or issuable as compensation under these contracts.
Prepaid and accrued consulting expenses have been recorded annually, based on
the terms and dates of the consulting agreements. The services provided by the
investors were recorded based upon the value of the securities issued. These
contracts all expire immediately upon an initial public offering of the
Company's common stock.
PATENTS--The Company has entered into an agreement with SatCon whereby SatCon
granted the Company a perpetual license to use the technology patented by SatCon
relating to the field of flywheel energy storage products, systems and processes
for stationary terrestrial applications.
SERVICES AGREEMENTS--SatCon performs certain research and development,
administrative and other services for the Company. Amounts paid to SatCon for
such services rendered amounted to approximately $1,351,000, $443,000, $59,000
and $1,853,000 during 1997, 1998, 1999 and the period from inception to
December 31, 1999, respectively. As of December 31, 1998, there was $18,611 due
to SatCon relating to such services.
DISTRIBUTION AGREEMENT--In 1997, the Company signed a 20-year agreement which
granted an investor (DQE Enterprises, Inc.) exclusive rights to distribute
certain of the Company's products in a territory comprised of seven Mid-Atlantic
states and the District of Columbia. However, the Company retained the right to
distribute products directly to cable television and telephone companies.
15. SUBSEQUENT EVENTS
BRIDGE FINANCING--On January 7, 2000, the Company received $600,000 of bridge
loans bearing annual interest at a rate of 12.5%; $200,000 of these loans were
repaid in February 2000 and the remaining loans were converted into Class E
redeemable convertible preferred stock (the "Class E Stock") in conjunction with
the Class E conversion (see below).
In February, March and April 2000, the Company received additional bridge
financing of $1,400,000 from previous investors and $4,100,000 from new and
previous investors (the "Class F Bridge Loans"). The Class F Bridge Loans bear
annual interest at a rate of 6%. $5,200,000 of these loans were converted into
Class F redeemable convertible preferred stock ("Class F Stock") in May 2000,
(see below). The remaining $300,000 plus interest was repaid in April 2000.
In conjunction with the April bridge loans, investors were granted warrants to
purchase 82,000 shares of the Company's common stock at $2.10 per share. These
warrants expire April 21, 2005. The estimated fair value of such warrants is
$27,000 based on the Black-Scholes Pricing Model.
WARRANTS ISSUED UNDER CLASS D AGREEMENT--Under the conditions of the Class D
Stock offering, the Company issued warrants in April 2000 to three investors to
purchase 712,500 shares of common stock
F-71
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
15. SUBSEQUENT EVENTS (CONTINUED)
at $1.67, 712,500 shares of common stock at $2.25, and 712,500 shares of common
stock at $3.00. Upon issuance of these warrants the Company recorded a dividend
of approximately $1,300,000 for the fair market value of these warrants based on
the Black-Scholes Pricing Model. These warrants expire December 31, 2004.
CLASS E CONVERSION--During April 2000, the Company authorized 2,000,000 shares
of $.01 par value per share Class E Stock. On April 7, 2000, the Company
converted $3,550,000 of bridge loans plus interest of $275,559 into 1,226,141
shares of Class E Stock (the "Class E conversion"). Each share of Class E Stock
is convertible into two shares of common stock at the option of the holder (see
Note 16). Holders of the Class E Stock have voting rights equivalent to the
number of shares of common stock into which their shares of Class E Stock
convert. Holders of the Class E Stock also share with the Class D Stock
shareholders the right to appoint representatives to the Board of Directors. The
Class E Stock earns cumulative dividends at an annual rate of 12.5% through
May 23, 2000 and 6% on and after this date, payable quarterly. Dividends are
payable in shares of Class E Stock through May 23, 2000 and after this date, are
payable in cash. Upon liquidation, holders of Class E Stock are entitled to
receive, out of funds then generally available unpaid dividends previously
declared or accrued and a per share amount of $3.12. The Class E Stock is
redeemable by the holder at any time after December 31, 2004 for the stated
value of $3.12 per share plus accrued but unpaid dividends. The Class E Stock
will automatically be converted into shares of common stock upon a change in
ownership of 50% of the Company's outstanding voting stock, upon a merger or
consolidation of the Company, upon the sale of significant assets of the
Company, or upon consummation of a qualified public offering.
Class E Stock is senior to Class A, B and C Stock, on parity with Class D Stock
and subordinate to Class F Stock.
In conjunction with the Class E conversion, warrants totaling 315,000, issued in
conjunction with the issuance of the Senior Notes in August 1999 (Note 10), were
cancelled. In exchange, warrants to purchase 306,535 shares of Class E Stock at
$2.50 per share were issued. These warrants expire April 7, 2005. The estimated
fair market value of these warrants is approximately $344,000 based on the
Binary Option Pricing Model.
