10-K/A 1 a10-ka.txt FORM 10-K/A -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A AMENDMENT NO. 1 TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER 1-11512 SATCON TECHNOLOGY CORPORATION (Exact name of Registrant as specified in its Charter) DELAWARE 04-2857552 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 161 FIRST STREET, 02142 CAMBRIDGE, MASSACHUSETTS (Address of principal executive offices) (ZIP CODE)
(617) 661-0540 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act TITLE OF CLASS COMMON STOCK, $.01 PAR VALUE ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the Registrant's Common Stock, $.01 par value per share, held by non-affiliates of the Registrant was $61,487,116, based on the last reported sale price of the Registrant's Common Stock on the Nasdaq National Market as of the close of business on December 15, 1999 ($8.125). There were 11,376,570 shares of Common Stock outstanding as of December 15, 1999. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL We were organized as a Massachusetts corporation in February 1985 and reincorporated in Delaware in 1992. We design, develop and manufacture intelligent, electro-mechanical products for aerospace, transportation, industrial and utility applications. We also design, develop and manufacture power and energy management products for telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive applications. Our electro-mechanical products are being developed for a wide variety of U.S. government and commercial markets. For the government, our electro-mechanical systems provide for applications ranging from satellite attitude control to high speed drives for shipboard systems. In the transportation segment, we are developing electric and hybrid electric drive components, auxiliary power units and advanced steering, alternator and starter/generator systems. We are working with major equipment producers to develop process equipment drives, high speed and precision machine tools, manipulators and machinery isolation equipment. Our electro-mechanical systems may offer advantages to the utility industry in power generation, energy storage and power quality. In the consumer market, we are developing variable speed motors for refrigeration equipment and other long-life, high-efficiency machinery. STRATEGY It is our strategy to continue to expand development of our technologies for use in commercial business applications and to seek the acquisition of businesses, products, assets and technologies that complement or augment our existing businesses, products, assets and technologies. DEVELOPMENTS DURING 1999 During 1999, our technology center made a concentrated effort toward building the power inverter for a fuel cell on-site power generation system. Using new technology, developed with government funding over the last seven years, we are developing new, smaller, high-efficiency, low-cost power inverters. Our power inverters are combined with fuel cell power generation systems, micro-turbines, or solar power generation systems for generating on-site power. Work also continued on the Department of Energy's contract with us to manufacture power electronics for use in hybrid-electric automobiles. With fuel cells and microturbines becoming more affordable, their use as alternative fuel drive trains is gaining interest from several perspectives. Our technology center also received funded research and development contracts for a modular drive for the U.S. Navy, miniature navigation systems, biological contamination detection systems, and a remote surveillance and targeting vehicle for DARPA. In January 1999, we acquired Lighthouse Software, Inc., which designs and develops software for the industrial machine tool industry. Over the past year, Magmotor, a manufacturer of custom electric motors targeting the factory automation, medical, semiconductor and packaging markets, introduced a new line of brushless DC servomotors for the machine tool industry. Within its first year with this product line, Magmotor was able to expand its customer base with the addition of orders from several machine tool manufacturers. These customers purchased servomotor for inclusion in such machines as Computer Numerical Control (CNC) machining centers, CNC lathes and milling machines and for small part precision turning. Magmotor also completed several delivery orders for its integrated suspension and motor (ISAM) product to Applied Materials. By having the encoder, brake, gearbox, tachometer and connectors that are required for each customer's unique application coupled with the appropriate motor, Magmotor can now provide its customers with an entire drive assembly. They have recently added brush and brushless motor amplifiers to 1 their product line and are building small motors for a major automotive manufacturer to be used in fuel cell cars. In January 1999, we acquired Inductive Components, Inc., a value-added supplier selling systems in the machine tool and semi-conductor industry. During 1999, FMI, a manufacturer and producer of custom integrated circuits for the communications, industrial, military and aerospace markets, introduced several new products. The first was a package of uplink electronics for satellite telecommunications systems such as mobile telephone repeater stations. The second set of products were a series of power resistors manufactured with aluminum nitride, FMI's solution to eliminating environmentally hazardous beryllium oxide, the substrate commonly used in this past for these products. These resistors are used in several telecommunications products, including cellular telephones. FMI was also chosen to design the thin film circuits for new satellite television/internet system for residential and business use. The system is being manufactured and sold through a major electronics manufacturer that also markets a satellite television service. FMI also developed a new process for manufacturing radio frequency identification cards. In April 1999, we acquired Hycomp, Inc., a manufacturer of high performance, high quality multi-chip modules. During 1999, Beacon Power Corporation, an affiliate of SatCon, successfully completed the first phase field testing of its flywheel uninterruptible power supply systems for telephone and cable television applications. The systems have successfully operated for over 1,800 continuous hours. In both applications, Beacon Power's flywheels have maintained the power during loss of utility power with no degredation of service. COMMERCIALIZATION We intend to continue directing our commercialization efforts in the following product areas: POWER ELECTRONICS We have developed proprietary high-voltage hybrid modules based on advanced power semiconductor technology at a fraction of the weight of conventional packages. The high-density topology and innovative cooling schemes utilized allow for higher throughput in smaller, lighter weight packages. These electronics support our high-speed drive and flywheel product developments as well as our power inverters for fuel cell, microturbine and other alternative fuel on-site power generation systems.. We have also developed a new hermetic amplifier product line that is manufactured without the use of hazardous beryllium oxide. In addition to the amplifiers, we are developing a new motor controller line based on the SAT-32 DSP motor control technology that is currently used in the Integrated Suspension and Motor product for semiconductor manufacturing. MOTORS AND HIGH SPEED DRIVES We design and build high performance motors and drives that capitalize on advances in materials and semiconductor technology to achieve high power density. Through the use of high performance materials and design of the magnetic circuits, we have demonstrated electric motor prototypes that are lightweight and have provided efficiencies in excess of 97 percent. Our motor designs are being evaluated for a wide variety of applications including electric vehicles, shipboard motors and general industrial applications. MAGNETIC BEARINGS AND SUSPENSION SYSTEMS Improvements in magnetic materials and electronic control systems have led the way to advances in electromagnetic bearings and suspension systems. We have participated in the development of such 2 systems for spacecraft and ground-based systems. Our magnetic bearing systems feature electromagnetic and permanent magnet actuators and advanced digital control systems. These systems have been developed for both commercial and military applications. By injecting electromagnetic forces along a selected bearing axis in concert with shaft rotation, the magnetic bearings can balance a dynamic machine, resulting in smooth and quiet operation. Similar principles guide the application of electromagnetic suspension systems. These automated systems provide a significant reduction of structure borne vibration transmittal, providing low vibration machinery operation, low detection or vibration isolation. In addition, these systems provide lubrication-free support for rotating, reciprocating, and stationary systems. Also, through active electronic control, these systems provide quiet, smooth and non-contaminating machinery operation and isolation. We are also developing a high-temperature magnetic bearing for gas turbine engines. FLYWHEEL ENERGY STORAGE SYSTEMS By integrating energy storing flywheels made of high strength materials with high power, permanent magnet motor/generators, we have developed electro-mechanical storage systems that we believe have the potential to offer practical solutions for mobile and stationary applications. Beacon Power's flywheel systems are anticipated to provide extremely high power output and energy storage in compact packages. They may be a long-lasting, lightweight, and an environmentally friendly alternative to conventional batteries. These systems can be used to provide backup for critical industrial processes and machines, as power supplies for satellites and as energy recovery systems for electric and hybrid-electric vehicle drive trains. Beacon Power is completing the commercialization of the 20C1000 cable/telecom flywheel system. Beacon Power's focus is limited to providing flywheel energy storage products for stationary terrestrial applications. Beacon Power's 20C1000 cable/telecom flywheel system is being developed to offer an alternative to lead acid batteries as an un-interruptible power supply for the telecommunications industry, including cable television and telephone service providers, which are required to maintain service during power outages. MARKETS Our objective is to capitalize on our technological developments from our internal and contract research and development projects to become a leading supplier of a new generation of intelligent, electro-mechanical and electro-optic products for aerospace, transportation, industrial, utility and food processing applications. These products, enabled by a revolution in the size, weight and efficiency of machines, are designed to provide competitive advantages in performance. COMPETITION A variety of companies compete in each of the areas in which we are developing and selling products. To date, we have faced only limited competition in providing research services, prototype development and custom and limited quality manufacturing. We expect competition to intensify greatly as commercial applications increase for our products under development. Some of our competitors are well established and have substantial managerial, technical, financial, marketing and product development resources competitive with, and, in some instances, greater than ours. Additional companies, both large and small, are entering the markets in which we compete. There can be no assurance that we will be successful in such a competitive environment. 3 PATENTS AND PROPRIETARY INFORMATION We currently own 23 U.S. patents which expire between 2007 and 2017. We also have 8 patent applications pending with the U.S. patent and trademark office. As a qualifying small business, we have retained commercial ownership rights to proprietary technology developed under various U.S. government contracts and grants, including small business innovation research contracts. Our patent and trade secret rights are of material importance to us and future prospects. No assurance can be given to as to the issuance of additional patents or, if so issued, as to their scope. Patents granted may not provide meaningful protection from competitors. Even if a competitor's products were to infringe patents owned by us, it would be costly for us to pursue our rights in an enforcement action and would divert funds and resources which otherwise could be used in our operations. Furthermore, there can be no assurance that we would be successful in enforcing intellectual property rights or that we may not infringe patent or intellectual of third parties. However, to date, we have not been required to defend our patents or proprietary information against claims by third parties. Since we intend to enforce our patent, trademarks and copyrights and protect our trade secrets, we may be involved from time to time in litigation to determine the enforceability, scope and validity of these rights. This litigation could result in substantial costs to us and divert efforts by our management and technical personnel. In addition to our patent rights, we also rely on treatment of our technology as trade secrets and upon confidentiality agreements, which our employees are required to sign, assigning to us all patent rights and technical or other information developed by employees during their employment with us. Our employees have also agreed not to disclose any trade secret or confidential information without our prior written consent. Notwithstanding these confidentiality agreements, there can be no assurance that other companies will not acquire information that we consider proprietary. RESEARCH AND DEVELOPMENT Approximately $6,355,000 or 41% of our revenue during the year ended September 30, 1999 was attributable to research and development activities funded by commercial customers and U.S. government agency sponsors. Under the agreements funded by the U.S. Government, the government retains a royalty-free license to use the technology developed for government purposes and we retain exclusive rights to the technology for commercial and industrial applications. The rights to technology developed under contracts funded by commercial customers are negotiated on a case by case basis. We expended approximately $726,000, $1,276,000 (as restated) and $4,055,000 (as restated) on internally-funded research and development during our years ended September 30, 1999, 1998 and 1997, respectively. During the year ended September 30, 1999, our most concentrated effort was directed toward building the power inverter for a fuel cell on-site power generation system. We continued our development efforts in the electro-optics and sensor inspection systems. In addition, we successfully tested a new version of our "Powersmart" alternator electronics package for Delco Remy International. Beacon Power's 20C1000 cable/telecom flywheel system and the introduction of our ISAM product accounted for the majority of the 1998 and 1997 internally-funded costs. GOVERNMENT REGULATION We have entered into contracts, subcontracts and grants with the U.S. government and its agencies which require compliance with applicable U.S. government regulations, including regulations with respect to bidding on proposals and billing practices. In the event that the U.S. government or its agencies conclude that we have not adhered to federal regulations, any contracts to which we are a party could be canceled. We could be prohibited from bidding on future contracts which could materially adversely affect our business. All payments for work performed on contracts with agencies of the U.S. government are subject to adjustment upon audit by the U.S. government defense contract audit agency, the general 4 accounting office and other agencies. We could also be required to disgorge any payments received from U.S. government agencies if we are found to have violated federal regulations. The commercialization of our technologies for use in various industries may also be affected by federal and state legislative and regulatory changes affecting such industries. MANUFACTURING AND SUPPLIERS If we are successful in obtaining market penetration of our products, we will be required to deliver large volumes of quality products or components to our customers on a timely basis at reasonable costs. When necessary, we intend to seek to supplement our manufacturing capabilities by establishing relationships with manufacturing organizations to deliver large volumes of our products until such time as we can develop our own manufacturing expertise and capacity. No assurance can be given that we will be able to successfully establish relationships with third party manufacturing organizations or, if such relationships are established, that they will be successful. The principal materials and supplies in our products are available from several commercial sources, and we do not depend on any single source for a significant portion of our materials or supplies. BACKLOG Our backlog consists primarily of research and development contracts and orders for multi-chip modules, hybrid and motor products. At September 30, 1999, the backlog was approximately $7,300,000 for work to be performed and products to be shipped during the year ending September 30, 2000 and beyond. Many of our contracts and sales orders may be canceled at any time with limited or no penalty. In addition, contract awards may be subject to funding approval from the U.S. government and commercial entities, which involves political, budgetary and other considerations over which we have no control. Our backlog at September 30, 1998 was approximately $10,000,000. SIGNIFICANT CUSTOMERS Although we have been developing applications of our technology for both commercial and government markets, a large percentage of our revenue is from the U.S. department of defense, department of energy and NASA contracts, subcontracts and grants. The majority of these contracts, subcontacts and grants were awarded through the small business innovation research program. Although we believe that the majority of our revenue in the future will result from commercial applications of our technologies, a significant portion of our business in the next few years will likely continue to involve research and development for the U.S government and its agencies. Consequently, a portion of future revenue may be subject to funding approval from Congress, which involves political, budgetary, and other considerations over which we have no control. To date, we have not been adversely affected by reductions in defense spending. We believe that government funding for the areas of our research and development activities will continue without reduction. However, we cannot assure you that this funding will not be reduced in the future. Any reduction could materially adversely affect our business. In addition, many of our U.S. government contracts may be canceled at any time by the U.S. government with limited or no penalty. EMPLOYEES At September 30, 1999, we employed a total of 177 people: 171 on a regular full-time basis, 4 on a regular part-time basis and 2 student interns. In addition, at September 30, 1999, Beacon Power employed a total of 27 people; 26 on a regular full-time basis and 1 on a regular part-time basis. Some of our employees are affiliated with large universities located in the greater Boston area. Approximately 59 persons are employed in engineering, 81 in manufacturing, 28 in administration and 9 in sales and marketing. None of these employees are represented by a union. We believe that our relations with our employees are satisfactory. 5 Our success will depend, in large part, upon our ability to attract, motivate and retain highly qualified scientists and engineers, as well as highly skilled and experiences management and technical personnel. Competition for these personnel is intense, and there can be no assurance that we will be successful in attracting, motivating or retaining key personnel. ITEM 2. PROPERTIES We lease 45,820 square feet of office and laboratory space at 161 First Street, Cambridge, Massachusetts under a primary lease expiring on October 31, 2003, an additional 8,719 square feet of office and laboratory space located at 6245 East Broadway Boulevard, Suite 350, Tucson, Arizona under a primary lease expiring on March 31, 2001 and an additional 1,561 square feet of laboratory space located at 984 Southford Road, Middlebury, Connecticut under a primary lease expiring on February 28, 2000. We also leases approximately 14,757 square feet of manufacturing space at 530 Turnpike Street, North Andover, Massachusetts under a primary lease expiring on July 31, 2002, approximately 17,000 square feet of manufacturing space at 121 Higgins Street, Worcester, Massachusetts under a primary lease expiring on March 31, 2003 and approximately 15,300 square feet of manufacturing space at 165 Cedar Hill Street, Marlborough, Massachusetts under a primary lease expiring on October 31, 2005 . Effective November 5, 1997, we entered into an agreement to sub-lease 8,930 square feet at 161 First Street to a third party, and effective July 15, 1998, we entered into an agreement to sub-lease an additional 3,952 square feet at 161 First Street to the same third party. Effective February 8, 1999, we entered into an agreement to sub-lease approximately 2,889 square feet at 6245 East Broadway Boulevard, Suite 350, Tucson, Arizona to a third party. Effective July 29, 1999, we entered into an agreement to sub-lease the remaining 5,830 square feet at the Tucson, Arizona location to another third party. We believe our facilities are adequate for our current needs and that adequate facilities for expansion, if required, are available. ITEM 3. LEGAL PROCEEDINGS On October 15, 1997, we received a letter from the Department of the Air Force stating that it may terminate for default a contract between the Air Force and us for development of a satellite component, unless perceived performance problems were cured. In the event of an actual default, we could be liable for extra costs incurred by the United States government in developing the component. We have had several discussions with the Air Force in order to resolve the issue. We informed the Air Force contracting officer of our belief that a termination for default is not warranted. On December 15, 1997, the Air Force issued a "Show Cause Notice" to us requiring us to demonstrate to the Air Force why the contract should not be terminated "for cause." On December 31, 1997, we responded to the Air Force's "Show Cause Notice, explaining our view that we should not be terminated for cause. As a related matter to the Air Force contract issue, on December 15, 1997, we received a subpoena from the United States Attorney for the District of Arizona. The subpoena sought documents relating to USAF Program/Contract No. F290601-96-C-145. On January 30, 1998 and February 4, 1998, we produced the documents responsive to the subpoena. In addition, we have made several of our current and former employees available to interview with officials from the Air Force and the United States Attorney's office. We are currently awaiting the United States Attorney's decision whether to proceed with any further investigation. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the year covered by this report through the solicitation of proxies or otherwise. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq national market under the trading symbol SATC. As of December 15, 1999 there were approximately 189 stockholders of record. For the periods reported below, the following table sets forth the range of high and low bid quotations for the common stock as reported by Nasdaq. Such quotations represent inter-dealer quotations without adjustment for retail markups, markdowns, or commissions and may not represent actual transactions. As of December 15, 1999 the closing price for our common stock, as reported by Nasdaq, was $8.125.
