10-Q 1 a10-q.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 1-11512 ------------------------ SATCON TECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) ------------------------ State of Incorporation: DELAWARE I.R.S. Employer ID. No.: 04-2857552 161 FIRST STREET CAMBRIDGE, MA 02142-1221 (Address of principal executive offices) (617) 661-0540 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.01 Par Value, 13,707,549 shares outstanding as of August 4, 2000. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I: FINANCIAL INFORMATION
PAGE -------- ITEM 1: FINANCIAL STATEMENTS Consolidated Balance Sheets (Unaudited)..................... 1 Consolidated Statements of Operations (Unaudited)........... 2 Consolidated Statement of Changes in Stockholders' Equity (Unaudited)............................................... 3 Consolidated Statements of Cash Flows (Unaudited)........... 4 Notes to Interim Consolidated Financial Statements (Unaudited)............................................... 5 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 16 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................... 21 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS................................... 22 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........... 22 ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................... 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................... 22 ITEM 5. OTHER INFORMATION................................... 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................... 22 SIGNATURE................................................... 24 EXHIBIT INDEX............................................... 25
PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS SATCON TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30, 2000 1999 ------------ ------------- (UNAUDITED) (AS RESTATED) ASSETS Current assets: Cash and cash equivalents................................. $ 9,576,144 $ 2,533,072 Accounts receivable, net of allowance of $450,938, at June 30, 2000 and $386,686 at September 30, 1999........ 6,245,472 2,799,143 Unbilled contract costs and fees, net of allowance of $746,121 at June 30, 2000 and September 30, 1999........ 428,809 1,462,201 Inventory................................................. 8,038,428 3,697,972 Prepaid expenses and other current assets................. 646,320 349,070 ------------ ------------ Total current assets...................................... 24,935,173 10,841,458 Property and equipment, net............................... 5,040,888 3,260,632 Intangibles, net.......................................... 9,417,068 3,194,609 Other long-term assets.................................... 599,848 103,675 ------------ ------------ Total assets............................................ $ 39,992,977 $ 17,400,374 ============ ============ LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,914,230 $ 1,563,605 Accrued payroll and payroll related expenses.............. 1,004,978 479,888 Deferred revenue.......................................... 965,757 113,179 Accrued loss from investment in Beacon Power Corporation............................................. -- 333,333 Other accrued expenses.................................... 1,369,370 620,874 Current portion of long-term debt......................... 17,168 16,226 ------------ ------------ Total current liabilities............................... 5,271,503 3,127,105 Long-term liabilities: Long-term debt, net of current portion.................... 20,874 33,871 Other long-term liabilities............................... 29,735 29,735 ------------ ------------ Total long-term liabilities............................. 50,609 63,606 Redeemable convertible preferred stock...................... -- 4,894,112 Stockholders' equity: Preferred stock; $0.01 par value, 1,000,000 shares authorized; none and 8,000 shares Series A redeemable convertible preferred stock issued and outstanding at June 30, 2000 and September 30, 1999, respectively...... -- -- Common stock, $0.01 par value, 25,000,000 shares authorized; 13,706,550 and 9,617,009 shares issued at June 30, 2000 and September 30, 1999, respectively...... 137,065 96,170 Additional paid-in capital................................ 67,759,327 37,074,161 Shares held in escrow, at market value; none and 42,860 shares at June 30, 2000 and September 30, 1999, respectively........................ -- (428,600) Amounts receivable from exercise of stock options......... (700,001) (1,816,667) Accumulated deficit....................................... (32,237,317) (25,359,809) Accumulated other comprehensive loss...................... (38,505) -- Treasury stock, at cost; 44,500 shares at June 30, 2000 and September 30, 1999.................................. (249,704) (249,704) ------------ ------------ Total stockholders' equity.............................. 34,670,865 9,315,551 ------------ ------------ Total liabilities, redeemable convertible preferred stock and stockholders' equity...................... $ 39,992,977 $ 17,400,374 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 1 SATCON TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2000 1999 2000 1999 ----------- ------------- ----------- ------------- (AS RESTATED) (AS RESTATED) Product revenue........................... $ 5,459,224 $ 2,622,440 $14,269,299 $ 6,389,193 Funded research and development revenue... 3,235,274 1,469,139 6,526,033 5,089,705 ----------- ----------- ----------- ----------- Total revenue........................... 8,694,498 4,091,579 20,795,332 11,478,898 Cost of product revenue................... 4,598,916 3,287,919 12,486,079 6,726,740 ----------- ----------- ----------- ----------- Gross margin.............................. 4,095,582 803,660 8,309,253 4,752,158 Research and development expenses......... 3,943,890 2,135,166 7,559,907 5,029,541 Selling, general and administrative expenses................................ 2,555,302 5,176,010 7,008,006 7,194,338 Amortization of intangibles............... 323,192 101,047 894,755 272,840 ----------- ----------- ----------- ----------- Total operating expenses.................. 6,822,384 7,412,223 15,462,668 12,496,719 ----------- ----------- ----------- ----------- Operating loss............................ (2,726,802) (6,608,563) (7,153,415) (7,744,561) Loss from investment in Beacon Power Corporation............................. -- (1,000,000) -- (1,030,000) Other income/(loss)....................... (9,100) (141,452) 2,425 (150,464) Interest income........................... 155,823 596 275,979 32,666 Interest expense.......................... (442) (46,268) (2,497) (74,816) ----------- ----------- ----------- ----------- Net loss.................................. (2,580,521) (7,795,687) (6,877,508) (8,967,175) Accretion of redeemable convertible preferred stock discount................ -- -- (3,105,888) -- ----------- ----------- ----------- ----------- Net loss attributable to common stockholders............................ $(2,580,521) $(7,795,687) $(9,983,396) $(8,967,175) =========== =========== =========== =========== Net loss per weighted average share, basic and diluted............................. $ (0.19) $ (0.85) $ (0.81) $ (0.99) =========== =========== =========== =========== Weighted average number of common shares, basic and diluted....................... 13,642,323 9,176,849 12,277,950 9,072,060 =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 2 SATCON TECHNOLOGY CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
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 ---------- -------- ----------- -------- ----------- ----------- ------------ Balance, September 30, 1999 (As restated)................ 9,617,009 $96,170 $37,074,161 42,860 $ (428,600) $(1,816,667) $(25,359,809) Net loss....................... -- -- -- -- -- -- (6,877,508) 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 -- -- -- -- Common stock issued in connection with NGC acquisition of assets........ 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...................... 667,139 6,671 5,224,578 -- -- 1,116,666 -- Exercise of common stock warrants..................... 18,000 180 140,220 -- -- -- -- 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, June 30, 2000......... 13,706,550 137,065 67,759,327 -- -- $ (700,001) $(32,237,317) ========== ======== =========== ======= =========== =========== ============ ACCUMULATED OTHER TOTAL COMPREHENSIVE TREASURY TREASURY STOCKHOLDERS' LOSS SHARES STOCK EQUITY -------------- -------- --------- ------------- Balance, September 30, 1999 (As restated)................ -- 44,500 $(249,704) $ 9,315,551 Net loss....................... -- -- -- (6,877,508) Common stock issued in connection with Ling acquisition.................. -- -- -- 7,756,356 Common stock issued in connection with MTI investment................... -- -- -- 6,975,226 Common stock issued in connection with NGC acquisition of assets........ -- -- -- 5,471,558 Conversion of redeemable preferred stock into common stock........................ -- -- -- 8,000,000 Exercise of common stock options...................... -- -- -- 6,347,915 Exercise of common stock warrants..................... -- -- -- 140,400 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................... (38,505) -- -- (38,505) -------- ------ --------- ----------- Balance, June 30, 2000......... $(38,505) 44,500 $(249,704) $34,670,865 ======== ====== ========= ===========
The accompanying notes are an integral part of the consolidated financial statements. 3 SATCON TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, ---------------------------- 2000 1999 ------------ ------------- (AS RESTATED) Cash flows from operating activities: Net loss.................................................. $(6,877,508) $(8,967,175) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......................... 1,499,041 744,486 Allowance for unbilled contract costs and fees........ -- 630,299 Allowance for doubtful accounts....................... 64,252 187,970 Allowance for inventory excess and obsolescence....... 300,000 714,536 Loss from investment in Beacon Power Corporation...... -- 1,030,000 Loss on sale of marketable securities................. -- 87,535 Write-off of impaired assets.......................... -- 260,790 Non-cash compensation expense related to issuance of common stock options to non-employees............... -- 2,183,373 Non-cash compensation expense related to issuance of common stock in exchange for consulting services.... 348,260 -- Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable................................... (1,573,558) 12,954 Unbilled contract costs and fees...................... 1,033,392 (285,748) Prepaid expenses and other current assets............. 112,989 (63,949) Inventory............................................. (306,465) (754,876) Other long-term assets................................ 10,485 558,739 Accounts payable...................................... (291,062) 284,122 Accrued expenses and payroll.......................... 271,512 322,194 Other liabilities..................................... 839,078 43,721 ----------- ----------- Total adjustments....................................... 2,307,924 5,956,146 ----------- ----------- Net cash used in operating activities....................... (4,569,584) (3,011,029) ----------- ----------- Cash flows from investing activities: Sales and maturities of marketable securities............. -- 580,144 Patent and intangible expenditures........................ (90,123) (51,333) Purchase of property and equipment........................ (1,033,657) (170,574) Cash used in acquisitions................................. (24,054) (995,876) Investment in Beacon Power Corporation.................... (333,333) (155,000) ----------- ----------- Net cash used in investing activities....................... (1,481,167) (792,639) ----------- ----------- Cash flows from financing activities: Borrowings under line of credit........................... -- 2,617,296 Repayment of borrowings................................... (12,055) (100,000) Net proceeds from issuance of common stock................ 6,975,226 -- Proceeds from exercise of stock options and warrants...... 6,488,315 678,000 Purchase of treasury stock................................ -- (76,628) Deferred financing fees................................... (319,158) -- ----------- ----------- Net cash provided by financing activities................... 13,132,328 3,118,668 ----------- ----------- Effect of foreign currency exchange rates on cash and cash equivalents............................................... (38,505) -- Net increase/(decrease) in cash and cash equivalents........ 7,043,072 (685,000) Cash and cash equivalents at beginning of period............ 