Pursuant to the stock purchase agreement related to the Class E Stock, the
Company is bound by certain covenants.
CLASS F ISSUANCE--During May 2000 the Company authorized q7,500,000 shares of
$.01 par value Class F Stock. On May 23, 2000, the Company sold 6,785,711 shares
of Class F Stock for a total of $28.5 million, and accordingly, the outstanding
Class F Bridge Loans of $5,200,000 were converted to Class F Stock.
Each share of Class F Stock is convertible into two shares of common stock at
the option of the holder (see Note 16). Holders of the Class F Stock have voting
rights equivalent to the number of shares of common stock into which their
shares of Class F Stock convert. The Class F Stock earns cumulative dividends at
an annual rate of 6%, payable quarterly. Dividends are payable in cash. The
Class F Stock will automatically be converted into shares of common stock
immediately prior to a merger or consolidation of the Company or upon the sale
of significant assets of the Company, or the
F-72
<PAGE>
BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999
15. SUBSEQUENT EVENTS (CONTINUED)
consummation of a qualified public offering. The Class F shareholders are
entitled to appoint representatives to the Board of Directors. The Class F stock
is redeemable by the holder at any time after May 23, 2005 at a price per share
equal to the sum of the Class F stated value, initially $4.20 per share,
multiplied by the number of shares to be redeemed, plus all accrued but unpaid
dividends.
The Class F Stock is senior to all other classes of preferred stock.
Upon liquidation, holders of the Class F stock are entitled to receive, out of
funds then generally available, unpaid dividends previously paid or accrued and
a per share amount equal to the Class F stated value.
Pursuant to the Stock Purchase Agreement related to the Class F Stock (the
"Class F Agreement"), the Company is bound by certain covenants.
Under the conditions of the Class F Agreement, the Company will issue warrants
for shares of common stock equal to $14,250,000 divided by the warrant price.
The warrant price is defined as 37.5% of the lower of: (i) the effective price
per share of common stock paid by the acquirer in a sale transaction as
determined by a nationally recognized banking firm chosen by the Company and
approved by a majority of the purchasers that hold a majority of the aggregate
preferred shares and conversion shares (shares of common stock issuable upon
conversion of the Class F Stock) as of the date of consummation of such sale
transaction and (ii) the initial price in the first qualified offering of the
Company's common stock. These warrants expire on May 23, 2005 and no warrants
have been issued at this time.
STOCK OPTIONS--During the period from January 1, 2000 to September 22, 2000, the
Company issued 1,808,988 ISOs with exercise prices from $.89 to $6.10, 1,157,200
NSOs to employees at exercise prices from $2.10 to $7.50, and 160,000 NSOs to
consultants at an exercise price of $4.10.
16. INITIAL PUBLIC OFFERING AND STOCK SPLIT
On November 22, 2000 the Company completed an initial public offering for the
sale of 8,000,000 shares of the Company's common stock. The gross proceeds of
the offering were $48 million. Prior to the effective date of the offering, the
Company completed a 2-for-1 split of the Company's common stock. All share and
per share amounts in the accompanying financial statements have been
retroactively restated to reflect this 2-for-1 split.
In conjunction with the Company's initial public offering, the Company
authorized a new class of preferred stock consisting of 10,000,000 shares.
* * * * * *
F-73
<PAGE>
--------------------------------------------------------------------------------
[LOGO]
SATCON TECHNOLOGY CORPORATION
SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 2001
CIBC WORLD MARKETS
BANC OF AMERICA SECURITIES LLC
FAC/EQUITIES
--------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION, WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THE COMMON STOCK.
UNTIL , 2001 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred in connection
with the sale and distribution of the securities being registered hereby, all of
which will be borne by the Registrant, other than the underwriting discounts and
commissions. All amounts shown are estimates except the SEC registration fee,
the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 30,360
NASD filing fee............................................. 12,000
Nasdaq National Market listing fee.......................... 17,500
Blue Sky fees and expenses.................................. 5,000
Transfer Agent and Registrar fees........................... 25,000
Accounting fees and expenses................................ 400,000
Legal fees and expenses..................................... 600,000
Printing and mailing expenses............................... 250,000
Miscellaneous............................................... 360,140
----------
Total................................................... $1,700,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law allows a corporation to
eliminate the personal liability of directors of a corporation to the
corporation or its stockholders for monetary damages for a breach of fiduciary
duty as a director, except where the director breached his duty of loyalty,
failed to act in good faith, engaged in intentional misconduct or knowingly
violated a law, authorized the payment of a dividend or approved a stock
repurchase in violation of Delaware corporate law or obtained an improper
personal benefit. SatCon has included such a provision in its Certificate of
Incorporation. This provision reads as follows:
"To the maximum extent permitted by Section 102(b)(7) of the
General Corporation Law of Delaware, a director of this
Corporation shall not be personally liable to the Corporation or
its stockholders for monetary demands for breach of fiduciary duty
as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts of omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper
personal benefit."