FISCAL YEAR FISCAL YEAR 1999 BID 1998 BID ------------------- ------------------- HIGH LOW HIGH LOW -------- -------- -------- -------- First Quarter............................ $ 7.500 $5.063 $14.375 $ 8.750 Second Quarter........................... 5.688 4.750 14.250 10.875 Third Quarter............................ 9.875 4.563 12.625 8.000 Fourth Quarter........................... 10.125 7.563 9.188 5.000
DIVIDEND POLICY We have not paid dividends to our stockholders since our inception and do not anticipate paying cash dividends in the foreseeable future. We intend to reinvest earnings, if any, in the development and expansion of our business. Declaration of dividends on our common stock or preferred stock will depend upon, among other things, future earnings, our operating and financial condition, our capital requirements and general business conditions. RECENT SALES OF UNREGISTERED SECURITIES On November 11, 1998, we issued to certain individuals, who formerly held warrants issued by us in connection with the our initial public offering in November 1992, warrants to purchase up to 67,125 shares of our common stock at an exercise price of $11.43 per share. These warrants expired on November 11, 1999 unexercised and were issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering. On January 4, 1999, we issued 100,000 shares of our common stock to two individuals in connection with the purchase by K&D MagMotor Corp., a wholly owned subsidiary of us, of certain assets and the assumption of certain liabilities of Inductive Components, Inc. and Lighthouse Software, Inc. These shares were issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering. On March 9, 1999, we issued 42,860 shares of our common stock to an escrow agent in connection with a consulting agreement entered into by us and Mr. Albert R. Snider pursuant to which Mr. Snider will perform such consulting, advisory and related services as we may reasonably request from time to time between October 1, 1999 and October 1, 2002. These shares were issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering. On April 7, 1999, we issued non-qualified stock options to Continental Capital & Equity Corporation to purchase in consideration of Continental Capital's consulting services rendered to us 50,000 shares of the our common stock at $5.75 per share and 50,000 shares of our common stock at an exercise price of $6.75 per share. As of December 20, 1999, Continental Capital has received 50,000 shares of our common 7 stock at an exercise price of $5.75 per share and 10,000 shares of our common stock at an exercise price of $6.75 per share upon exercise of these options. The remaining options expire on April 7, 2000 and were issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering. On August 25, 1999, we issued 8,000 shares of our series A redeemable convertible preferred stock, $0.01 par value per share, to Brown Simpson Strategic Growth Funds for an aggregate price of $8 million. The series A redeemable convertible preferred stock is initially convertible into 1,025,641 shares of our common stock at an initial conversion price of $7.80 per share. Under certain circumstances, we have the option to cause the series A preferred stock to convert into shares of common stock or otherwise be redeemed. At the end of seven years, we must redeem any remaining shares of the series A redeemable convertible preferred stock for cash or, at our option, common stock with a then fair market value equal to the original purchase price of the series A redeemable convertible preferred stock. The obligation at seven years to redeem any remaining shares of the series A redeemable convertible preferred stock accelerates to August 25, 2003 in the event the average bid price of our common stock for the 60 "trading day" period immediately preceding the fourth anniversary is $5.00 per share or less. In connection with the transaction, we also issued to Brown Simpson warrants to purchase up to 675,000 additional shares of common stock at an exercise price of $8.54 per share. These warrants expire on August 25, 2003. The series A preferred stock and these warrants were issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering. On August 25, 1999, in connection with the Brown Simpson financing, we issued to H.C. Wainwright & Co., Inc., Matthew Balk and Scott Weisman warrants to purchase up to 18,000, 61,200 and 40,800 shares, respectively, of our common stock at an exercise price of $7.80 per share. These warrants have a call option value of $12.81 per share. These warrants expire on August 25, 2003 and were issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering. On October 21, 1999, in connection with our acquisition of Ling Electronics, Inc. and Ling Electronics, Ltd., we issued 770,000 shares of our common stock to Mechanical Technology Incorporated, the parent entity of the two acquired entities. The common stock was issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving a public offering. On October 21, 1999, in connection with an investment, we issued 370,800 shares of our common stock to Mechanical Technology Incorporated. In addition, we issued to Mechanical Technology Incorporated a warrant to purchase 36,000 shares of our common stock at an exercise price of $8.80 per share. This warrant expires on October 21, 2003. In connection with this transaction, we also received a warrant to purchase 36,000 shares of the common stock of Mechanical Technology Incorporated at an exercise price of $37.66 per share and $2,570,000 in cash. This warrant expires on October 21, 2003. Both the common stock and the warrant were issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering. On November 16, 1999, we issued 578,761 shares of our common stock to Northrop Grumman Corporation in exchange for certain intellectual property, equipment and other assets which were used by Northop Grumman Corporation in connection with its power electronics products business. In addition, we issued to Northrop Grumman Corporation a warrant to purchase up to 100,000 shares of our common stock at an exercise price of $9.725 per share. This warrant expires on December 31, 2006. Both the common stock and the warrant were issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering. 8 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below for the year ended September 30, 1999 has been derived from our restated financial statements which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data set forth below for the year ended September 30, 1998, 1997 and 1996 has been derived from our restated financial statements which have been audited by PricewaterhouseCoopers LLP, independent accountants. The selected consolidated financial data set forth below for the year ended September 30, 1995 has been derived from our financial statements which have been audited by PricewaterhouseCoopers LLP, independent accountants. This information should be read in conjunction with the consolidated financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K.
FISCAL YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (AS RESTATED) STATEMENT OF OPERATIONS DATA Product revenue.............................. $ 9,123 $ 7,520 $ 3,728 $ -- $ -- Funded research and development revenue...... 6,355 8,011 8,738 9,385 11,475 -------- ------- ------- ------- ------- Total revenue................................ 15,478 15,531 12,466 9,385 11,475 Cost of product revenue...................... 9,511 5,474 2,683 -- -- -------- ------- ------- ------- ------- Gross margin................................. 5,967 10,057 9,783 9,385 11,475 -------- ------- ------- ------- ------- Research and development expenses............ 6,554 6,794 11,443 8,213 11,431 Selling, general and administrative expenses................................... 8,819 4,523 6,198 5,569 2,512 Amortization of intangibles.................. 371 291 120 -- -- -------- ------- ------- ------- ------- Total operating expenses..................... 15,744 11,608 17,761 13,782 13,943 -------- ------- ------- ------- ------- Operating loss............................... (9,777) (1,551) (7,978) (4,397) (2,468) Loss from investment in Beacon Power Corporation................................ (1,030) (1,889) -- -- -- Other income (expense), net.................. (224) 170 269 464 451 -------- ------- ------- ------- ------- Net loss before income taxes................. (11,031) (3,270) (7,709) (3,933) (2,017) Provision/(benefit) for income taxes......... -- 4 -- (144) (807) -------- ------- ------- ------- ------- Net loss..................................... (11,031) (3,274) (7,709) (3,789) (1,210) Accretion of redeemable convertible preferred stock discount............................. (51) -- -- -- -- -------- ------- ------- ------- ------- Net loss attributable to common stockholders............................... $(11,082) $(3,274) $(7,709) $(3,789) $(1,210) ======== ======= ======= ======= ======= Net loss per share, basic and diluted........ $ (1.21) $ (0.37) $ (0.97) $ (0.52) $ (0.17) ======== ======= ======= ======= ======= Weighted average number of common shares, basic and diluted.......................... 9,176 8,957 7,959 7,286 7,080 ======== ======= ======= ======= =======
AS OF SEPTEMBER 30, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS) (AS RESTATED) BALANCE SHEET DATA Cash and cash equivalents........................... $2,533 $1,202 $4,257 $3,771 $2,188 Total assets........................................ 17,400 16,708 18,219 16,354 19,793 Working capital..................................... 7,714 8,502 10,595 11,011 15,616 Long-term debt, net of current portion.............. 34 221 323 -- -- Redeemable convertible preferred stock.............. 4,894 -- -- -- -- Stockholders' equity................................ 9,316 13,956 15,589 15,175 18,753
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (AS RESTATED) The following discussion reflects restatement of our financial statements for fiscal years 1997, 1998 and 1999. The restatement was prompted by the recently completed initial audit of the financial statements of our affiliate, Beacon Power Corporation, and reflects treating certain costs as expenses rather than being included in the value of the net assets of Beacon Power at December 24, 1997. We previously had accounted for these costs either as fixed assets or as part of the net assets of Beacon Power. As a result, certain costs previously capitalized in 1996, 1997 and 1998 should have been expensed as incurred, therefore reducing our investment in Beacon Power by $3.1 million as of December 24, 1997. The adjustments to our financial statements at December 24, 1997, the date which we began accounting for our investment in Beacon Power under the equity method of accounting, consisted of a reduction of $37,000 from current assets, a reduction of $3.0 million from property and equipment and intangible assets and an increase of $73,000 of accrued expenses. The cumulative effect of this change on our stockholders' equity as of September 30, 1999, was a reduction of $130,000. The effect of this change on the reported net loss attributable to common stockholders for each period is as follows:
($ IN THOUSANDS) AS RESTATED AS REPORTED INCREASE/(DECREASE) ----------- ----------- ------------------- Net loss attributable to common stockholders for year ended September 30, 1996................................ $ (3,789) $ (2,865) $ (924) Net loss attributable to common stockholders for year ended September 30, 1997................................ (7,709) (6,143) (1,566) Net loss attributable to common stockholders for year ended September 30, 1998................................ (3,274) (4,306) 1,032 Net loss attributable to common stockholders for year ended September 30, 1999................................ (11,082) (12,410) 1,328 ------- Cumulative effect of change............................... $ (130) =======
We have adjusted the accumulated deficit as of September 30, 1996 for the effect of the 1996 restatement. The cumulative effect of this change on our stockholders' equity as of September 30, 1996 was a reduction of $924,000. See Notes A and F to our consolidated financial statements for additional discussion of this restatement. In addition, for all periods presented, expenses associated with funded research and development activities have been reclassified as research and development expenses from cost of revenue. OVERVIEW We are developing enabling technologies for the emerging distributed power generation and power quality markets. We manufacture power and energy management products that convert, condition, store and manage electricity for businesses and consumers that require high-quality, uninterruptible power. We are utilizing our engineering and manufacturing expertise to develop products to serve the distributed power generation and power quality markets, including products for fuel cell and microturbine power generation systems, hybrid-electric vehicles and flywheel energy storage systems. We believe the family of products we are developing will be integral components of distributed power generation and power quality systems. In the past three years, we have expanded our business and capabilities through the following acquisitions: - K&D Magmotor Corp.--a manufacturer of custom and standard electric motors, acquired in January 1997. 10 - Film Microelectronics, Inc.--a manufacturer of thin film substrates and hybrid microelectronics, acquired in April 1997. - Inductive Components, Inc.--a value-added supplier of customized electric motors, acquired in January 1999. - Lighthouse Software, Inc.--a supplier of control software for machine tools, acquired in January 1999. - HyComp, Inc.--a manufacturer of hybrid microelectronics, acquired in April 1999. - Ling Electronics, Inc.--a manufacturer of shaker vibration test systems, power converters, amplifiers and controllers, acquired in October 1999. All of these acquisitions were accounted for using the purchase method of accounting. In addition, in November 1999, we acquired intellectual property, tooling and other assets from Northrop Grumman Corporation enabling us to manufacture and sell electric drivetrains. See Note P to our Consolidated Financial Statements in this Annual Report on Form 10-K for more information regarding our acquisitions. The results of our operations include $3.1 million loss of Beacon Power from May 8, 1997 to December 24, 1997 under the consolidation method of accounting. As a result of a recapitalization of Beacon Power on December 24, 1997, we began accounting for our investment in Beacon Power using the equity method and have included $1.9 million of losses of Beacon Power for the period from December 25, 1997 through June 1998, which equaled our initial investment in Beacon Power. In connection with the additional investment by outside third parties on October 23, 1998, we committed $30,000 to Beacon Power and accordingly, recorded a $30,000 loss from our investment in Beacon Power representing a portion of the suspended losses as of October 23, 1998. For the period from October 24, 1998 through June 21, 1999, we recorded no additional losses of Beacon Power as our investment in Beacon Power had been reduced to zero as of October 23, 1998. In June 1999, Beacon received $3.0 million of additional financing commitments, including $1.0 million from us. As a result of this additional commitment, we have included a $1.0 million loss from our investment in Beacon Power representing a portion of the suspended losses as of June 22, 1999. For the period from June 23, 1999 through September 30, 1999, we recorded no additional losses of Beacon Power as our investment in Beacon Power had been reduced to zero as of June 22, 1999. Revenue from manufactured products is recognized upon shipment. We provide for a warranty reserve at the time the product revenue is recognized. We perform funded research and development in collaboration with third parties under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fee depending on how costs compare with budget. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as services are performed. In each form of contract, we receive periodic progress payments or payment upon reaching interim milestones. All payments to us for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When the current estimates of total contract revenue and contract costs indicate a loss, a provision for the entire loss on the contract is recorded. Cost of revenue includes cost of product revenue. Costs incurred in connection with funded research and development arrangements are included in research and development expenses. We have incurred significant costs to develop our technology and products. These costs have exceeded total revenues. As a result, we have incurred net losses in each of the past five fiscal years. As of 11 September 30, 1999, we had an accumulated deficit of $25.4 million (as restated). We intend to significantly increase our capital expenditures and operating expenses to rapidly expand our manufacturing capabilities and for general corporate purposes, including product development activities, sales and marketing and administrative activities. Because we expect to continue to invest in our business ahead of anticipated future revenues, we expect to incur operating losses for at least the next two years. SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K/A contains or incorporates forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Act of 1934. You can identify these forward-looking statement by our use of the words "believes," "anticipates," "plans," "expects," "may," "will," "intends," "estimates," and similar expressions, whether in the negative or in the affirmative. Although we believe that these forward-looking statements reasonably reflect our plans, intentions and expectations, our actual results could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements below (particularly under the heading "Factors Affecting Future Results") that we believe could cause our actual results to differ materially from the forward-looking statements that we make. These factors also include, without limitation, those set forth in Exhibit 99 to this Form 10-K, which are expressly incorporated by reference herein. We do not intend to update information contained in any forward-looking statement we make. RESULTS OF OPERATIONS FISCAL YEAR ENDED SEPTEMBER 30, 1999 (AS RESTATED) COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1998 (AS RESTATED) PRODUCT REVENUE. Product revenue increased $1.6 million or 21% from $7.5 million to $9.1 million. Product revenue increased by $396,000 for power electronics products and $1.2 million for motion control products. FUNDED RESEARCH AND DEVELOPMENT REVENUE. Funded research and development revenue decreased by $1.7 million or 21% from $8.0 million to $6.4 million. During the year ended September 30, 1999, we devoted more resources to internally funded research and development programs including the development of power conversion products for the distributed power generation market. GROSS MARGIN. Gross margin decreased by $4.1 million from $10.1 million to $6.0 million. Gross margin from products decreased by $2.4 million and funded research and development revenue decreased by $1.7 million. Gross margin from product revenue as a percentage of product revenue decreased to (4)% of product revenue in 1999 from 27% in the prior year. Gross margin from product sales as a percentage of product revenue decreased due to increased costs incurred in developing new products and for additional staffing and facility costs. In addition, we also recorded a $900,000 provision for obsolete and slow moving inventory. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased $240,000 or 4% from $6.8 million to $6.6 million. The decrease was the result of converting to the equity method of accounting for our investment in Beacon Power in 1998 and thus no longer including Beacon Power's research and development expenses in our results. In 1998, we included $1.2 million of Beacon Power's research and development expenses in our results through December 24, 1997, at which time we converted to the equity method of accounting for our investment in Beacon Power. This decrease was partially offset by an increase in our effort to develop distributed power conversion systems and other internal research and development programs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $4.3 million or 95% from $4.5 million to $8.8 million. This increase was primarily due to $2.2 million of non-cash, stock-based compensation expense related to the issuance of stock options and warrants to 12 consultants in 1999, $1.0 million of additional reserves for unbilled contract costs and accounts receivable and $800,000 in costs for facilities and staffing in an effort to meet expected growth and demand for our products. AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $80,000 or 27% from $291,000 to $371,000. This was the result of the acquisition of Inductive and Lighthouse in January 1999. LOSS FROM INVESTMENT IN BEACON POWER CORPORATION. Loss from investment in Beacon Power decreased $859,000 or 45% from $1.9 million to $1.0 million. As of October 1, 1998, our remaining initial investment of $1.9 million in Beacon Power has been reduced to zero. During 1999, we committed an additional $1.0 million in financing to Beacon Power and accordingly, recorded a $1.0 million loss from our investment in Beacon Power representing a portion of our suspended losses from Beacon Power. As of June 22, 1999, our investment in Beacon Power has been reduced to zero, and no additional losses were recorded during the period from June 23, 1999 to September 30, 1999. OTHER INCOME (EXPENSE), NET. Other expense, net increased to $224,000 from $170,000 of other income, net as a result of increased interest expense and decreased interest income. FISCAL YEAR ENDED SEPTEMBER 30, 1998 (AS RESTATED) COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1997 (AS RESTATED) PRODUCT REVENUE. Product revenue increased by $3.8 million or 102% from $3.7 million to $7.5 million. The increase in product revenue was primarily due to the impact of recording a full year of revenue in 1998 for Magmotor and FMI versus recording less than a full year of revenue during 1997. FUNDED RESEARCH AND DEVELOPMENT REVENUE. Funded research and development revenue decreased by $727,000 or 8% from $8.7 million to $8.0 million. During the year ended September 30, 1998, we devoted more resources to internally funded research and development programs including the development of power conversion products for the distributed power generation market. GROSS MARGIN. Gross margin increased by $274,000 from $9.8 million to $10.1 million. Gross margin from products increased by $1.0 million while funded research and development revenue decreased by $727,000. Gross margin from product revenue as a percentage of product revenue decreased to 27% of product revenue from 28% in the prior year. Gross margin from product revenue as a percentage of product revenue decreased due to increased costs incurred in developing new products and for additional staffing and facility costs. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased $4.6 million or 41% from $11.4 million to $6.8 million. During 1997, we expensed $4.3 million of product development costs related to Beacon Power's flywheel system and the Integrated Suspension and Motor System (ISAM) products. In December 1997, we converted to the equity method of accounting for our investment in Beacon Power and only included $1.2 million of Beacon Power's research and development expenses in our results. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $1.7 million or 27% from $6.2 million to $4.5 million. During 1997, we established a reserve of $500,000 for expenses, primarily lease cancellation costs relating to the consolidation of our Tucson Space division into our Technology Center. In 1997, we also included $1.1 million of selling, general and administrative expense of Beacon Power in our results. In December 1997, we converted to the equity method of accounting for our investment in Beacon Power and only included $39,000 of Beacon Power's selling, general and administrative expenses in our results. AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $171,000 or 143% from $120,000 to $291,000. The increase was the result of a full year of goodwill amortization in connection with the acquisitions of Magmotor and FMI. 13 LOSS FROM INVESTMENT IN BEACON POWER CORPORATION. For 1997, our investment in Beacon Power was accounted for under the consolidation method of accounting. On December 24, 1997, we converted to the equity method of accounting for our investment as a result of the recapitalization of Beacon Power, and Beacon Power's net loss for the period October 1, 1997 through December 24, 1997 of $1.1 million was included in our operating results. We have included $1.9 million loss from our investment in Beacon Power for the period from December 25, 1997 through June 1998, which equaled our remaining initial investment in Beacon Power. As of June 30, 1998, our investment in Beacon Power had been reduced to zero, and no additional losses were recorded during the period from July 1, 1998 to September 30, 1998. OTHER INCOME (EXPENSE) NET. Other income, net decreased $99,000 or 37% from $269,000 to $170,000. The decrease was primarily the result of a decrease of interest income on marketable securities. QUARTERLY RESULTS OF OPERATIONS (AS RESTATED) The following table presents restated unaudited quarterly statement of operations data for the eight quarters ended September 30, 1999. This data has been prepared on a basis consistent with our restated audited financial statements included elsewhere in this Annual Report on Form 10-K. This data includes all adjustments, consisting solely of normal recurring adjustments, that we believe necessary for a fair 14 presentation of this information. The operating results for any quarter are not necessarily indicative of results to be expected for any future period.
THREE MONTHS ENDED --------------------------------------------------------------------------------------- SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, 1999 1999 1999 1998 1998 1998 1998 1997 --------- -------- -------- -------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (AS RESTATED) STATEMENT OF OPERATIONS DATA Product revenue.................... $ 2,733 $ 2,623 $1,772 $1,995 $2,077 $1,787 $ 1,940 $ 1,716 Funded research and development revenue.......................... 1,266 1,469 1,890 1,730 1,743 1,857 2,386 2,025 ------- ------- ------ ------ ------ ------ ------- ------- Total revenue...................... 3,999 4,092 3,662 3,725 3,820 3,644 4,326 3,741 Cost of product revenue............ 2,784 3,288 1,915 1,524 1,887 917 1,348 1,322 ------- ------- ------ ------ ------ ------ ------- ------- Gross margin....................... 1,215 804 1,747 2,201 1,933 2,727 2,978 2,419 ------- ------- ------ ------ ------ ------ ------- ------- Research and development expenses......................... 1,526 2,136 1,465 1,428 1,001 1,515 1,726 2,552 Selling, general and administrative expenses......................... 1,624 5,176 1,029 990 1,133 1,112 1,163 1,115 Amortization of intangibles........ 98 101 94 78 78 75 83 55 ------- ------- ------ ------ ------ ------ ------- ------- Total operating expenses........... 3,248 7,413 2,588 2,496 2,212 2,702 2,972 3,722 ------- ------- ------ ------ ------ ------ ------- ------- Operating (loss) income............ (2,033) (6,609) (841) (295) (279) 25 6 (1,303) Loss from investment in Beacon Power Corporation................ -- (1,000) -- (30) -- (808) (1,080) -- Other income (expense), net........ (31) (186) (26) 20 27 36 53 53 ------- ------- ------ ------ ------ ------ ------- ------- Net loss before income taxes....... (2,064) (7,795) (867) (305) (252) (747) (1,021) (1,250) Provision for income taxes......... -- -- -- -- 4 -- -- -- ------- ------- ------ ------ ------ ------ ------- ------- Net loss........................... (2,064) (7,795) (867) (305) (256) (747) (1,021) (1,250) Accretion of redeemable convertible preferred stock discount......... (51) -- -- -- -- -- -- -- ------- ------- ------ ------ ------ ------ ------- ------- Net loss attributable to common stockholders..................... $(2,115) $(7,795) $ (867) $ (305) $ (256) $ (747) $(1,021) $(1,250) ======= ======= ====== ====== ====== ====== ======= ======= Net loss per share, basic and diluted.......................... $ (0.22) $ (0.85) $(0.10) $(0.03) $(0.03) $(0.08) $ (0.11) $ (0.14) ======= ======= ====== ====== ====== ====== ======= ======= Weighted average number of common shares, basic and diluted........ 9,488 9,177 9,059 8,980 9,008 9,019 8,955 8,845 ======= ======= ====== ====== ====== ====== ======= =======
LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations and met our capital expenditure requirements primarily through the sale of private equity securities, public security offerings, borrowings on our line of credit and capital equipment leases. As of September 30, 1999, our cash and cash equivalents were $2.5 million, an increase of $1.3 million from September 30, 1998. Cash used in operating activities for the year ended September 30, 1999 was $5.6 million as compared to $2.9 million in 1998. Cash used in operating activities during the year ended September 30, 1999 was primarily attributable to our net loss and an increase in unbilled contract costs and fees and inventory partially offset by non-cash items such as depreciation and amortization, loss from our investment in Beacon Power and compensation expense related to issuance of stock options and warrants to non-employees. 15 Cash used in investing activities during the year ended September 30, 1999 was $1.4 million as compared to $1.7 million in 1998. Net cash used in investing activities during the year ended September 30, 1999 included the acquisitions of certain assets of Inductive, Lighthouse and HyComp of $996,000, capital and intellectual expenditures of $323,000 and an investment in Beacon Power of $697,000 partially offset from the proceeds from the sale of marketable securities of $580,000. We estimate that we will spend an additional $2.0 million on capital expenditures during fiscal year 2000, primarily to expand our capacity to manufacture our power conversion products. We expect these additions will be financed by cash on hand and from lease financing. Cash provided by financing activities during the year ended September 30, 1999 was $8.4 million. During August 1999, we completed an $8.0 million private placement of 8,000 shares of our series A redeemable convertible preferred stock with Brown Simpson Strategic Growth Funds. The series A redeemable convertible preferred stock is initially convertible into 1,025,641 shares of our common stock, at an initial conversion price of $7.80 per share. The series A redeemable convertible preferred stock is also subject to certain dilution protection for a period of three years. Under certain circumstances, we have the option to cause the series A preferred stock to convert into shares of common stock or otherwise be redeemed. At the end of seven years, we must redeem any remaining shares of the series A redeemable convertible preferred stock for cash or, at our option, common stock with a then fair market value equal to the original purchase price of the series A redeemable convertible preferred stock. The obligation at seven years to redeem any remaining shares of the series A redeemable convertible preferred stock accelerates to the fourth anniversary of the closing in the event the average bid price of our common stock for the 60 "trading day" period immediately preceding the fourth anniversary is $5.00 per share or less. In the event of certain change in control events regarding us or our common stock is delisted, Brown Simpson has the right to cause the series A preferred stock to be redeemed. In connection with the transaction, Brown Simpson also received warrants to purchase up to 675,000 additional shares of common stock at $8.54 per share. The Brown Simpson warrants expire on August 25, 2003. H.C. Wainwright & Co., Inc. served as placement agent for the transaction and received a commission of $560,000 and warrants to purchase 120,000 shares of our common stock at $7.80 per share. These warrants expire on August 25, 2003. H.C. Wainwright will also receive a future fee in the amount of 4% of any monies received by us upon the exercise of the Brown Simpson warrants. During 1999, we granted options to purchase 755,000 shares of our common stock to consultants at prices ranging from $5.75 to $10.00 per share. As of December 20, 1999, the consultants exercised options to purchase 450,000, 50,000 and 10,000 shares at exercise prices of $7.00, $5.75 and $6.75 per share, respectively. As of September 30, 1999, we received approximately $1,333,000 of cash and the remaining amount due from the shareholder is classified within stockholders' equity as amounts receivable from exercise of stock options. We have a $3,000,000 demand discretionary line of credit with a bank. The line of credit bears interest at the bank's prime rate plus 1 1/2% (9 3/4% as of September 30, 1999). Available borrowings are based on a formula of eligible accounts receivable and inventory. During 1999, we borrowed approximately $2,657,000 against the line of credit. At September 30, 1999, there were no amounts outstanding under the line of credit. We anticipate that the existing $2.5 million in cash and cash equivalents will be sufficient to fund operations for at least fiscal year 2000. However, there can be no assurance that we will not require additional financings within this time frame or that any additional financing, if needed, will be available to us on terms acceptable to us, if at all. FACTORS AFFECTING FUTURE RESULTS Our future results remain difficult to predict and may be affected by a number of factors which could cause actual results to differ materially from forward-looking statements contained in this Annual Report 16 on Form 10-K and presented elsewhere by management from time to time. These factors include business conditions within the aerospace, transportation, industrial, utility, telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive industries and the world economies as a whole, and competitive pressures that may impact research and development spending. Our revenue growth is dependent on technology developments and contract research and development for both the government and commercial sectors and no assurance can be given that such investments will continue or that we can successfully obtain such funds. In addition, our future growth opportunities are dependent on the introduction of new products that must penetrate aerospace, transportation, industrial, utility, telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive market segments. No assurance can be given that new products can be developed, or if developed, will be successful; that competitors will not force prices to an unacceptably low level or take market share from the us; or that we can achieve or maintain profits in these markets. Because of these and other factors, past financial performances should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results and should be aware that our stock price frequently experiences significant volatility. On October 23, 1998, we granted the purchasers of Beacon Power's Series D redeemable preferred stock the right to cause us, under circumstances described below, to purchase all of Beacon Power's shares of Series D redeemable preferred stock issued to those purchasers and, upon exercise of this "put right," we must pay $4,750,000 in our common stock, valued at the average fair value for the fifteen trading days before and after notice of exercise of the put right. The put right is exercisable within sixty days of the second, third, forth and fifth anniversary of the closing date of the transaction, upon certain events of bankruptcy of Beacon Power and upon the occurrence of certain going private transactions involving us. If the put right is exercised, we would record the value of the shares repurchased as an additional investment in Beacon Power. If we determine that redemption of the put right is probable or the put right is exercised and the value we pay for the shares of Series D redeemable preferred stock exceeds the fair market value of Beacon Power's stock, such amount would be recorded as a loss in the period the judgement is made or the put right is exercised. The put right will terminate, if not previously exercised, on the earlier of (i) October 23, 2003, (ii) upon the listing of Beacon Power's common stock on the New York Stock Exchange or the Nasdaq National Market, or (iii) with respect to put rights resulting from an event described above, 100 days after the purchasers receive written notice from us requesting that the purchasers either exercise or waive their put rights resulting from that event. EFFECTS OF INFLATION We believe that inflation and changing prices over the past three years have not had a significant impact on our net revenue or on our income from continuing operations. EFFECTS OF YEAR 2000 We have assessed our software systems and internal operations. We believe that we have resolved all potential Year 2000 issues and problems and, to the best of our knowledge, our systems are Year 2000 compliant. However, if our systems do not operate properly with respect to date calculations involving the Year 2000 and subsequent dates, we could incur unanticipated expenses to remedy any problems, which could seriously harm our business. We may also experience reduced sales of our products as current or potential customers reduce their budgets due to increased expenditures on their own Year 2000 compliance efforts. Additionally, we rely on information technology supplied by third parties and our other business partners, including third-party distributors and consultants, who are also heavily dependent on information technology systems and on their own and third-party vendor systems. Year 2000 problems experienced by us or any of these third parties could materially adversely affect our business. Prior versions of our products may contain technology from third parties that is not Year 2000 compliant. 17 Given the pervasive nature of the Year 2000 problem, we cannot guarantee that disruptions in other industries and market segments will not adversely affect our business. Moreover, our costs related to Year 2000 compliance, which thus far have not been material, could ultimately be significant. In the event that we experience unforeseen disruptions as a result of the Year 2000 problem, our business could be seriously affected. RECENT ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 (SFAS No. 137), "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities" to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. We will adopt SFAS No. 133 beginning in the first quarter of the fiscal year ending September 30, 2001. Adoption of SFAS No. 133 is not expected to have a material impact to our consolidated financial position, results of operations or cash flows. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. INTEREST RATE RISK We maintain an investment portfolio consisting of debt securities of various issuers, types and maturities. These securities are classified as available for sale, and consequently are recorded on the balance sheet at market value, with the unrealized gain or loss recorded through the equity section. These instruments are not leveraged, and are not held for purposes of trading. The following table summarizes derivative financial instruments included in marketable securities held by us at September 30, 1998, which are sensitive to changes in interest rates:
FOR THE YEARS ENDED SEPTEMBER 30, TOTAL FACE TOTAL FAIR ---------------------------------------------------- ---------- ---------- DESCRIPTION 1999 2000 2001 2002 2003 THEREAFTER VALUE VALUE ----------- -------- -------- -------- -------- -------- ---------- ---------- ---------- Floater..................... $350,000 $350,000 $325,500 Average Interest Rate..... 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% CMO......................... $ 70,614 $ 70,614 $ 73,492 Average Interest Rate..... 5.4% 5.4% 5.4% 5.4% 5.4% 5.4% Structured Notes............ $250,000 $250,000 $258,439 Average Interest Rate..... 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
18 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TABLE OF CONTENTS