2,533,072 1,201,610 ----------- ----------- Cash and cash equivalents at end of period.................. $ 9,576,144 $ 516,610 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 4 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of SatCon Technology Corporation and its majority-owned subsidiaries (collectively, the "Company") as of June 30, 2000 and have been prepared by the Company in accordance with generally accepted accounting principles for interim financial reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All intercompany accounts and transactions have been eliminated. These consolidated financial statements, which in the opinion of management reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1999, as amended. Operating results for the three-month and nine-month periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year. The Company has restated its financial statements for the three-month and nine-month periods ended June 30, 1999. The restatement was prompted by the recently completed 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. The Company previously had accounted for these costs either as fixed assets or as part of the net assets of Beacon Power. As a result, certain costs previously capitalized in 1996, 1997 and 1998 should have been expensed as incurred, therefore reducing the Company's investment in Beacon Power by $3.1 million as of December 24, 1997. The adjustments to the financial statements at December 24, 1997, the date which the Company began accounting for its investment in Beacon Power under the equity method of accounting, consisted of a reduction of $37,000 from current assets, a reduction of $3.0 million from property and equipment and intangible assets and an increase of $73,000 of accrued expenses. There is no cumulative effect of this change on the Company's stockholders' equity as of June 30, 2000, since the 5 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Company had reduced its investment in Beacon Power to zero. The effect of this change on the reported results for each period is as follows: CONSOLIDATED STATEMENTS OF OPERATIONS:
THREE MONTHS ENDED JUNE 30, 1999 ----------------------------- (AS RESTATED) (AS REPORTED) ------------- ------------- Product revenue............................................. $ 2,622,440 $ 2,622,440 Funded research and development revenue..................... 1,469,139 1,469,139 ----------- ----------- Total revenue............................................. 4,091,579 4,091,579 Cost of product revenue..................................... 3,287,919 3,287,919 ----------- ----------- Gross margin................................................ 803,660 803,660 Research and development expenses........................... 2,135,166 2,135,166 Selling, general and administrative expenses................ 5,176,010 5,176,010 Amortization of intangibles................................. 101,047 101,047 ----------- ----------- Total operating expenses.................................... 7,412,223 7,412,223 ----------- ----------- Operating loss.............................................. (6,608,563) (6,608,563) Loss from investment in Beacon Power Corporation............ (1,000,000) (396,620) Other income/(loss)......................................... (141,452) (141,452) Interest income............................................. 596 596 Interest expense............................................ (46,268) (46,268) ----------- ----------- Net loss attributable to common stockholders................ $(7,795,687) $(7,192,307) =========== =========== Net loss per weighted average share, basic and diluted...... $ (0.85) $ (0.78) =========== =========== Weighted average number of common shares, basic and diluted................................................... 9,176,849 9,176,849 =========== ===========
6 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NINE MONTHS ENDED JUNE 30, 1999 ----------------------------- (AS RESTATED) (AS REPORTED) ------------- ------------- Product revenue............................................. $ 6,389,193 $ 6,389,193 Funded research and development revenue..................... 5,089,705 5,089,705 ----------- ----------- Total revenue............................................. 11,478,898 11,478,898 Cost of product revenue..................................... 6,726,740 6,726,740 ----------- ----------- Gross margin................................................ 4,752,158 4,752,158 Research and development expenses........................... 5,029,541 5,029,541 Selling, general and administrative expenses................ 7,194,338 7,194,338 Amortization of intangibles................................. 272,840 272,840 ----------- ----------- Total operating expenses.................................... 12,496,719 12,496,719 ----------- ----------- Operating loss.............................................. (7,744,561) (7,744,561) Loss from investment in Beacon Power Corporation............ (1,030,000) (1,884,803) Other income/(loss)......................................... (150,464) (150,464) Interest income............................................. 32,666 32,666 Interest expense............................................ (74,816) (74,816) ----------- ----------- Net loss attributable to common stockholders................ $(8,967,175) $(9,821,978) =========== =========== Net loss per weighted average share, basic and diluted...... $ (0.99) $ (1.08) =========== =========== Weighted average number of common shares, basic and diluted................................................... 9,072,060 9,072,060 =========== ===========
7 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) CONSOLIDATED BALANCE SHEET DATA:
SEPTEMBER 30, 1999 JUNE 30, 1999 --------------------------- --------------------------- AS RESTATED AS REPORTED AS RESTATED AS REPORTED ------------ ------------ ------------ ------------ Investment in Beacon Power Corporation...... -- -- -- -- ------------ ------------ ------------ ------------ Total assets................................ $ 17,400,374 $ 17,400,374 $ 15,278,952 $ 15,278,952 ============ ============ ============ ============ Accrued losses from investment in Beacon Power Corporation................... $ 333,333 $ 202,829 $ 875,000 $ 271,016 ------------ ------------ ------------ ------------ Accumulated deficit......................... $(25,359,809) $(25,229,305) $(23,296,402) $(22,692,418) ------------ ------------ ------------ ------------ Total liabilities, redeemable convertible preferred stock and stockholders' equity... $ 17,400,374 $ 17,400,374 $ 13,278,952 $ 15,278,952 ============ ============ ============ ============