Section 145 of the General Corporation Law of Delaware provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and
II-1
<PAGE>
only to the extent that the adjudicating court like determines that such
indemnification is proper under the circumstances. SatCon's Bylaws include the
following provision:
"Reference is made to Section 145 and any other relevant
provisions of the General Corporation Law of the State of
Delaware. Particular reference is made to the class of persons,
hereinafter called "Indemnitees", who may be indemnified by a
Delaware corporation pursuant to the provisions of such
Section 145, namely, any person or the heirs, executors, or
administrators of such person, who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, by reason of the fact that such
person is or was a director, officer, employee, or agent of such
corporation or is or was serving at the request of such
corporation as a director, officer, employee, or agent of another
corporation, partnership joint venture, trust, or other
enterprise. The Corporation shall, and is hereby obligated to,
indemnify the Indemnitees, and each of them in each and every
situation where the Corporation is obligated to make such
indemnification pursuant to the aforesaid statutory provisions.
The Corporation shall indemnify the Indemnitees, and each of them,
in each and every situation where, under the aforesaid statutory
provisions, the Corporation is not obligated, but is nevertheless
permitted or empowered, to make such indemnification, it being
understood that, before making such indemnification with respect
to any situation covered under this sentence, (i) the Corporation
shall promptly make or cause to be made, by any of the methods
referred to in Subsection (d) of such Section 145, a determination
as to whether each Indemnitee acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, in the case of any criminal
action or proceeding, had no reasonable cause to believe his
conduct was unlawful, and (ii) that no such indemnification shall
be made unless it is determined that such Indemnitee acted in good
faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, in the
case of any criminal action or proceeding, had no reasonable cause
to believe that his conduct was unlawful."
SatCon has purchased directors' and officers' liability insurance which would
indemnify its directors and officers against damages arising out of certain
kinds of claims which might be made against them based on their negligent acts
or omissions while acting in their capacity as such.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
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).
5.1(**) Opinion of Hale and Dorr LLP.
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).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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.
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).
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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.
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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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.
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.
23.3 Consent of PricewaterhouseCoopers LLP.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
23.4 Consent of Deloitte & Touche LLP.
</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.
(**) To be filed by amendment.
(b) Financial Statement Schedules
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO ADDITIONS BALANCE
BEGINNING OF COSTS AND FROM AT END
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 21,254,448
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>
All other schedules have been omitted because they are not required or because
the required information is given in the Registrant's Consolidated Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such
II-7
<PAGE>
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cambridge, Commonwealth
of Massachusetts, on December 12, 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 Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board, President,
/s/ DAVID B. EISENHAURE Chief Executive Officer and
--------------------------------- Director (Principal Executive December 12, 2000
David B. Eisenhaure Officer)
Vice President of Finance, Chief
/s/ SEAN F. MORAN* Financial Officer and Treasurer
--------------------------------- (Principal Financial Officer and December 12, 2000
Sean F. Moran Principal Accounting Officer)
/s/ MICHAEL C. TURMELLE* Director, Vice President, Chief
--------------------------------- Operating Officer and Secretary December 12, 2000
Michael C. Turmelle
/s/ JAMES L. KIRTLEY, JR.* Director, Vice President and Chief
--------------------------------- Scientist December 12, 2000
James L. Kirtley, Jr.
/s/ MARSHALL J. ARMSTRONG* Director
--------------------------------- December 12, 2000
Marshall J. Armstrong
/s/ ALAN P. GOLDBERG* Director
--------------------------------- December 12, 2000
Alan P. Goldberg
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THOMAS A. HURKMANS* Director
--------------------------------- December 12, 2000
Thomas A. Hurkmans
/s/ GERALD L. WILSON* Director
--------------------------------- December 12, 2000
Gerald L. Wilson
* By: /s/ DAVID B. EISENHAURE
---------------------------------
David B. Eisenhaure
As Attorney-In-Fact
</TABLE>
II-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY SCHEDULE
To the Board of Directors of
SatCon Technology Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of SatCon Technology Corporation and its
subsidiaries and have issued our report thereon dated November 28, 2000. Our
audit was made for the purpose of forming an opinion on those consolidated
financial statements taken as a whole. The schedule listed in Item 16(b) is the
responsibility of the Company's management and is presented for the purposes of
complying with the Securities and Exchange Commission's rules and is not a part
of the basic consolidated financial statements. This schedule has been subjected
to auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Boston, Massachusetts
November 28, 2000
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
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).
5.1(**) Opinion of Hale and Dorr LLP.
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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.
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).
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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.
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 17, 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.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Deloitte & Touche LLP.
</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.
(**) To be filed by amendment.