PAGE -------- PART I: RESTATED FINANCIAL STATEMENTS OF SATCON TECHNOLOGY CORPORATION AND ITS SUBSIDIARIES Reports of Independent Accountants.......................... 20 Consolidated Financial Statements: Consolidated Balance Sheets as of September 30, 1999 and 1998.................................................... 22 Consolidated Statements of Operations for the Years Ended September 30, 1999, 1998, and 1997................................................ 23 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1999, 1998, and 1997...................... 24 Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998, and 1997................................................ 25 Notes to Consolidated Financial Statements................ 26 Schedule II; Valuation and Qualifying Accounts for the Years Ended September 30, 1999, 1998, and 1997........................ 54 PART II: FINANCIAL STATEMENTS OF BEACON POWER CORPORATION Unaudited Financial Statements: Balance Sheet as of December 31, 1999..................... 55 Statements of Operations for the Year Ended December 31, 1999 and for the Period May 8, 1997 (Date of Inception) to December 31, 1999.................................... 56 Statement of Stockholders' Deficiency for the Year Ended December 31, 1999....................................... 57 Statements of Cash Flows for the Year Ended December 31, 1999 and for the Period May 8, 1997 (Date of Inception) to December 31, 1999.................................... 58 Notes to Financial Statements............................. 59 Independent Auditor's Report................................ 70 Financial Statements: Balance Sheets as of December 31, 1998.................... 71 Statements of Operations for the Years Ended December 31, 1998 and for the Period from May 8, 1997 (Date of Inception) to December 31, 1998......................... 72 Statements of Stockholders' Deficiency for the Years Ended December 31, 1998....................................... 73 Statements of Cash Flows for the Years Ended December 31, 1998 and for the Period from May 8, 1997 (Date of Inception) to December 31, 1998......................... 74 Notes to Financial Statements............................. 75
19 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of SatCon Technology Corporation: We have audited the accompanying consolidated balance sheet of SatCon Technology Corporation and its subsidiaries (a Delaware corporation) as of September 30, 1999 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended as restated, see Note A. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SatCon Technology Corporation and its subsidiaries as of September 30, 1999, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts December 27, 1999 (except with respect to the matter discussed in Note A for which the date is August 7, 2000) 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of SatCon Technology Corporation: In our opinion, the consolidated balance sheet as of September 30, 1998 and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows for each of the two years in the period ended September 30, 1998 present fairly, in all material respects, the financial position, results of operations and cash flows of SatCon Technology Corporation and its subsidiaries at September 30, 1998 and for each of the two years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule for the years ended September 30, 1998 and 1997 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of SatCon Technology Corporation for any period subsequent to September 30, 1998. As discussed in Note A, the accompanying consolidated financial statements for the years ended September 30, 1997 and 1998 have been revised to expense certain assets which had previously been capitalized. /s/ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts December 17, 1998, except as to Note A for which the date is August 7, 2000 21 SATCON TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (AS RESTATED)
SEPTEMBER 30, ------------------------- 1999 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents................................. $ 2,533,072 $ 1,201,610 Marketable securities..................................... -- 657,431 Accounts receivable, net of allowance of $386,686 and $51,836 at September 30, 1999 and 1998, respectively.... 2,799,143 3,347,405 Unbilled contract costs and fees, net of allowance of $746,121 and $57,611 at September 30, 1999 and 1998, respectively............................................ 1,462,201 1,196,318 Inventory................................................. 3,697,972 3,678,067 Prepaid expenses and other current assets................. 346,653 338,017 Amounts due from related party............................ 2,417 596,453 ----------- ----------- Total current assets.................................. 10,841,458 11,015,301 Property and equipment, net................................. 3,260,632 2,677,786 Intangibles, net............................................ 3,194,609 2,967,988 Other long-term assets...................................... 103,675 47,332 ----------- ----------- Total assets........................................ $17,400,374 $16,708,407 =========== =========== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,563,605 $ 1,447,897 Accrued payroll and payroll related expenses.............. 479,888 352,701 Deferred revenue.......................................... 113,179 197,930 Accrued losses from investment in Beacon Power Corporation............................................. 333,333 -- Other accrued expenses.................................... 620,874 368,252 Current portion of long-term debt......................... 16,226 146,594 ----------- ----------- Total current liabilities............................. 3,127,105 2,513,374 Long-term liabilities: Long-term debt, net of current portion.................... 33,871 221,462 Other long-term liabilities............................... 29,735 17,747 ----------- ----------- Total long-term liabilities........................... 63,606 239,209 Commitments and contingencies (Note I) Redeemable convertible preferred stock...................... 4,894,112 -- Stockholders' equity: Preferred stock; $.01 par value, 1,000,000 shares authorized; 8,000 shares series A redeemable convertible preferred stock issued and outstanding at September 30, 1999 and none issued and outstanding at September 30, 1998.................................................... -- -- Common stock, $.01 par value, 20,000,000 shares authorized; 9,617,009 and 9,018,549 shares issued at September 30, 1999 and 1998, respectively............... 96,170 90,185 Additional paid-in capital................................ 37,074,161 28,377,718 Common stock held in escrow, at market value; 42,860 and 0 shares at September 30, 1999 and 1998, respectively..... (428,600) -- Amounts receivable from exercise of stock options......... (1,816,667) -- Accumulated deficit....................................... (25,359,809) (14,328,623) Net unrealized losses on marketable securities, net of tax effect.................................................. -- (10,380) Treasury stock, at cost; 44,500 and 28,300 shares at September 30, 1999 and 1998, respectively............... (249,704) (173,076) ----------- ----------- Total stockholders' equity............................ 9,315,551 13,955,824 ----------- ----------- Total liabilities, redeemable convertible preferred stock and stockholders' equity...................... $17,400,374 $16,708,407 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 22 SATCON TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (AS RESTATED)
FOR THE YEARS ENDED SEPTEMBER 30, ---------------------------------------- 1999 1998 1997 ------------ ----------- ----------- Product revenue....................................... $ 9,122,498 $ 7,520,188 $ 3,728,042 Funded research and development revenue............... 6,355,383 8,010,735 8,738,293 ------------ ----------- ----------- Total revenue......................................... 15,477,881 15,530,923 12,466,335 ------------ ----------- ----------- Cost of product revenue............................... 9,510,941 5,474,067 2,683,389 ------------ ----------- ----------- Gross margin.......................................... 5,966,940 10,056,856 9,782,946 Research and development expenses..................... 6,554,464 6,793,634 11,442,465 Selling, general and administrative expenses.......... 8,818,706 4,523,424 6,197,951 Amortization of intangibles........................... 371,087 290,957 120,467 ------------ ----------- ----------- Total operating expenses.............................. 15,744,257 11,608,015 17,760,883 ------------ ----------- ----------- Operating loss........................................ (9,777,317) (1,551,159) (7,977,937) Loss from investment in Beacon Power Corporation...... (1,030,000) (1,888,619) -- Other losses.......................................... (150,464) -- -- Interest income....................................... 42,287 179,861 283,131 Interest expense...................................... (115,692) (10,206) (13,933) ------------ ----------- ----------- Net loss before income taxes.......................... (11,031,186) (3,270,123) (7,708,739) Provision for income taxes............................ -- 3,872 -- ------------ ----------- ----------- Net loss.............................................. (11,031,186) (3,273,995) (7,708,739) Accretion of redeemable convertible preferred stock discount............................................ (50,904) -- -- ------------ ----------- ----------- Net loss attributable to common stockholders.......... $(11,082,090) $(3,273,995) $(7,708,739) ============ =========== =========== Net loss per share, basic and diluted................. $ (1.21) $ (.37) $ (.97) ============ =========== =========== Weighted average number of common shares, basic and diluted............................................. 9,176,041 8,956,671 7,959,309 ============ =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 23 SATCON TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (AS RESTATED) FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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, 1996 (as restated).................... 7,359,074 $73,591 $18,487,209 -- -- -- $ (3,345,889) Net loss....................... -- -- -- -- -- -- (7,708,739) Exercise of stock options...... 161,934 1,619 408,390 -- -- -- -- Change in net unrealized losses on marketable securities..... -- -- -- -- -- -- -- Stock issued in acquisition.... 450,000 4,500 2,871,750 -- -- -- -- Securities purchase agreement.................... 798,138 7,981 4,809,251 -- -- -- -- ---------- ------- ----------- ------ ----------- ------------ ------------ Balance, September 30, 1997.... 8,769,146 $87,691 $26,576,600 -- -- -- $(11,054,628) Net loss....................... -- -- -- -- -- -- (3,273,995) Exercise of stock options...... 100,266 1,003 580,736 -- -- -- -- Exercise of warrants........... 149,137 1,491 1,220,382 -- -- -- -- Treasury stock purchased....... -- -- -- -- -- -- -- Change in net unrealized losses on marketable securities..... -- -- -- -- -- -- -- ---------- ------- ----------- ------ ----------- ------------ ------------ Balance, September 30, 1998.... 9,018,549 $90,185 $28,377,718 -- -- -- $(14,328,623) Net loss....................... -- -- -- -- -- -- (11,031,186) Exercise of stock options...... 455,600 4,556 3,173,445 -- -- (1,816,667) -- Treasury stock purchased....... -- -- -- -- -- -- -- Common stock issued in acquisitions................. 100,000 1,000 567,800 -- -- -- -- Common stock issued in connection with settlement agreement which is held in escrow....................... 42,860 429 189,762 42,860 (190,191) -- -- Compensation expense related to stock options and warrants issued to non-employees................ -- -- 2,208,639 -- -- -- -- Valuation adjustment for common stock held in escrow......... -- -- 238,409 -- (238,409) -- -- Warrants issued in connection with the sale of redeemable preferred stock........................ -- -- 2,369,292 -- -- -- -- Change in net unrealized losses on marketable securities..... -- -- -- -- -- -- -- Accretion of redeemable convertible preferred stock discount..... -- -- (50,904) -- -- -- -- ---------- ------- ----------- ------ ----------- ------------ ------------ Balance, September 30, 1999.... 9,617,009 $96,170 $37,074,161 42,860 $ (428,600) $ (1,816,667) $(25,359,809) ========== ======= =========== ====== =========== ============ ============ NET UNREALIZED LOSS ON TOTAL MARKETABLE TREASURY TREASURY STOCKHOLDERS' SECURITIES SHARES STOCK EQUITY ---------- -------- --------- ------------- Balance, September 30, 1996 (as restated).................... $(39,935) -- -- $ 15,174,976 Net loss....................... -- -- -- (7,708,739) Exercise of stock options...... -- -- -- 410,009 Change in net unrealized losses on marketable securities..... 19,720 -- -- 19,720 Stock issued in acquisition.... -- -- -- 2,876,250 Securities purchase agreement.................... -- -- -- 4,817,232 -------- ------ --------- ------------ Balance, September 30, 1997.... $(20,215) -- -- $ 15,589,448 Net loss....................... -- -- -- (3,273,995) Exercise of stock options...... -- -- -- 581,739 Exercise of warrants........... -- -- -- 1,221,873 Treasury stock purchased....... -- 28,300 $(173,076) (173,076) Change in net unrealized losses on marketable securities..... 9,835 -- -- 9,835 -------- ------ --------- ------------ Balance, September 30, 1998.... $(10,380) 28,300 $(173,076) $ 13,955,824 Net loss....................... -- -- -- (11,031,186) Exercise of stock options...... -- -- -- 1,361,334 Treasury stock purchased....... -- 16,200 (76,628) (76,628) Common stock issued in acquisitions................. -- -- -- 568,800 Common stock issued in connection with settlement agreement which is held in escrow....................... -- -- -- -- Compensation expense related to stock options and warrants issued to non-employees................ -- -- -- 2,208,639 Valuation adjustment for common stock held in escrow......... -- -- -- -- Warrants issued in connection with the sale of redeemable preferred stock........................ -- -- -- 2,369,292 Change in net unrealized losses on marketable securities..... 10,380 -- -- 10,380 Accretion of redeemable convertible preferred stock discount..... -- -- -- (50,904) -------- ------ --------- ------------ Balance, September 30, 1999.... -- 44,500 (249,704) $ 9,315,551 ======== ====== ========= ============
The accompanying notes are an integral part of the consolidated financial statements. 24 SATCON TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED)
FOR THE YEARS ENDED SEPTEMBER 30, ---------------------------------------- 1999 1998 1997 ------------ ----------- ----------- Cash flows from operating activities: Net loss.................................................. $(11,031,186) $(3,273,995) $(7,708,739) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization....................... 1,013,037 625,976 969,010 Allowance for unbilled contract costs and fees...... 688,510 (19,065) 697,968 Allowance for doubtful accounts..................... 334,850 (94,424) 28,324 Allowance for inventory............................. 870,021 (549,765) 758,541 Loss from investment in Beacon Power Corporation.... 1,030,000 1,888,619 -- Loss on sale of marketable securities............... 87,535 -- -- Write-off impaired assets........................... 255,544 50,104 2,593,558 Compensation expense related to issuance of stock options and warrants to non-employees............... 2,208,639 -- -- Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable............................... 89,858 (301,909) 535,797 Prepaid expenses and other assets................. 31,455 (8,529) 62,174 Unbilled contract costs and fees.................. (954,393) 532,573 (749,462) Inventory......................................... (601,120) (1,550,819) (1,161,843) Other assets...................................... 517,402 (607,245) 212,339 Accounts payable.................................. 72 647,689 (385,868) Accrued costs for consolidation of facilities..... -- (398,000) 498,000 Accrued expenses and payroll...................... (98,163) 106,939 (1,396,970) Other liabilities................................. (72,763) 6,802 -- ------------ ----------- ----------- Total adjustments....................................... 5,400,484 328,946 2,661,568 ------------ ----------- ----------- Net cash used in operating activities....................... (5,630,702) (2,945,049) (5,047,171) ------------ ----------- ----------- Cash flows from investing activities: Purchases of marketable securities........................ -- -- (600,000) Sales and maturities of marketable securities............. 580,144 1,340,609 2,079,064 Patent and intangible expenditures........................ (102,227) (431,526) (150,534) Deferred financing fees................................... -- -- 56,313 Capital expenditures...................................... (220,416) (601,331) (931,229) Acquisitions, net of cash acquired........................ (995,876) -- (112,986) Investment in Beacon Power Corporation.................... (696,667) (2,007,508) -- ------------ ----------- ----------- Net cash (used in) provided by investing activities......... (1,435,042) (1,699,756) 340,628 ------------ ----------- ----------- Cash flows from financing activities: Repayment of borrowings................................... (100,000) (40,625) (35,119) Borrowings under line of credit........................... 2,657,234 -- -- Repayment of borrowings under line of credit.............. (2,657,234) -- -- Proceeds from exercise of stock options................... 1,361,334 581,739 410,009 Proceeds from exercise of warrants........................ -- 1,221,873 -- Proceeds from issuance of common stock.................... -- -- 4,817,232 Proceeds from issuance of redeemable convertible preferred stock................................................... 7,212,500 -- -- Purchase of treasury stock................................ (76,628) (173,076) -- ------------ ----------- ----------- Net cash provided by financing activities................... 8,397,206 1,589,911 5,192,122 ------------ ----------- ----------- Net increase/(decrease) in cash and cash equivalents........ 1,331,462 (3,054,894) 485,579 Cash and cash equivalents at beginning of year.............. 1,201,610 4,256,504 3,770,925 ------------ ----------- ----------- Cash and cash equivalents at end of year.................... $ 2,533,072 $ 1,201,610 $ 4,256,504 ============ =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 25 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION SatCon Technology Corporation (the "Company" or "SatCon") was organized as a Massachusetts corporation in February 1985 and reincorporated in Delaware in 1992. SatCon designs, develops and manufactures intelligent, electro-mechanical products for aerospace, transportation, industrial and utility applications. SatCon also designs, develops and manufactures power and energy management products for telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive applications. The Company's electro-mechanical products are being developed for a wide variety of U.S. government and commercial markets. For the government, the electro-mechanical systems provide for applications ranging from satellite attitude control to high-speed drives for shipboard systems. In the transportation segment, SatCon is developing electric and hybrid electric drive components, auxiliary power units and advanced steering, alternator and starter/generator systems. The Company is working with major equipment producers to develop process equipment drives, high speed and precision machine tools, manipulators and machinery isolation equipment. The Company's electro-mechanical systems may offer advantages to the utility industry in power generation, energy storage and power quality. In the consumer market, SatCon is developing variable speed motors for refrigeration equipment and other long-life, high-efficiency machinery. RESTATEMENT The Company has restated its financial statements for fiscal 1997, 1998 and 1999. The restatement was prompted by the recently completed initial audit of the financial statements of its affiliate, Beacon Power Corporation and reflects treating certain costs as expenses rather than being included in the value of the net assets of Beacon Power at December 24, 1997. The Company previously had accounted for these costs either as fixed assets or as part of the net assets of Beacon Power. As a result, certain costs previously capitalized in 1996, 1997 and 1998 should have been expensed as incurred, therefore reducing the Company's investment in Beacon Power by $3.1 million as of December 24, 1997. The adjustments to the financial statements at December 24, 1997, the date which the Company began accounting for its investment in Beacon Power under the equity method of accounting, consisted of a reduction of $37,000 from current assets, a reduction of $3.0 million from property and equipment and intangible assets and an increase of $73,000 of accrued expenses. The Company has adjusted its accumulated deficit as of September 30, 1996 for the effect of the 1996 restatement. The cumulative effect of this change on the Company's stockholders' equity as of September 30, 1996, was a reduction of $924,192. The cumulative effect of this change on the Company's stockholders' equity as of September 30, 1999, was a reduction of $130,504. The effect of this change on the reported results for each period is as follows: 26 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONSOLIDATED STATEMENTS OF OPERATIONS:
FOR THE YEAR ENDED SEPTEMBER 30, 1999 --------------------------- AS RESTATED AS REPORTED ------------ ------------ Product revenue............................................. $ 9,122,498 $ 9,122,498 Funded research and development revenue..................... 6,355,383 6,355,383 ------------ ------------ Total revenue............................................... 15,477,881 15,477,881 ------------ ------------ Cost of product revenue..................................... 9,510,941 9,510,941 ------------ ------------ Gross margin................................................ 5,966,940 5,966,940 Research and development expenses........................... 6,554,464 6,554,464 Selling, general and administrative expenses................ 8,818,706 8,818,706 Amortization of intangibles................................. 371,087 371,087 ------------ ------------ Total operating expenses.................................... 15,744,257 15,744,257 ------------ ------------ Operating loss.............................................. (9,777,317) (9,777,317) Loss from investment in Beacon Power Corporation............ (1,030,000) (2,357,679) Other losses................................................ (150,464) (150,464) Interest income............................................. 42,287 42,287 Interest expense............................................ (115,692) (115,692) ------------ ------------ Net loss.................................................... (11,031,186) (12,358,865) Accretion of redeemable convertible preferred stock discount.................................................. (50,904) (50,904) ------------ ------------ Net loss attributable to common stockholders................ $(11,082,090) $(12,409,769) ============ ============ Net loss per share, basic and diluted....................... $ (1.21) $ (1.35) ============ ============ Weighted average number of common shares, basic and diluted................................................... 9,176,041 9,176,041 ============ ============
27 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOR THE YEAR ENDED SEPTEMBER 30, 1998 --------------------------- AS RESTATED AS REPORTED ------------ ------------ Product revenue............................................. $ 7,520,188 $ 7,520,188 Funded research and development revenue..................... 8,010,735 7,965,735 ------------ ------------ Total revenue............................................... 15,530,923 15,485,923 ------------ ------------ Cost of product revenue..................................... 5,474,067 5,474,067 ------------ ------------ Gross margin................................................ 10,056,856 10,011,856 Research and development expenses........................... 6,793,634 5,863,296 Selling, general and administrative expenses................ 4,523,424 4,787,070 Amortization of intangibles................................. 290,957 290,957 ------------ ------------ Total operating expenses.................................... 11,608,015 10,941,323 ------------ ------------ Operating loss.............................................. (1,551,159) (929,467) Loss from investment in Beacon Power Corporation............ (1,888,619) (3,541,817) Interest income............................................. 179,861 179,861 Interest expense............................................ (10,206) (10,206) ------------ ------------ Net loss before income taxes................................ (3,270,123) (4,301,629) Provision for income taxes.................................. 3,872 3,872 ------------ ------------ Net loss attributable to common stockholders................ $ (3,273,995) $ (4,305,501) ============ ============ Net loss per share, basic and diluted....................... $ (.37) $ (.48) ============ ============ Weighted average number of common shares, basic and diluted................................................... 8,956,671 8,956,671 ============ ============
28 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOR THE YEAR ENDED SEPTEMBER 30, 1997 --------------------------- AS RESTATED AS REPORTED ------------ ------------ 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 ============ ============
CONSOLIDATED BALANCE SHEET DATA:
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 --------------------------- --------------------------- AS RESTATED AS REPORTED AS RESTATED AS REPORTED ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
29 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of SatCon and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. REVENUE RECOGNITION The Company performs research under cost-type, fixed-price, and time-and-material contracts and sells product prototypes. On fixed-price contracts, revenue is recognized on the percentage-of-completion method based on the proportion of costs incurred to total estimated costs for each contract. Revenue recognized in excess of amounts billed are classified in current assets as unbilled contract costs. Certain contracts contain provisions for performance incentives. Such incentives are included in revenue when realization is assured. If a current contract estimate indicates a loss, a provision is made for the total anticipated loss. All payments to the Company for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. Revenue on time and material contracts is recognized as services are provided. The Company also designs and manufactures standard products such as multi-chip modules and hybrids, custom electric motors, and integrated suspension and motor systems. Revenue from product sales is recognized upon shipment. The Company provides for warranty reserves at the time product is shipped. CASH AND CASH EQUIVALENTS Cash and cash equivalents include demand deposits and highly liquid investments with a maturity of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value. MARKETABLE SECURITIES The Company accounts for marketable securities in accordance with the Statement of Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such determination at each balance sheet date. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale. Securities available for sale are carried at fair value, based on quoted market prices, with the unrealized gains and losses, net of tax effect, reported in a separate component of stockholders' equity, except for unrealized losses determined to be permanent in nature. Such unrealized losses are included in the determination of net income in the period in which management determines the decline to be permanent. The Company is not actively involved in the purchase and sale of investments classified as trading. At September 30, 1999 and 1998, the Company had no investments that qualified as trading or held to maturity. The amortized cost of debt securities classified as available for sale is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and interest are included in interest income. Realized 30 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) gains and losses are included in other income or expense. The cost of securities sold is based on the specific identification method. INVENTORY Inventories are stated at the lower of cost or market and costs are determined based on the first-in, first-out method of accounting and include material, labor and manufacturing overhead costs. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the asset's estimated useful life. The estimated useful lives of property and equipment are as follows:
ESTIMATED LIVES --------------- Computer equipment and software........... 3-5 years Electronic laboratory and shop 5 years equipment............................... Mechanical laboratory and shop 10 years equipment............................... Sales and demonstration equipment......... 3-10 years Furniture and fixtures.................... 7-10 years Leasehold improvements.................... Lesser of the life of the lease or the useful life of the improvement
When assets are retired or otherwise disposed of, the cost and related depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in other income. LONG-LIVED ASSETS The Company periodically evaluates the potential impairment of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. At the occurrence of a certain event or change in circumstances or at each balance sheet date, the Company evaluates the potential impairment of an asset based on future undiscounted cash flows. In the event that impairment exists, the Company will measure the amount of such impairment based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved. Factors that management considers in performing this assessment include current operating results, trends and prospects and, in addition, demand, competition and other economic factors. At September 30, 1999 and 1998, the Company determined that there had been no impairment of its long-lived assets, except as in Note E. Intangibles, which consist primarily of patents and trademarks, goodwill and a non-compete agreement, are amortized on a straight-line basis over periods ranging from 5 to 15 years. At September 30, 1999 and 1998, accumulated amortization of intangibles amounted to $831,922 and $442,237, respectively. DEFERRED REVENUE Deferred revenue consists of payments received from customers in advance of services performed or product shipped. 31 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TREASURY STOCK The Company is authorized to repurchase up to 5% of the Company's outstanding shares of common stock through July 2000. Under the repurchase program, the Company plans to purchase shares of the Company's outstanding common stock on the open market from time-to-time, depending on market conditions. USE OF ESTIMATES The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period reported. Actual results could differ from these estimates. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which is the asset and liability method for accounting and reporting for income taxes. Under SFAS No. 109, deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the basis of assets and liabilities using statutory rates. In addition, SFAS No. 109 requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. STOCK-BASED COMPENSATION The Company recognizes stock-based compensation in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires that companies recognize compensation expense for grants of stock, stock options, and other equity instruments based on fair value, or, for grants to employees, provide pro forma disclosure of net income and earnings per share in the notes to the financial statements using the fair value method. NET LOSS PER BASIC AND DILUTED COMMON SHARE The Company reports net loss per basic and diluted common share in accordance with SFAS No. 128, "Earnings Per Share," which establishes standards for computing and presenting earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. CONCENTRATION OF CREDIT RISK Financial instruments that subject the Company to concentrations of credit risk consist principally of cash equivalents, investments in marketable securities, trade accounts receivable, unbilled contract costs and amounts receivable from exercise of stock options. 32 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company's trade accounts receivable and unbilled contract costs and fees are primarily from sales to U.S. government agencies and several commercial customers. The Company does not require collateral and has not historically experienced significant credit losses related to receivables or unbilled contract costs and fees from individual customers or groups of customers in any particular industry or geographic area. The Company deposits its cash and invests in short-term investments and marketable securities primarily through two regional commercial banks and an investment company. Credit exposure to any one entity is limited by company policy. RESEARCH AND DEVELOPMENT COSTS The Company expenses research and development costs as incurred. COMPREHENSIVE LOSS Comprehensive loss includes net loss, as well as other changes in stockholders' equity, except stockholders' investments and distributions. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, accounts receivable, unbilled contract costs and fees, accounts payable, debt instruments and amounts receivable from exercise of stock options. The book value of such financial instruments approximate their respective fair values due to their short-term maturities. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to current year presentations. For all periods presented, expenses associated with funded research and development activities have been reclassified as research and development expenses from cost of revenue. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. The Company will adopt SFAS No. 133 beginning in the first quarter of the fiscal year ending September 30, 2001. Adoption of SFAS No. 133 is not expected to have a material impact to the Company's consolidated financial position, results of operations or cash flows. 33 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) B. MARKETABLE SECURITIES At September 30, 1998, marketable securities have been categorized as available for sale, and as a result, are stated at fair value. As of September 30, 1998, marketable securities consisted of the following:
GROSS GROSS AMORTIZED AGGREGATE UNREALIZED UNREALIZED SECURITY CATEGORY COST BASIS FAIR VALUE GAINS LOSSES ----------------- ---------- ---------- ---------- ---------- Corporate debt securities........................... $597,197 $583,939 $ 8,149 $(21,407) Mortgage-backed securities.......................... 70,614 73,492 2,878 -- -------- -------- ------- -------- $667,811 $657,431 $11,027 $(21,407) ======== ======== ======= ========
The change in net unrealized losses during 1999, 1998 and 1997 were $10,380, $23,312, and $32,866, respectively, and are included in the balance sheet in a separate component of stockholders' equity, net of tax effect. Proceeds from sales and maturities of marketable securities during 1999, 1998 and 1997 were $580,144, $1,340,609, and $2,079,064, respectively. Gross realized losses from the sale of securities classified as available for sale during 1999, 1998 and 1997 were $87,535, $0, and $0, respectively. C. UNBILLED CONTRACT COSTS AND FEES Unbilled contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions. These amounts included retained fee and unliquidated costs totaling $282,746 and $363,087 at September 30, 1999 and 1998, respectively. D. INVENTORY Inventory consisted of the following:
SEPTEMBER 30, ----------------------- 1999 1998 ---------- ---------- Raw material......................................... $1,139,064 $1,783,803 Work-in-process...................................... 2,199,199 1,788,241 Finished goods....................................... 359,709 106,023 ---------- ---------- $3,697,972 $3,678,067 ========== ==========
34 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) E. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
SEPTEMBER 30, ----------------------- 1999 1998 ---------- ---------- Machinery and equipment.............................. $4,505,287 $3,391,758 Sales and demonstration equipment.................... -- 19,052 Furniture and fixtures............................... 280,769 265,173 Computer software.................................... 621,583 556,876 Leasehold improvements............................... 648,734 626,216 ---------- ---------- 6,056,373 4,859,075 Less accumulated depreciation and amortization....... 2,795,741 2,181,289 ---------- ---------- $3,260,632 $2,677,786 ========== ==========
Depreciation expense for the years ended September 30, 1999, 1998, and 1997 was $633,964, $540,213, and $736,924, respectively. As of September 30, 1999, there was $19,903 and $29,910 of capital leases that were included in machinery and equipment and computer software, respectively. As of September 30, 1998, there was no equipment under capital lease. During 1999 and 1997, the Company determined that certain of its machinery and equipment totaling $105,544 and $2,593,558, respectively, was impaired based on a change in the needs of its customers and such assets were written-off during 1999 and 1997, respectively. F. INVESTMENT IN BEACON POWER CORPORATION On May 28, 1997, SatCon Technology Corporation entered into a Securities Purchase Agreement (the "Agreement"), dated as of May 28, 1997, by and among the Company, Beacon Power Corporation ("Beacon Power"), a new wholly-owned subsidiary of the Company, and Duquesne Enterprises ("Duquesne"). Pursuant to the terms of the Agreement, Duquesne purchased from the Company and the Company issued, sold and delivered to Duquesne 798,138 shares (the "Shares") of the Company's Common Stock. The aggregate consideration received by the Company was $5,000,000. In exchange for a capital contribution, the Company received all of the capital stock of Beacon Power, consisting of 3,375,000 shares of Beacon Power's Common Stock and 1,125,000 shares of Beacon Power's preferred stock, par value $.01 per share, as adjusted to reflect a 1:1.125 stock split. Duquesne also entered into agreements pursuant to which it will act as exclusive distributor of Beacon Power's products, subject to certain exceptions, in seven Mid-Atlantic States and the District of Columbia. During a recapitalization of Beacon Power on December 24, 1997, Beacon Power obtained equity financing from private investors and the Company converted a significant portion of its ownership of Beacon Power to non-voting convertible preferred stock and the Company began accounting for its 35 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED) investment under the equity method of accounting. The book value of assets and liabilities of Beacon Power at the time the Company applied the equity method of accounting was as follows:
(AS RESTATED) (AS REPORTED) ------------- ------------- Accounts receivable................................ $ 14,487 $ 31,437 Inventory.......................................... -- 16,788 Prepaid expenses and other assets.................. 67,147 70,478 Property and equipment, net........................ -- 2,859,572 Intangibles, net................................... -- 90,957 Accounts payable................................... (50,000) -- Accrued payroll and payroll related expenses....... (32,298) (32,298) Accrued expenses................................... (118,225) (95,000) Subscriptions receivable........................... 2,007,508 2,058,066 ----------- ----------- Investment in Beacon Power Corporation............. $ 1,888,619 $ 5,000,000 =========== ===========