NOTE B. SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Revenue from manufactured products is recognized upon shipment, or if the product requires installation, then revenue is recognized upon installation of the product. The Company provides for a warranty reserve at the time the product revenue is recognized. The Company performs funded research and development in collaboration with third parties under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fee depending on how costs compare with budget. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as services are performed. In each form of contract, the Company receives periodic progress payments or payment 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 and contract costs indicate a loss, a provision for the entire loss on the contract is recorded. As of June 30, 2000, the Company has accrued $150,000 for anticipated contract losses. Deferred revenue consists of payments received from customers in advance of services performed, product shipped or installation completed. 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 $191,049 and $282,746 at June 30, 2000 and September 30, 1999, respectively. 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. 8 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE C. SIGNIFICANT EVENTS INVESTMENT IN BEACON POWER CORPORATION For the nine months ended June 30, 2000, the Company did not record a loss from its investment in Beacon Power Corporation. For the nine months ended June 30, 1999, the Company recorded a loss of $1.0 million which represented the additional $1.0 million committed investment from June 1999 and the recognition of a portion of the suspended losses from Beacon Power. As of June 22, 1999, the Company's investment in Beacon Power had been reduced to zero, and no additional losses were recorded during the period October 1, 1999 through June 30, 2000. On January 7, 2000, the Company purchased from Beacon Power a convertible promissory note with a principal amount of $200,000. The note bore interest at 12% per annum and was repaid on February 14, 2000. On February 25, 2000, the Company purchased from Beacon Power a convertible promissory note with a principal amount of $300,000. The note bore interest at 12% per annum and was repaid on April 27, 2000. 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, $0.01 par value per share (the "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. 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. In addition, the Company received a warrant to purchase 36,000 shares of MTI's common stock on October 21, 1999 and a warrant to purchase 64,000 shares of MTI's common stock on January 31, 2000 at exercise prices of $37.66 per share. ACQUISITIONS 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 9 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) $7,579,726. In addition, the Company has 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: 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 Intangibles................................................. 3,754,910 Accounts payable............................................ 641,687 Accrued payroll and payroll related expenses................ 334,129 Deferred revenue............................................ 13,500 Other accrued expenses...................................... 560,437
The following unaudited pro forma financial information combines the Company's and Ling Electronics' results of operations as if the acquisition had taken place on October 1, 1998. The pro forma results are not necessarily indicative of what the results of operations actually would have been if the transaction had occurred on the applicable dates indicated and are not intended to be indicative of future results of operations.
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, --------------------------- ---------------------------- 2000 1999 2000 1999 ----------- ------------- ------------ ------------- (AS RESTATED) (AS RESTATED) Revenue.................................. $ 8,694,498 $ 5,881,579 $ 20,934,921 $ 17,380,898 Operating loss........................... $(2,726,807) $(7,006,563) $ (7,473,620) $ (8,709,769) Net loss................................. $(2,580,521) $(8,193,687) $ (7,196,392) $ (9,935,383) Net loss attributable to common stockholders........................... $(2,580,521) $(8,193,687) $(10,302,280) $ (9,935,383) Net loss per share, basic and diluted.... $ (0.19) $ (0.84) $ (0.84) $ (1.01)
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 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 10 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) warrant is exercisable upon the occurrence of certain defined events. As of June 30, 2000, this warrant is not yet exercisable. The purchase price of the asset purchase has been allocated as follows: Inventory................................................... $1,206,000 Property and equipment...................................... 1,091,643 Intangibles................................................. 3,281,423
The pro forma financial information has not been presented, as the Company views this transaction as the purchase of assets rather than as a business combination. PREFERRED STOCK CONVERSION 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 the remaining discount of $2,789,031 on redeemable preferred stock. SHARES RELEASED FROM ESCROW On April 26, 2000, the Company released 42,860 shares of common stock that were held in escrow for Albert R. Snider that had been issued on March 9, 1999 in exchange for consulting, advisory and related services the Company may reasonably request from time to time between October 1, 1999 and September 30, 2002. The Company marked to-market these securities 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 net realizable value of the underlying services to be received by $235,760. The Company has charged this amount to selling, general and administrative expenses during the three months ended June 30, 2000. The Company is amortizing the realizable asset of $450,000 over the period of service through September 30, 2002. At June 30, 2000, the unamortized value of this asset is $337,500. 11 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE D. LOSS PER SHARE The following is the reconciliation of the numerators and denominators of the basic and diluted per share computations of net loss:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2000 1999 2000 1999 ----------- ------------- ----------- ------------- (AS RESTATED) (AS RESTATED) Net loss attributable to common stockholders............................. $(2,580,521) $(7,795,687) $(9,983,396) $(8,967,175) BASIC: Common shares outstanding, beginning of period................................... 13,578,022 9,074,049 9,529,649 8,990,249 Weighted average common shares issued during the period........................ 64,301 102,800 2,748,301 95,378 Weighted average shares repurchased during the period............................... -- -- -- (13,567) ----------- ----------- ----------- ----------- Weighted average shares outstanding--basic....................... 13,642,323 9,176,849 12,277,950 9,072,060 =========== =========== =========== =========== Net loss per weighted average share, basic.................................... $(0.19) $(0.85) $(0.81) $(0.99) =========== =========== =========== =========== DILUTED: Weighted average shares outstanding--basic....................... 13,642,323 9,176,849 12,277,950 9,072,060 ----------- ----------- ----------- ----------- Weighted average common stock equivalents (a).......................... -- -- -- -- ----------- ----------- ----------- ----------- Weighted average shares outstanding--diluted..................... 13,642,323 9,176,849 12,277,950 9,072,060 =========== =========== =========== =========== Net loss per weighted average share, diluted.................................. $(0.19) $(0.85) $(0.81) $(0.99) =========== =========== =========== ===========
------------------------ (a) As of June 30, 2000 and 1999, 2,946,906 and 1,327,951 common stock equivalents, respectively, were excluded from the weighted average common shares outstanding as their effect would be antidilutive. NOTE E. INVENTORY Inventory consists of the following:
JUNE 30, SEPTEMBER 30, 2000 1999 ---------- ------------- Raw material................................................ $3,680,799 $1,139,064 Work-in-process............................................. 3,466,694 2,199,199 Finished goods.............................................. 890,935 359,709 ---------- ---------- $8,038,428 $3,697,972 ========== ==========
12 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE F. COMPREHENSIVE LOSS The Company's total comprehensive loss is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2000 1999 2000 1999 ----------- ------------- ----------- ------------- (AS RESTATED) (AS RESTATED) Net loss.................................... $(2,580,521) $(7,795,687) $(6,877,508) $(8,967,175) =========== =========== =========== =========== Other comprehensive income/(loss), net of tax: Unrealized gains/(losses) on securities..... -- 15,085 -- 10.380 Foreign currency translation adjustment..... (19,171) -- (38,505) -- ----------- ----------- ----------- ----------- Other comprehensive income/(loss)........... (19,171) 15,085 (38,505) 10,380 ----------- ----------- ----------- ----------- Comprehensive loss.......................... $(2,561,356) $(7,780,602) $(6,916,013) $(8,956,795) =========== =========== =========== ===========
NOTE G. SEGMENT DISCLOSURES As of October 1, 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products and services, geographical areas and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and assess their performance. The Company's organizational structure is based on strategic business units that offer various products to the principal markets in which the Company's products are sold. These business units equate to three reportable segments: research and development, power electronic products and motion control products. The Company provides research and development services in collaboration with third-parties. Film Microelectronics, Inc designs and manufactures power electronics products. The MagMotor Division and Ling Electronics specialize in the engineering and manufacturing of motion control products. The Company evaluates performance based on revenue and profit and loss from operations before income taxes, interest income, interest expense, other income and losses and loss from investment in Beacon Power Corporation, excluding the effects of amortization of intangible assets associated with acquisitions. Common costs not directly attributable to a particular segment are allocated among segments based on management's estimates. 13 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) The following is a summary of the Company's operations by operating segment:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Research and development: Product revenue........................... $ 14,000 $ -- $ 76,486 $ -- Funded research and development revenue... 3,235,274 1,469,139 6,526,033 5,089,705 ----------- ----------- ----------- ----------- Total revenue........................... 3,249,274 $ 1,469,139 6,602,519 $ 5,089,705 ----------- ----------- ----------- ----------- Loss from operations, net of amortization of intangibles.......................... $(1,287,250) $(5,163,562) $(2,834,148) $(5,367,417) =========== =========== =========== =========== Power electronic products: Product revenue........................... 2,426,929 $ 2,058,987 5,936,330 $ 4,547,803 ----------- ----------- ----------- ----------- Loss from operations, net of amortization of intangibles.......................... $ (527,559) $ (994,420) $(1,911,135) $(1,668,190) =========== =========== =========== =========== Motion control products: Product revenue........................... 3,018,295 $ 563,453 8,256,483 $ 1,841,390 ----------- ----------- ----------- ----------- Loss from operations, net of amortization of intangibles.......................... $ (588,801) $ (349,534) $(1,513,377) $ (436,114) =========== =========== =========== ===========
The following is a summary of the Company's long-lived assets by operating segment:
JUNE 30, SEPTEMBER 30, 2000 1999 ---------- ------------- Research and development: Long-lived assets................................. $6,234,921 $1,717,228 ---------- ---------- Power electronic products: Long-lived assets................................. $4,338,258 $3,978,027 ---------- ---------- Motion control products: Long-lived assets................................. $4,484,625 $ 863,661 ---------- ----------