The restated amounts reflects treating certain costs as expenses rather than being included in the value of the net assets of Beacon Power (See Note A). At September 30, 1998, the Company had amounts of $596,453 due from Beacon Power. These amounts arose from transactions after December 24, 1997, whereby the Company advanced money and made payments for certain expenses incurred by Beacon Power. Such amounts were subsequently repaid in connection with the October 23, 1998 financing. On October 23, 1998, the Company entered into a Securities Purchase Agreement, by and among Beacon Power, Perseus Capital, L.L.C. ("Perseus"), Duquesne, Micro Generation Technology Fund, L.L.C ("Micro", and together with Perseus and Duquesne, the "Purchasers") and the Company. Pursuant to the terms of the Agreement, (i) the Purchasers purchased from Beacon Power and Beacon Power issued, sold and delivered to the Purchasers 1,900,000 shares (the "Shares") of Beacon's Class D Redeemable Preferred Stock, $.01 par value per share; (ii) the Purchasers have the right to receive certain warrants to purchase shares of Beacon Power's common stock, $.01 par value per share ("Beacon Power's Common Stock"); (iii) the Company granted the Purchasers the right (the "Put Right") to cause the Company, in circumstances described below, to purchase all of the Shares and all of Beacon Power's Common Stock issuable upon conversion of the Shares; and (iv) upon exercise of the Put Right pursuant to the terms of the Agreement, the Company must pay the consideration contemplated by the Agreement in shares of the Company's common stock, $.01 par value per share, valued at the average fair value for the 15 trading days before and after notice of exercise of the Put Right. The aggregate consideration received by Beacon Power was $4,750,000. The Put Right is exercisable within 60 days of the second, third, fourth and fifth anniversary of the closing date of the transaction, upon certain events of bankruptcy of Beacon Power and upon the occurrence of certain going private transactions involving the Company. If the put right is exercised, the Company would record the value of the shares repurchased as an additional investment in Beacon Power. If management determines that redemption of the put right is probable or the put right is exercised and the value paid for the shares of Series D redeemable preferred stock exceeds the fair market value of Beacon Power's stock, such amount would be recorded as a loss in the period that the judgement is made or the put right is exercised. The put right will terminate, if not previously exercised, on the earlier of (i) October 23, 2003, (ii) upon the listing of Beacon Power's common stock on the New York Stock 36 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED) Exchange or the Nasdaq National Market, or (iii) with respect to put rights resulting from an event described above, 100 days after the Purchasers receive written notice from the Company requesting that the Purchasers either exercise or waive their put rights resulting from that event. The Company retained approximately 0.1% of Beacon Power's outstanding voting stock; however, there was a presumption that the Company had the ability to exercise significant influence, and therefore, the Company continues to account for its investment using the equity method of accounting. On June 22, 1999, the Company purchased from Beacon Power a note (the "June 22, 1999 Note") with a principal amount of $125,000 due and payable on the earlier of (i) September 22, 1999 ("Maturity Date") or (ii) upon the occurrence of an event of default, as defined therein. The note bears interest at 12 % per annum; provided that, if the note is not repaid in full on or prior to Maturity Date, the interest rate would increase to 15% per annum. The June 22, 1999 Note was issued pursuant to the terms of a Note Purchase Agreement, dated as of June 22, 1999, by and among Beacon Power, the Purchasers named therein, and the Company (the "Note Purchase Agreement"). Interest on the June 22, 1999 Note is payable on the Maturity Date. On July 6, 1999, the Company purchased from Beacon Power an additional note (the "July 6, 1999 Note") with a principal amount of $125,000 due and payable on the earlier of (i) Maturity Date or (ii) upon the occurrence of an event of default. The note bears interest at 12 % per annum; provided, that if the note is not repaid in full on or prior to Maturity Date, the interest rate would increase to 15% per annum (the "July 6, 1999 Note" and together with the June 22, 1999 Note, the "Notes"). The July 6, 1999 Note was also issued pursuant to the terms of the Note Purchase Agreement. Interest on the July 6, 1999 Note is payable on the Maturity Date. In August 1999, the Company exchanged in full the Notes and $83,333.33 for a note with a principal amount of $333,333.33 ("Bridge Note") plus accrued interest due and payable on the earlier of (i) the date of conversion of the note as described below or (ii) upon the occurrence of an event of default. The Bridge Note bears interest at 12 % per annum; provided that if the Funding Date (as defined below) does not occur within six months, such interest rate shall increase effective February 2, 2000 to 15% per annum. The Bridge Note was issued pursuant to the terms of a Note and Warrant Purchase Agreement, dated as of August 2, 1999, by and among Beacon Power, the Purchasers named therein, and the Company (the "Note and Warrant Purchase Agreement"). Interest on the Bridge Note is payable on the Maturity Date. Pursuant to the terms of the Note and Warrant Purchase, the Company purchased two (2) additional notes each with a principal amount of $333,333.33 on September 16, 1999 and October 19, 1999. The Bridge Note and the additional notes each with a principal amount of $333,333.33 are collectively referred to as the "Bridge Securities." In the event that Beacon Power obtains a funding commitment for at least $5 million of external funds within four months of the issuance of the first Bridge Security and closes a funding pursuant to such commitment within six months of the first issuance of the first Bridge Security (the date of such funding, the "Funding Date"), all outstanding principal and interest on the Bridge Securities will convert into equity of Beacon Power at a price and on terms that are equivalent to the securities issued by Beacon Power pursuant to the funding commitment. If Beacon Power does not obtain a qualified financing commitment within the four-month period referred to above, or close such funding within the six-month period referred to above, the Bridge Securities will convert into securities of Beacon Power pursuant to terms to be agreed 37 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F. INVESTMENT IN BEACON POWER CORPORATION (CONTINUED) to with Beacon Power, or if no terms are agreed to, the Company has the right to demand payment of all principal and interest on the Bridge Securities. Warrants to purchase shares of Beacon Power Securities were issued in connection with each issuance of the Bridge Securities. The warrants are for the purchase of the type of securities to be issued upon conversion of the Bridge Securities or if such securities are not converted, Beacon Power Common Stock. The number of shares of Beacon Power securities that will be subject to the warrants will be determined by dividing (i) 25% of the principal amount of the Bridge Securities issued by (ii) the price per share of the Bridge Securities, or, if the Bridge Securities are not converted, $2.50. At September 30, 1999, the Company has accrued losses of $333,333 relating to its share of Beacon Power losses, which it is required to fund pursuant to the terms of the Note and Warrant Purchase Agreement. Upon the conversion of Beacon Power's series D redeemable preferred stock into common stock, the Company's investment in Beacon Power and additional paid in capital would be written up to reflect its beneficial interest in the proceeds of the series D redeemable preferred stock financing, in accordance with Staff Accounting Bulletin 51. At the time of the conversion, the Company would record its share of suspended losses in Beacon Power. G. LINE OF CREDIT In December 1998, as modified, the Company obtained a $3,000,000 demand discretionary line of credit with a bank. The line of credit bears interest at the bank's prime rate plus 1 1/2% (9 3/4% as of September 30, 1999). Available borrowings are based on a formula of eligible accounts receivable and inventory. There were no amounts outstanding under the line of credit at September 30, 1999. During 1999, the maximum amount outstanding on the line of credit was $2,657,234. The Company has pledged all assets of the Company as collateral against this line of credit. H. LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 30, -------------------- 1999 1998 -------- --------- Note payable due in 52 weekly payments. The total note of $443,804 commenced on April 16, 1997.............. $ -- $ 368,056 Capital lease obligations.............................. 50,097 -- Less: Current Portion.................................. (16,226) (146,594) -------- --------- $ 33,871 $ 221,462 ======== =========
38 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) H. LONG-TERM DEBT (CONTINUED) At September 30, 1999, maturities of these obligations are as follows:
FISCAL YEAR ----------- 2000........................................................ $ 16,226 2001........................................................ 17,494 2002........................................................ 10,778 2003........................................................ 5,599 -------- 50,097 Less: Current Portion....................................... (16,226) -------- $ 33,871 ========
On March 1, 1999, the Company reached a definitive settlement arrangement with Albert R. Snider (the "Settlement Agreement"), the holder of the note payable which commenced on April 16, 1997, regarding the suit filed against Mr. Snider for breach of certain representations made by him, including statements of inventory balances in the Asset Purchase Agreement, dated as of April 3, 1997, between FMI and Mr. Snider relating to the purchase of the business of FMI and a counterclaim filed by Mr. Snider seeking, among other things, payments allegedly due from the Company under a promissory note. Pursuant to the terms of the Settlement Agreement, the Company made a $100,000 cash payment to Mr. Snider on March 9, 1999 and the parties executed mutual general releases dismissing any and all claims between them. In addition, the Settlement Agreement provides a right of first refusal in favor of the Company with respect to certain shares of the Company's Common Stock, beneficially owned by Mr. Snider. Concurrently with the execution of the Settlement Agreement, the Company and Mr. Snider entered into a consulting agreement pursuant to which Mr. Snider will perform certain consulting, advisory and related services as the Company may reasonably request from time to time between October 1, 1999 and October 1, 2002. In exchange for these services, the Company issued 42,860 shares of its Common Stock to an escrow agent who will release such shares to Mr. Snider or his nominees on January 2, 2001. The Company has recorded these shares held in escrow at market value and as a reduction to stockholders' equity as of September 30, 1999. The Company will continue to mark-to-market these securities until such shares are released from escrow. The Company will amortize the market value of the common stock held in escrow as consulting, advisory and related services expense as services are provided between the period October 1, 1999 and October 1, 2002. I. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases its facilities under various operating leases that expire through 2003. The Company has also entered into a master leasing agreement to lease various items of equipment not to exceed $600,000. At September 30, 1999, the availability under this facility has expired. 39 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) I. COMMITMENTS AND CONTINGENCIES (CONTINUED) Future minimum annual rentals under the lease agreements at September 30, 1999 are as follows:
FISCAL YEAR ----------- 2000........................................................ $1,471,382 2001........................................................ 1,520,400 2002........................................................ 1,446,996 2003........................................................ 1,215,498 2004........................................................ 280,850 Thereafter.................................................. 218,829 ---------- Total (not reduced by minimum sublease rentals of $1,265,847)............................................... $6,153,955 ==========
Total rental expense including operating expenses and real estate taxes for operating leases amounted to $1,683,749, $1,235,867, and $1,245,238 for the years ended September 30, 1999, 1998 and 1997, respectively. Certain of the facility leases contain escalation clauses, effective October 1, 1998, rental expense has been recognized on a straight-line basis over the remaining lease term. At September 30, 1999, deferred rent expense amounted to $110,390. In the fourth quarter of 1997, the Company decided to consolidate its operating facility in Tucson, AZ with its facility in Cambridge, MA. As a result, the Company accrued approximately $498,000, primarily related to the buyout of the facility lease. At September 30, 1999 and 1998, the Company had a reserve of $100,000, primarily related to the lease cancellation costs. J. EMPLOYEE BENEFIT PLAN The Company offers a 401(k) Employee Benefit Plan (the "Plan"). Under the Plan, any regular employee, as defined by the Plan, who has completed six months of service and has attained the age of 21 years is eligible to participate. Under the terms of the Plan, an employee may defer up to 15% of his or her compensation through contributions to the Plan. During 1999, the Company extended the Plan to its wholly-owned subsidiaries. The Company made matching contributions to the Plan of $218,729, $86,883 and $133,018 during 1999, 1998 and 1997, respectively. 40 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) K. INCOME TAXES The provision for income taxes consists of the following:
FOR THE YEARS ENDED SEPTEMBER 30, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Current payable: Federal.............................................. -- -- -- State................................................ -- $ 3,872 -- ----------- ----------- ----------- Deferred tax expense/(benefit): Federal.............................................. $(3,888,031) $(1,349,519) $(1,823,584) State................................................ (1,167,905) (404,950) (680,530) Change in valuation allowance........................ 5,055,936 1,754,469 2,504,114 ----------- ----------- ----------- -- -- -- ----------- ----------- ----------- -- $ 3,872 -- =========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of September 30, 1999 and 1998, the components of the net deferred tax assets/(liabilities) are as follows:
1999 1998 ----------------------------- ----------------------------- (AS RESTATED) (AS REPORTED) (AS RESTATED) (AS REPORTED) ------------- ------------- ------------- ------------- Federal net operating loss....... $ 5,566,879 $ 5,048,719 $ 4,081,970 $ 3,563,810 State net operating loss, net of federal benefit................ 495,980 404,540 666,053 574,613 Unrealized losses on marketable securities..................... -- -- 4,116 4,116 Credits.......................... 499,585 499,585 455,982 455,982 Depreciation..................... 336,038 336,038 15,318 15,318 Loss on investment in Beacon Power Corporation.............. 1,171,050 2,363,850 755,448 1,404,347 Other............................ 1,562,820 1,562,820 189,152 189,152 Valuation allowance.............. (9,632,352) (10,215,552) (6,168,039) (6,207,338) ------------ ----------- ------------ ----------- Net deferred income taxes........ -- -- -- -- ============ =========== ============ ===========
The Company has placed a full valuation allowance against its net deferred tax assets since the Company believes it is "more likely than not" that it will not be able to utilize its deferred tax asset. A decrease in net deferred tax assets and a decrease in the valuation allowance in the amount of approximately $1,240,000 (as restated) each has been made to account for the recapitalization of Beacon Power Corporation during the year ended September 30, 1998. 41 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) K. INCOME TAXES (CONTINUED) The provision for income taxes differs from the federal statutory rate due to the following:
FOR THE YEARS ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 1997 -------- -------- -------- Tax at statutory rate............................... (34.0)% (34.0)% (34.0)% State taxes--net of federal benefit................. (6.2) (6.2) (7.3) Other............................................... (0.7) (0.5) .6 Change in valuation allowance....................... 40.9 40.8 40.7 ----- ----- ----- Effective tax rate.................................. -- % 0.1 % -- % ===== ===== =====
At September 30, 1999, the Company had net operating loss carry-forwards of approximately $16,550,000 (as restated) and $7,976,000 (as restated) for federal and state income tax purposes, respectively. The federal net operating losses expire beginning September 30, 2008 through 2019. The state net operating losses will expire beginning September 30, 2000 through 2004. The use of these losses may be limited due to ownership change limitations under Section 382 of the Code. L. STOCKHOLDERS' EQUITY STOCK OPTIONS Under the Company's 1992, 1994, 1996 and 1998 Stock Option Plans, both qualified and non-qualified stock options may be granted to certain officers, employees, directors and consultants to purchase up to 1,550,000 shares of the Company's common stock. At September 30, 1999, all of the 1,550,000 stock options available for grant under the Company's 1992, 1994, 1996 and 1998 Stock Option Plan have been granted. During 1999, the Company adopted its 1999 Stock Option Plan that provides for the grant to employees, officers, directors and consultants for qualified and non-qualified stock options to purchase up to 1,500,000 shares of the Company's common stock. At September 30, 1999, 816,898 of the 1,500,000 stock options available for grant under the Company's 1999 Stock Option Plan have been granted. The 1992, 1994, 1996, 1998, and 1999 Stock Option Plans (collectively the "Plans") are subject to the following provisions: The aggregate fair market value (determined as of the date the option is granted) of the common stock that any employee may purchase in any calendar year pursuant to the exercise of qualified options may not exceed $100,000. No person who owns, directly or indirectly, at the time of the granting of a qualified option to him or her, more than 10% of the total combined voting power of all classes of stock of the Company shall be eligible to receive any qualified options under the Plans unless the option price is at least 110% of the fair market value of the common stock subject to the option, determined on the date of grant. Non-qualified options are not subject to this limitation. Qualified options are issued only to employees of the Company, while non-qualified options may be issued to non-employee directors, consultants, and others, as well as to employees of the Company. Options granted under the Plans may not be granted with an exercise price less than 100% of fair value of the Company's common stock, as determined by the Board of Directors on the grant date. 42 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) L. STOCKHOLDERS' EQUITY (CONTINUED) Options under the Plans must be granted within 10 years from the effective date of the Plan. Qualified options granted under the Plans cannot be exercised more than 10 years from the date of grant, except that qualified options issued to 10% or greater stockholders are limited to five-year terms. All options granted under the Plans provide for the payment of the Company's exercise price in cash, or by delivery to the Company of shares of common stock already owned by the optionee having fair market value equal to the exercise price of the options being exercised, or by a combination of such methods of payment. The Plans contain antidilutive provisions authorizing appropriate adjustments in certain circumstances. Shares of common stock subject to options that expire without being exercised or that are canceled as a result of the cessation of employment are available for further grants. A summary of the status of the Company's stock option plans as of September 30, 1999, 1998 and 1997 and changes for the years then ended are presented below.