The Company operates and markets its services and products on a worldwide basis with its principal markets as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ -------------------------- 2000 1999 2000 1999 ----------- ---------- ------------ ----------- Revenue by geographic region: United States............................ $ 8,497,792 $4,091,579 $ 19,645,417 $11,478,898 Asia..................................... 176,239 -- 602,480 -- Europe................................... 20,467 -- 399,867 -- Rest of world............................ -- -- 147,568 -- ----------- ---------- ------------ ----------- Total revenue.......................... $ 8,694,498 $4,091,579 $ 20,795,332 $11,478,898 =========== ========== ============ ===========
14 SATCON TECHNOLOGY CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE H. LEGAL MATTERS On November 6, 1999, APACE, Inc. 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. At this time, the arbitration is scheduled to go forward in Boston, and an arbitrator has been selected. The parties have exchanged discovery. The arbitration is scheduled to commence on September 18, 2000 and proceed for nine days during September and October 2000. 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. 15 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. The factors include, without limitation, those set forth in Exhibit 99 to this Quarterly Report on Form 10-Q, which are expressly incorporated by reference herein. The following discussion reflects restatement of our financial statements for the three-month and nine-month periods ended June 30, 1999. The restatement was prompted by the recently completed initial audit of the financial statements of our affiliate, Beacon Power Corporation, and reflects treating certain costs as expenses rather than being included in the value of the net assets of Beacon Power at December 24, 1997. SatCon Technology Corporation (the "Company" or "SatCon") 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 SatCon's investment in Beacon Power by $3.1 million as of December 24, 1997. The adjustments to our financial statements at December 24, 1997, which represents the date in which we began accounting for our investment in Beacon Power under the equity method, 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. There is no cumulative effect of this change on SatCon's stockholders' equity as of June 30, 2000, since SatCon had reduced its investment in Beacon Power to zero. In addition, for all periods presented, expenses associated with funded research and development activities have been reclassified as research and development expenses from cost of revenue. OVERVIEW 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.--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. 16 - 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. On May 20, 1997, the Company formed Beacon Power. On October 23, 1998, Beacon Power completed a $4.8 million private placement of its Series D preferred stock and warrants to third-party investors, and the Company relinquished significant control of Beacon Power. 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 the Company. On April 7, 2000, Beacon Power issued 1,226,141 shares of its class E preferred stock and 306,535 class E warrants 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 preferred stock and 86,852 class E warrants. On April 21, 2000, Beacon Power raised an additional $4.1 million through the sale of additional bridge notes that are convertible into Beacon Power's class F preferred stock. The Company did not participate in this financing. On May 23, 2000, Beacon Power raised an additional $28.5 million through the sale of Beacon Power's class F preferred stock. The Company did not participate in this financing. The results of the Company's operations include $3.1 million loss of Beacon Power from May 8, 1997 to December 24, 1997 under the consolidation method of accounting. As a result of a recapitalization of Beacon Power on December 24, 1997, the Company began accounting for its investment in Beacon Power using the equity method and has included $1.9 million loss of Beacon Power for the period from December 25, 1997 through June 1998, which equaled its initial investment in Beacon Power. In connection with the additional investment by outside third parties on October 23, 1998, the Company committed $30,000 to Beacon Power and, accordingly, recorded a $30,000 loss from its investment in Beacon Power representing a portion of the suspended losses as of October 23, 1998. For the period October 24, 1998 through June 21, 1999, the Company recorded no additional losses of Beacon Power as its investment in Beacon Power had been reduced to zero as of October 23, 1998. In June and August 1999, Beacon received $3.0 of additional financing commitments, including $1.0 million from the Company. As a result of this additional commitment, the Company has included $1.0 million loss from its investment in Beacon Power representing a portion of the suspended losses as of June 22, 1999. For the period June 23, 1999 through September 30, 1999, the Company recorded no additional losses of Beacon Power as its investment in Beacon Power had been reduced to zero as of June 22, 1999. As of June 30, 2000, the Company has no obligations to provide any additional funding to Beacon. The Company performs funded research and development in collaboration with third parties under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs, an in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in fees depending on how costs compare with a budget. On fixed-price contracts, revenue is 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. Revenue from manufactured products is recognized upon shipment, or, if the product requires installation, the revenue is recognized upon installation of the product. The Company has incurred significant costs to develop its technology and products. These cost have exceeded total revenue. As a result, the Company has incurred net losses in each of the past five fiscal years and for the nine months ended June 30, 2000. As of June 30, 2000, the Company had an accumulated deficit of $32.2 million. The Company intends to significantly increase its capital expenditures and operating expenses to rapidly expand its manufacturing capabilities and for general corporate purposes, including product development activities, sales and marketing and administrative activities. Because the 17 Company expects to continue to invest in its business ahead of anticipated future revenues, the Company expects to incur operating losses for at least the next two years. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999 (AS RESTATED) PRODUCT REVENUE. Product revenue increased by $2.8 million or 108% from $2.6 million to $5.5 million. This increase was attributable to $1.7 million in revenue from Ling Electronics and a $1.1 million increase in revenue from the Company's microelectronics products, high performance motors and magnetic levitation products. FUNDED RESEARCH AND DEVELOPMENT REVENUE. Funded research and development revenue increased by $1.8 million or 120% from $1.5 million to $3.2 million. This increase was primarily attributable to $1.7 million funded research and development revenue from a Department of Energy program to develop low-cost power conversion modules for electric and hybrid-electric vehicles. GROSS MARGIN. Gross margin increased by $3.3 million or 410% from $804,000 to $4.1 million. Gross margin from products increased by $1.5 million and funded research and development increased by $1.8 million. Gross margin from product revenue as a percentage of product revenue increased to 16% from (25%). The improvement in gross margin from product revenue as a percentage of revenue is due to improved plant utilization at MagMotor and Film Microelectronics, due to higher revenue and gross margin from Ling Electronics. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $2.6 million or 51% from $5.2 million to $2.6 million. The decrease was primarily due to 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 accounts receivable in 1999. These decreases were offset by the inclusion of $728,000 of costs from Ling Electronics. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by $1.8 million or 85% from $2.1 million to $3.9 million. The increase was attributable to the $1.9 million increase in funded research and development revenue as well as the Company's increased focus on internally funded research and development projects including the development of power conversion products for the distributed power generation market. AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased by $222,000 or 220% from $101,000 to $323,000. This increase was the result of amortization of intangibles recorded in connection with the acquisitions of Ling Electronics in October 1999 and certain intellectual property and other intangible assets from Northrop Grumman Corporation in November 1999. LOSS FROM INVESTMENT IN BEACON POWER CORPORATION. For the three months ended June 30, 2000, the Company did not record a loss from its investment in Beacon Power. As of June 22, 1999, the Company's investment in Beacon Power had been reduced to zero, and no additional losses were recorded during the period from June 23, 1999 through June 30, 2000. During June 1999, we committed an additional $1.0 million in financing to Beacon Power and accordingly, recorded a $1.0 million loss from our investment in Beacon Power representing a portion of our suspended losses from Beacon Power. OTHER INCOME (EXPENSE), NET. Other income, net increased to $146,000 from $187,000 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 the Company's line of credit. 18 COMPARISON OF NINE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999 (AS RESTATED) PRODUCT REVENUE. Product revenue increased by $7.9 million or 123% from $6.4 million to $14.3 million. This increase was attributable to $5.2 million in revenue from Ling Electronics and a $2.7 million increase in revenue from the Company's microelectronics products, high performance motors and magnetic levitation products. FUNDED RESEARCH AND DEVELOPMENT REVENUE. Funded research and development revenue increased by $1.4 million or 28% from $5.1 million to $6.5 million. This increase was attributable to $3.2 million funded research and development revenue from a Department of Energy program to develop low-cost power conversion modules for electric and hybrid-electric vehicles partially offset by the Company's 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 $3.6 million or 75% from $4.8 million to $8.3 million. Gross margin from products increased by $2.1 million and funded research and development increased by $1.4 million. Gross margin from product revenue as a percentage of product revenue increased to 13% from (5%). 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, Inc. due to higher revenue and gross margin from Ling Electronics. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $186,000 or 3% from $7.2 million to $7.0 million. The decrease was primarily due to 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 accounts receivable in 1999. These decreases were offset by the inclusion of $1.9 million of costs from Ling Electronics, and $900,000 of costs for facilities and staffing in an effort to meet expected growth and demand for our products. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by $2.5 million or 50% from $5.0 million to $7.6 million. The increase was attributable to the $1.4 million increase in funded research and development revenue as well as the Company's increased focus on internally funded research projects including the development of power conversion products for the distributed power generation market. AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $622,000 or 228% from $273,000 to $895,000. This increase was the result of amortization of intangibles recorded in connection with the acquisitions of Inductive and Lighthouse in January 1999, Ling Electronics in October 1999 and certain intellectual property and other intangible assets from Northrop Grumman Corporation in November 1999. LOSS FROM INVESTMENT IN BEACON POWER CORPORATION. For the nine months ended June 30, 2000, the Company did not record a loss from its investment in Beacon Power. For the nine months ended June 30, 1999, the Company recorded a loss of $1.0 million. As of June 30, 1999, the Company's investment in Beacon Power had been reduced to zero and no additional losses were recorded during the period October 1, 1999 through June 30, 2000. OTHER INCOME (EXPENSE), NET. Other income, net increased to $276,000 from $193,000 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 the Company's line of credit. 