1999 1998 1997 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- --------- -------- Outstanding at beginning of year.......... 820,910 $9.58 700,427 $8.44 713,392 $7.08 Granted................................. 1,404,000 7.09 319,000 11.20 144,000 8.97 Exercised............................... (455,600) 6.98 (100,266) 5.80 (144,466) 2.25 Canceled................................ (118,083) 8.84 (98,251) 10.55 (12,499) 10.71 --------- ----- -------- ----- -------- ----- Outstanding at end of year................ 1,651,227 $8.24 820,910 $9.58 700,427 $8.44 ========= ===== ======== ===== ======== ===== Options exercisable at year-end........... 640,560 $9.18 413,403 $8.48 503,660 $8.14 ========= ===== ======== ===== ======== =====
The following table summarizes information about stock options outstanding as of September 30, 1999.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE --------------------- ----------- --------- -------- ----------- -------- $5.00--$ 7.81....... 576,328 7.8 $ 5.75 159,328 $5.86 $8.75--$10.50....... 773,399 8.4 8.84 345,732 9.72 $11.00--$13.38....... 301,500 7.9 10.69 135,500 11.69 --------- ----- ------- ------- ----- 1,651,227 8.1 $ 8.24 640,560 $9.18 ========= ===== ======= ======= =====
An additional 683,102 shares were available under the 1999 Stock Option Plan for future grants at September 30, 1999. During 1999, the Company granted fully vested options to purchase 755,000 shares of the Company's common stock to consultants at prices ranging from $5.75 to $10.00 per share. The Company has recorded the fair value of the options, as determined by the Black-Scholes option pricing model, of $2,152,277, to 43 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) L. STOCKHOLDERS' EQUITY (CONTINUED) selling, general and administrative expenses during the year ended September 30, 1999. As of September 30, 1999, options to purchase 450,000 shares at $7.00 per share have been exercised. As of September 30, 1999, the Company received $1,333,333 of cash and the remaining amount due from the shareholders is classified within stockholders' equity as amounts receivable from exercise of stock options. WARRANTS On June 5, 1998, the Company issued to certain individuals, in settlement of a claim asserted against the Company, Common Stock Purchase Warrants to purchase up to 68,795 shares of common stock, as amended, at an exercise price of $11.43 per share. These warrants expired on November 11, 1999 unexercised. On November 11, 1998, the Company issued common stock warrants to purchase up to 67,125 shares of the Company's Common Stock at an exercise price of $11.43 per share. The Company has recorded the fair value of these warrants as determined by the Black-Scholes option pricing model, of $56,362, to selling, general and administrative expenses during the year ended September 30, 1999. These warrants expired on November 11, 1999 unexercised. On August 25, 1999, in connection with the $8 million private placement of 8,000 shares of the Company's Series A Convertible Preferred Stock, $0.01 par value per share with Brown Simpson Strategic Growth Funds (See Note M), the Company issued common stock warrants to purchase up to 120,000 and 675,000 shares of common stock at an exercise price of $7.80 and $8.54, respectively. These warrants expire on August 25, 2003. At September 30, 1999, none of these warrants have been exercised. STOCK-BASED COMPENSATION Had compensation cost for the Company's stock-based compensation been determined based on fair value at the grant dates as calculated in accordance with SFAS No. 123, the Company's net loss and loss per share for the years ended September 30, 1999, 1998 and 1997 would have been increased to the pro forma amounts indicated below:
1999 1998 1997 ----------------------- ----------------------- ----------------------- NET LOSS NET LOSS NET LOSS ATTRIBUTABLE LOSS PER ATTRIBUTABLE LOSS PER ATTRIBUTABLE LOSS PER TO COMMON COMMON TO COMMON COMMON TO COMMON COMMON STOCKHOLDERS SHARE STOCKHOLDERS SHARE STOCKHOLDERS SHARE ------------ -------- ------------ -------- ------------ -------- As restated........................ $(11,082,090) $(1.21) $(3,273,995) $(.37) ($7,708,739) $ (.97) Pro forma.......................... $(12,286,542) $(1.34) $(3,849,985) $(.43) ($7,780,546) $ (.98)
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1996 and additional awards in future years are anticipated. The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: an expected life of seven years, expected volatility of 80.0%, no dividends, and risk-free interest rate of 6.08% for September 30, 1999; an expected life of seven years, expected volatility of 57.9%, no dividends, and risk-free interest rate of 5.76% for September 30, 1998; and an expected life of seven years, expected volatility of 57.9%, no dividends, and risk-free interest rate of 6.125% for September 30, 1997. The weighted average price of the fair value of 44 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) L. STOCKHOLDERS' EQUITY (CONTINUED) options granted for years ended September 30, 1999, 1998 and 1997 are $5.21, $7.14 and $5.80, respectively. M. PREFERRED STOCK The Company is authorized to issue up to 1,000,000 shares of Preferred Stock, $.01 par value. The Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions On August 25, 1999, the Company completed an $8 million private placement of 8,000 shares of its Series A Redeemable Convertible Preferred Stock, $0.01 par value per share (the "Series A Preferred Stock"), with Brown Simpson Strategic Growth Funds ("Brown Simpson"). The Series A Preferred Stock is initially convertible into 1,025,641 shares of the Company's common stock, $0.01 par value per share (the "Common Stock"), at an initial conversion price of $7.80 per share. The Series A Preferred Stock is also subject to certain dilution protection for a period of three years. Under certain circumstances, the Company has the option to cause the Series A Preferred Stock to convert into shares of Common Stock or otherwise be redeemed. At the end of seven years, the Company must redeem any remaining shares of the Series A Preferred Stock for cash or, at the Company's option, Common Stock with a then fair market value equal to the original purchase price of the Series A Preferred Stock. The obligation at seven years to redeem any remaining shares of the Series A Preferred Stock accelerates to the fourth anniversary of the closing in the event that the average bid price of the Company's Common Stock for the 60 "trading day" period immediately preceeding the fourth anniversary is $5 per share or less. In the event of certain changes in control events regarding the Company or if the Common Stock is delisted, Brown Simpson has the right to cause the Series A Preferred Stock to be redeemed. In connection with the transaction, Brown Simpson also received warrants to purchase up to 675,000 additional shares of Common Stock at $8.54 per share (the "Brown Simpson Warrants"). The Brown Simpson Warrants expire on August 25, 2003. The Company has allocated $1,818,558 of the proceeds, net of $1,338,234 transaction costs, based on the fair value of these warrants, as determined by the Black-Scholes option pricing model. H.C. Wainwright & Co., Inc. ("H.C. Wainwright") served as placement agent for the transaction and received a commission of $560,000 and warrants to purchase 120,000 shares of the Company's Common Stock at $7.80 per share. These warrants expire on August 25, 2003. H.C. Wainwright will also receive a future fee in the amount of 4% of any monies received by the Company upon the exercise of the Brown Simpson Warrants. The Company has recorded the fair value of these warrants, as determined by the Black-Scholes option pricing model, of $550,734 as a transaction cost of this offering. The Company has valued the redeemable convertible preferred stock at issuance to be $4,843,208 based on the relative fair market values of the financial instruments issued in connection with this placement. The Company will accrete the carrying value of the redeemable convertible preferred stock to its redeemable value of $8,000,000 at August 25, 2003, in the event that the average bid price for the 60 trading days prior is $5.00 or less, using the effective interest method. As of September 30, 1999, the Company has accreted $50,904 and recorded this as a charge against additional paid-in capital. 45 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) N. SIGNIFICANT CUSTOMERS Significant customers, defined as net revenues from those customers that account for 10% or more of total net revenue in a fiscal year, were as follows:
PERCENTAGE OF TOTAL NET REVENUES FOR THE YEARS ENDED SEPTEMBER 30, ------------------------------ CUSTOMER 1999 1998 1997 -------- -------- -------- -------- (AS RESTATED) U.S. government: U.S. Department of Defense.............................. 20.6% 22.1% 44.6%
O. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION NON-CASH INVESTING AND FINANCING ACTIVITIES
FOR THE YEARS ENDED SEPTEMBER 30, ------------------------------ 1999 1998 1997 -------- -------- -------- Accretion of redeemable convertible preferred stock discount.................................................. $50,904 $ -- $ -- Acquisition of equipment under capital leases............... $49,813 $ -- $ --
INTEREST AND INCOME TAXES PAID Cash paid for interest and income taxes were as follows:
FOR THE YEARS ENDED SEPTEMBER 30, ------------------------------ 1999 1998 1997 -------- -------- -------- Interest........................................ $115,692 $10,206 $13,933 ======== ======= ======= Income taxes.................................... -- $ 5,772 $ 5,800 ======== ======= =======
P. ACQUISITIONS K&D MAGMOTOR CORPORATION On January 23, 1997, the Company acquired substantially all of the assets and assumed certain of the liabilities of K&D MagMotor Corporation ("MagMotor") pursuant to the terms of an Asset Purchase Agreement, dated as of January 2, 1997, by and among the Company, MagMotor and MagMotor's principal stockholder (the "Stockholder") (the "Asset Purchase Agreement"). The aggregate consideration paid by the Company for the acquired assets of MagMotor was approximately $210,000 in cash and 30,000 shares of the Company's common stock, par value $.01 per share valued at $6.625 per share or $198,750. MagMotor's assets, including machinery and equipment and inventory, were recorded at their estimated market value of $250,000 and $160,000, respectively. MagMotor is a manufacturer of custom electric motors targeting the factory automation, medical, semi-conductor and packaging markets. The Company continues to use the assets in the same manner in 46 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) P. ACQUISITIONS (CONTINUED) which they were used by MagMotor immediately prior to the acquisition. The Company has included in its consolidated results of operations the acquisition of MagMotor under the purchase method of accounting. The pro forma financial information has not been presented as the acquisition of Magmotor is not material. FILM MICROELECTRONICS, INC. On April 16, 1997, the Company acquired substantially all of the assets of Film Microelectronics, Inc. ("FMI"), pursuant to the Asset Purchase Agreement, dated as of April 3, 1997, by and among the Company, FMI and FMI's principal stockholder. In addition, the Company assumed trade payables aggregating approximately $900,000 and the assumption of indebtedness of approximately $1 million. The aggregate consideration paid by the Company for the acquired assets of FMI was 420,000 shares of the Company's common stock, par value $.01 per share (the "Common Stock"), valued at $6.375 per share or $2,677,500. FMI is a manufacturer of production and custom integrated circuits for the communications, industrial, military and aerospace markets. The Company continues to use the assets in the same manner in which they were used by FMI immediately prior to the acquisition. FMI's assets have been recorded at their estimated market values with the excess purchase price assigned to goodwill, which is being amortized over 15 years. The Company has included in its consolidated results of operations the acquisition of FMI under the purchase method of accounting. The following unaudited pro forma financial information combines SatCon and FMI's results of operations as if the acquisition had taken place on October 1, 1996. The pro forma results are not necessarily indicative of what the results of operations actually would have been if the transaction had occurred on the applicable dates indicated and are not intended to be indicative of future results of operations.