19 LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations and met its capital expenditure requirements primarily through the sale of private equity securities, public security offerings, borrowings on its line of credit and capital equipment leases. As of June 30, 2000, the Company's cash and cash equivalents were $9.6 million, an increase of $7.0 million from September 30, 1999. Cash used in operating activities for the nine months ended June 30, 2000 was $4.6 million as compared to $3.0 million in 1999. Cash used in operating activities during the nine months ended June 30, 2000 was primarily attributable to the Company's net loss and an increase in accounts receivable partially offset by depreciation and amortization. Cash used in investing activities during the nine months ended June 30, 2000 was $1.5 million as compared to $793,000 in 1999. Net cash used in investing activities during the nine months ended June 30, 2000 included capital expenditures of $1.0 million and an investment in Beacon of $333,000. The Company estimates that it will spend an additional $2.0 million on capital expenditures during the next 12 months primarily at its Advanced Fuel Cell Division to expand its capacity to manufacture its power conversion products. The Company expects these additions will be financed from cash on hand and from lease financing. Cash provided by financing activities for the nine months ended June 30, 2000 was $13.1 million as compared to $3.1 million in 1999. Net cash provided by financing activities during the nine months ended June 30, 2000 includes net proceeds of $7.0 million from the sale of the Company's common stock and $6.5 million from the exercise of common stock options and warrants. The Company anticipates that the existing $9.6 million in cash and cash equivalents will be sufficient to fund operations for at least the next twelve months. However, there can be no assurance that the Company will not require additional financings within this time frame or that any additional financing, if needed, will be available to the Company on terms acceptable to the Company, if at all. EFFECTS OF INFLATION The Company believes that inflation and changing prices over the past three years have not had a significant impact on its net revenue or on its income from continuing operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 (SFAS No. 137), "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities" to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. We will adopt SFAS No. 133 beginning in the first quarter of the fiscal year ending September 30, 2001. The Company does not expect that the adoption of SFAS No. 133 will have a material impact on its financial condition or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Bulletin No. 101 (SAB No. 101), "Revenue Recognition." This bulletin, as amended, establishes guidelines for revenue recognition and is effective for fiscal 2000. The Company does not expect that the adoption of the guidance required by SAB No. 101 will have a material impact on its financial condition or results of operations. 20 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 Opinion No. 25, including (a) the definition of employees 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 Company does not expect that the adoption of this Interpretation will have a material impact on its financial condition or results of operations. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company develops products in the United States and sells them worldwide. As a result, the Company's financial results could be affected by factors such as changes in foreign exchange rates or weak economic conditions in foreign markets. Since the Company's sales are currently priced in U.S. dollars and are translated to local currency amounts, a strengthening of the dollar could make the Company's products less competitive in foreign markets. Interest income and expense are sensitive to changes in the general level of U.S. interest rates, particularly since the Company's investments are in short-term instruments and the Company's available line of credit requires interest payments calculated at variable rates. Based on the nature and current levels of the Company's investments and debt, however, the Company has concluded that there is no material market risk exposure. 21 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: On November 6, 1999, APACE, Inc. 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. At this time, the arbitration is scheduled to go forward in Boston, and an arbitrator has been selected. The parties have exchanged discovery. The arbitration is scheduled to commence on September 18, 2000 and proceed for nine days during September and October 2000. 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. Disclosure relating to this matter was previously set forth in the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1999 and the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000. 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 its results of operations or financial condition. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS: Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES: Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: Not applicable. ITEM 5. OTHER INFORMATION: Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (A) EXHIBITS 27 Financial Data Schedule.
22 10.1 Consulting Agreement, dated July 19, 2000, between the Registrant and Marshall J. Armstrong. 99 Risk Factors.
(B) REPORTS ON FORM 8-K On June 7, 2000, the Company filed a Current Report on Form 8-K, dated May 23, 2000, in connection with Beacon Power Corporation's completion of a $28.5 million private placement of Beacon Power's Class F Preferred Stock and warrants to purchase shares of Beacon Power's common stock with Perseus Capital L.L.C., DQE Enterprises, Inc., Micro-Generation Technology Fund L.L.C., GE Capital Equity Investments, Inc., Mechanical Technology Incorporated, Penske Corporation and The Beacon Group Energy Investment Fund II, L.P. 23 SIGNATURE PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. SATCON TECHNOLOGY CORPORATION By: /s/ SEAN F. MORAN ----------------------------------------- SEAN F. MORAN, CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING Date: August 14, 2000 OFFICER)
24 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT ------- ------------------------------------------------------------ 27 Financial Data Schedule. 10.1 Consulting Agreement, dated July 19, 2000, between the Registrant and Marshall J. Armstrong. 99 Risk Factors.
25