FOR THE YEAR ENDED SEPTEMBER 30, 1997 ------------- (AS RESTATED) Revenue..................................................... $14,974,765 Operating loss.............................................. $(8,589,880) Net loss.................................................... $(8,110,334) Net loss per share.......................................... $ (.99)
INDUCTIVE COMPONENTS, INC. AND LIGHTHOUSE SOFTWARE, INC. On January 4, 1999, the Company's MagMotor subsidiary acquired substantially all of the assets and assumed certain liabilities of Inductive Components, Inc. and Lighthouse Software, Inc., pursuant to the terms of an Asset Purchase Agreement, dated January 4, 1999, among MagMotor, the Company, Inductive Components, Inc, Lighthouse Software, Inc. and Thomas Glynn, the sole stockholder of Inductive and the majority stockholder of Lighthouse. The aggregate consideration paid by the Company for the acquired assets of Inductive Components, Inc. and Lighthouse Software, Inc. was 100,000 shares of the Company's common stock, valued at $5.6875 per share or $568,750. In addition, the Company assumed indebtedness of approximately $246,000. The Company has included in its consolidated results of operations the 47 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) P. ACQUISITIONS (CONTINUED) acquisition of Inductive and Lighthouse under the purchase method of accounting. The purchase price has been allocated as follows: Inventory................................................... $ 50,000 Property and equipment...................................... 100,597 Intangibles................................................. 275,000 Goodwill.................................................... 389,079 -------- $814,676 ========
The pro forma financial information has not been presented, as the acquisitions of Inductive Components, Inc. and Lighthouse Software, Inc. are not material. HYCOMP, INC. On April 12, 1999, the Company executed an agreement to purchase substantially all of the assets and assume certain liabilities of HyComp, Inc. ("HyComp"). This agreement was dated March 31, 1999 and was by and between HyComp and HyComp Acquisition Corp., a wholly-owned subsidiary of the Company. The aggregate consideration paid by the Company for the acquired assets of HyComp consisted of (i) $750,000 in cash; (ii) the assumption of certain liabilities and obligations of HyComp in the amount of approximately $422,000; (iii) transaction costs of $95,000; and (iv) a 5% royalty to HyComp on certain sales through April 12, 2000. At September 30, 1999, the Company has recorded $50,000 of accrued royalties. The Company has included in its consolidated results of operations the acquisition of HyComp under the purchase method of accounting. The purchase price has been allocated as follows: Accounts receivable......................................... $ 38,556 Inventory................................................... 318,359 Deposits.................................................... 19,800 Property and equipment...................................... 940,500 ---------- $1,317,215 ==========
The pro forma financial information has not been presented as the acquisition of HyComp is not material. 48 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) P. ACQUISITIONS (CONTINUED) Net cash paid for the acquisitions of K&D MagMotor Corporation, Film Microelectronics, Inc., Inductive Components Inc., Lighthouse Software, Inc. and HyComp, Inc. was as follows:
FOR THE YEARS ENDED SEPTEMBER 30, ---------------------------------- 1999 1998 1997 ---------- -------- ---------- Fair value of assets........................ $1,742,812 -- $4,723,408 Cost in excess of net assets of companies acquired, net............................. 389,079 -- 987,678 Liabilities assumed, including transaction costs..................................... (567,215) -- (2,624,836) Stock issued................................ (568,800) -- (2,876,250) ---------- ------- ---------- Cash paid................................... $ 995,876 -- $ 210,000 Less: Cash acquired......................... -- -- (97,014) ---------- ------- ---------- Net cash paid for the acquisitions.......... $ 995,876 -- $ 112,986 ========== ======= ==========
Q. EARNINGS PER SHARE The following is the reconciliation of the numerators and denominators of the basic and diluted per share computations of net loss:
FOR THE YEARS ENDED SEPTEMBER 30, --------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- (AS RESTATED) (AS RESTATED) (AS RESTATED) Net loss attributable to common shareholders.......... $(11,082,090) $(3,273,995) $(7,708,739) BASIC: Common shares outstanding, beginning of year........ 8,990,249 8,769,146 7,359,074 Weighted average common shares issued during the year.............................................. 200,017 190,163 600,235 Weighted average shares repurchased during the year.............................................. (14,225) (2,638) -- ------------ ----------- ----------- Weighted average shares outstanding--basic.......... 9,176,041 8,956,671 7,959,309 ============ =========== =========== Net loss per share, basic........................... $ (1.21) $ (.37) $ (.97) ============ =========== =========== DILUTED: Weighted average shares outstanding--basic.......... 9,176,041 8,956,671 7,959,309 Weighted average common stock equivalents (a)....... -- -- -- Weighted average shares outstanding--diluted........ 9,176,041 8,956,671 7,959,309 ============ =========== =========== Net loss per share, diluted......................... $ (1.21) $ (.37) $ (.97) ============ =========== ===========
(a) At September 30, 1999, 1998 and 1997, 2,582,147, 884,758 and 1,000,427 options and warrants, respectively, were excluded from the weighted average common shares outstanding as their effect would be antidilutive. 49 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) R. COMPREHENSIVE LOSS The Company's total comprehensive loss is as follows:
FOR THE YEARS ENDED SEPTEMBER 30, --------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- (AS RESTATED) (AS RESTATED) (AS RESTATED) Net loss.............................................. $(11,031,186) $(3,273,995) $(7,708,739) ============ =========== =========== Other comprehensive income/(loss), net of tax: Unrealized gains/(losses) on securities............... $ 10,380 $ 9,835 $ 19,720 ------------ ----------- ----------- Other comprehensive income/(loss)..................... $ 10,380 $ 9,835 $ 19,720 ------------ ----------- ----------- Comprehensive loss.................................... $(11,020,806) $(3,264,160) $(7,689,019) ============ =========== ===========
S. SEGMENT DISCLOSURES As of October 1, 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS No. 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products and services, geographical areas and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and assess their performance. The Company's organizational structure is based on strategic business units that offer various products to the principal markets in which the Company's products are sold. These business units equate to three reportable segments: research and development, power electronic products and motion-control products. SatCon Technolgy Corporation provides research and development services in collaboration with third-parties. Film Microelectronics, Inc designs and manufactures power electronics products. The Magmotor Division specializes in the engineering and manufacturing of motion-control products. The Company's principal operations and markets are located in North America. The accounting policies of each of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on revenue and profit and loss from operations before income taxes, interest income, interest expense, other income and losses and loss from investment in Beacon Power Corporation, excluding the effects of amortization of intangible assets associated with acquisitions. Common costs not directly attributable to a particular segment are allocated among segments based on management's estimates. 50 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) S. SEGMENT DISCLOSURES (CONTINUED) The following is a summary of the Company's operations by operating segment:
FOR THE YEARS ENDED SEPTEMBER 30, --------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- (AS RESTATED) (AS RESTATED) (AS RESTATED) Research and development: Funded research and development revenue............................ $ 6,355,383 $ 8,010,735 $ 8,738,293 ----------- ----------- ----------- Loss from operations, net of amortization....................... $(6,577,012) $(1,454,707) $(8,088,347) =========== =========== =========== Power electronic products: Revenue.............................. $ 6,306,085 $ 5,909,765 $ 2,594,023 ----------- ----------- ----------- (Loss)/income from operations, net of amortization....................... $(2,073,946) $ 504,528 $ 137,268 =========== =========== =========== Motion-control products: Revenue.............................. $ 2,816,413 $ 1,610,423 $ 1,134,019 ----------- ----------- ----------- (Loss)/income from operations, net of amortization....................... $ (755,272) $ (310,023) $ 93,609 =========== =========== ===========
The following is a summary of the Company's long-lived assets by operating segment:
SEPTEMBER 30, ----------------------- 1999 1998 ---------- ---------- Research and development: Long-lived assets.................................. $1,717,228 $1,842,517 ---------- ---------- Power electronic products: Long-lived assets.................................. $3,978,027 $3,416,341 ---------- ---------- Motion-control products: Long-lived assets.................................. $ 863,661 $ 434,248 ---------- ----------
T. SUBSEQUENT EVENTS On October 21, 1999, the Company received an investment from Mechanical Technology, Inc. ("MTI") of $7,000,000 in the Company. In consideration for MTI's investment, MTI will receive 1,030,000 shares of the Company's common stock at a discounted price of approximately $6.80 per share, $.01 par value per share (the "Common Stock"), and warrants to purchase an additional 100,000 shares of the Company's Common Stock. MTI funded $2,570,000 of its investment in the Company on October 21, 1999 and received 370,800 shares of the Company's Common Stock and a warrant to purchase 36,000 shares of the Company's Common Stock, and it will make the remaining investment by the end of January 2000. In addition, the Company has received a warrant to purchase 36,000 shares of MTI's Common Stock and will receive the remaining warrant to purchase 64,000 shares of MTI's Common Stock by the end of January 2000. 51 SATCON TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) T. SUBSEQUENT EVENTS (CONTINUED) Additionally, the Company acquired Ling Electronics, Inc. and Ling Electronics, Ltd. (collectively, "Ling Electronics") from MTI. In consideration for the acquisition of Ling Electronics, MTI received $70,000 and 770,000 shares of the Company's common stock, $.01 par value per share (the "Common Stock") valued at $9.8438 per share or $7,579,726. The following unaudited pro forma financial information combines SatCon and Ling's results of operations as if the acquisition had taken place on October 1, 1997. The pro forma results are not necessarily indicative of what the results of operations actually would have been if the transaction had occurred on the applicable dates indicated and are not intended to be indicative of future results of operations.
FOR THE YEARS ENDED SEPTEMBER 30, -------------------------- 1999 1998 ------------ ----------- (AS RESTATED) (UNAUDITED) Revenue........................................... $ 23,849,881 $27,764,923 Operating loss.................................... $(11,252,135) $(2,109,977) Net loss.......................................... $(12,506,004) $(4,085,069) Net loss attributable to common stockholders...... $(12,556,908) $(4,085,069) Net loss per share, basic and diluted............. $ (1.26) $ (0.42)
On November 16, 1999, the Company purchased certain intellectual property, equipment and other assets from Northrop Gruman Corporation ("NGC"). These assets were used by NGC in connection with its power electronics products business. The Company also entered into (i) a sublease with NGC pursuant it entered into a five-year sublease for approximately 14,863 square feet of rentable space in the Baltimore area and (ii) a three-year Transition Services Agreement providing the Company access to certain test facilities and personnel of NGC on a fee basis. In consideration for these foregoing acquisition and agreements, NGC received 578,761 shares of the Company's common stock, $.01 par value per share (the "Common Stock"), and warrants to purchase an additional 200,000 shares of the Company's Common Stock. The pro forma financial information has not been presented, as the Company views this transaction as the purchase of assets rather than as a business combination. 52 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE To the Board of Directors of SatCon Technology Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated statements of SatCon Technology Corporation and its subsidiaries (as restated) and have issued our report thereon dated December 27, 1999 (except with respect for the matter discussed in Note A for which the date is August 7, 2000). Our audit was made for the purpose of forming an opinion on those consolidated financial statements taken as a whole. The schedule listed in the financial statement schedule index is the responsibility of the Company's management and is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Boston, Massachusetts December 27, 1999 53 FINANCIAL STATEMENT SCHEDULE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ---------- ---------- ----------- ----------- YEAR ENDED SEPTEMBER 30, 1997: Allowance for doubtful accounts........... $ 130,900 $ 30,750 $ (2,407) $ 159,243 Allowance for unbilled contract costs..... $ 432,500 $ 909,100 $ (211,132) $ 1,130,468 Deferred tax valuation allowance.......... $1,661,329 $1,840,639 -- $ 3,501,968 Allowance for obsolete inventory.......... -- $ 758,541 -- $ 758,541 Reserve for product warranty expense...... -- $ 16,511 -- $ 16,511 Accrued costs for consolidation of facilities.............................. -- $ 498,000 -- $ 498,000 YEAR ENDED SEPTEMBER 30, 1998: Allowance for doubtful accounts........... $ 159,243 $ 29,014 $ (136,421) $ 51,836 Allowance for unbilled contract costs..... $1,130,468 -- $(1,072,857) $ 57,611 Deferred tax valuation allowance.......... $3,501,968 $2,705,370 -- $ 6,207,338 Allowance for obsolete inventory.......... $ 758,541 -- $ (549,765) $ 208,776 Reserve for product warranty expense...... $ 16,511 -- $ (16,511) -- Accrued costs for consolidation of facilities.............................. $ 498,000 -- $ (398,000) $ 100,000 YEAR ENDED SEPTEMBER 30, 1999: Allowance for doubtful accounts........... $ 51,836 $ 345,433 $ (10,583) $ 386,686 Allowance for unbilled contract costs..... $ 57,611 $ 688,510 -- $ 746,121 Deferred tax valuation allowance.......... $6,207,338 $4,008,214 -- $10,215,552 Allowance for obsolete inventory.......... $ 208,776 $ 870,021 -- $ 1,078,797 Reserve for product warranty expense...... -- $ 36,000 -- $ 36,000 Accrued costs for consolidation of facilities.............................. $ 100,000 -- -- $ 100,000
54 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 1999 ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 234,350 Prepaid expenses and other current assets................. 15,987 ------------ Total current assets.................................. 250,337 PROPERTY AND EQUIPMENT, Net................................. 566,013 DEFERRED FINANCING COSTS.................................... 81,934 DEPOSITS.................................................... 57,150 OTHER ASSETS................................................ 18,066 ------------ TOTAL ASSETS................................................ $ 973,500 ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES: Accounts payable.......................................... $ 413,146 Accrued compensation and benefits......................... 109,206 Accrued interest.......................................... 164,140 Accrued loss on contracts................................. 325,000 Other accrued expenses.................................... 43,222 Current portion of capital lease obligations.............. 73,291 ------------ Total current liabilities............................. 1,128,005 ------------ DIVIDENDS PAYABLE........................................... 749,005 ------------ NOTES PAYABLE TO INVESTORS.................................. 3,150,000 ------------ CAPITAL LEASE OBLIGATIONS, Net of current portion........... 2,875 ------------ COMMITMENTS (Note 6) CLASS D REDEEMABLE CONVERTIBLE PREFERRED STOCK (Liquidation preference of $4,750,000)...... 4,534,816 ------------ STOCKHOLDERS' (DEFICIENCY) EQUITY: Preferred stock: Class A Convertible, $.01 par value; 6,000,000, shares authorized 4,767,907 issued and outstanding (liquidation preference, $21,217,186................... 5,707,718 Class B Convertible, $.01 par value; 1 share authorized; no shares issued and outstanding....................... -- Class C Convertible, $.01 par value; 6 shares authorized, issued and outstanding..................... 29,933 Common stock, $.01 par value; 30,000,000 shares authorized; 8,424 shares issued and outstanding........ 84 Deferred consulting expense, net.......................... (100,000) Deferred stock compensation............................... (56,648) Additional paid-in capital................................ 515,318 Accumulated deficit during the development stage.......... (14,687,606) ------------ Total stockholders' deficiency........................ (8,591,201) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY.............. $ 973,500 ============
SEE NOTES TO FINANCIAL STATEMENTS. 55 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (UNAUDITED)
CUMULATIVE FROM MAY 8, 1997 (DATE OF YEAR ENDED INCEPTION) THROUGH DECEMBER 31, DECEMBER 31, 1999 1999 ------------ ------------------ REVENUE..................................................... $ 268,868 $ 501,184 ----------- ------------ OPERATING EXPENSES: Selling, general and administrative....................... 1,558,985 3,915,621 Research and development.................................. 3,506,031 9,321,477 Loss on contracts......................................... 325,000 325,000 Depreciation and amortization............................. 218,594 296,802 ----------- ------------ Total operating expenses................................ 5,608,610 13,858,900 ----------- ------------ LOSS FROM OPERATIONS........................................ (5,339,742) (13,357,716) ----------- ------------ OTHER INCOME (EXPENSE): Interest income........................................... 25,118 153,043 Interest expense.......................................... (356,869) (371,599) ----------- ------------ Total other income (expense), net....................... (331,751) (218,556) ----------- ------------ NET LOSS.................................................... (5,671,493) (13,576,272) PREFERRED STOCK DIVIDENDS................................... (916,852) (1,029,005) ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK......... (41,671) (48,579) ----------- ------------ LOSS TO COMMON SHAREHOLDERS................................. $(6,630,016) $(14,653,856) =========== ============ LOSS PER SHARE--BASIC AND DILUTED........................... $ (787.04) $ (1,739.54) =========== ============ WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING.................. 8,424 8,424 =========== ============
56 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED)
CLASS A CLASS C DEFERRED PREFERRED STOCK PREFERRED STOCK COMMON STOCK CONSULTING ---------------------- --------------------- --------------------- EXPENSE, SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT NET --------- ---------- ---------- -------- ---------- -------- ---------- BALANCE, JANUARY 1, 1999........... 4,622,907 $5,345,218 6 $29,933 8,424 $84 $ (37,500) Issuance of Class A preferred stock for services............. 145,000 362,500 -- -- -- -- (125,000) Dividend on Class D preferred stock.......................... -- -- -- -- -- -- -- Deferred stock compensation...... -- -- -- -- -- -- -- Amortization of deferred stock compensation................... -- -- -- -- -- -- -- Amortization of deferred consulting expense, net........ -- -- -- -- -- -- 62,500 Issuance of warrants to holders of Class D shares.............. -- -- -- -- -- -- -- Issuance of warrants for bridge loans.......................... -- -- -- -- -- -- -- Accretion of redeemable preferred stock to redemption value...... -- -- -- -- -- -- -- Net loss......................... -- -- -- -- -- -- -- --------- ---------- ---------- ------- ---------- --- --------- BALANCE, DECEMBER 31, 1999......... 4,767,907 $5,707,718 6 $29,933 8,424 $84 $(100,000) ========= ========== ========== ======= ========== === ========= DEFICIT ACCUMULATED DEFERRED ADDITIONAL DURING THE TOTAL STOCK PAID-IN DEVELOPMENT STOCKHOLDERS' COMPENSATION CAPITAL STAGE DEFICIENCY ------------- ---------- ------------ ------------- BALANCE, JANUARY 1, 1999........... $ -- $ -- $(8,057,590) $(2,719,855) Issuance of Class A preferred stock for services............. -- -- -- 237,500 Dividend on Class D preferred stock.......................... -- -- (636,852) (636,852) Deferred stock compensation...... (65,318) 65,318 -- -- Amortization of deferred stock compensation................... 8,670 -- -- 8,670 Amortization of deferred consulting expense, net........ -- -- -- 62,500 Issuance of warrants to holders of Class D shares.............. -- 280,000 (280,000) -- Issuance of warrants for bridge loans.......................... -- 170,000 -- 170,000 Accretion of redeemable preferred stock to redemption value...... -- -- (41,671) (41,671) Net loss......................... -- -- (5,671,493) (5,671,493) -------- --------- ------------ ----------- BALANCE, DECEMBER 31, 1999......... $(56,648) $ 515,318 $(14,687,606) $(8,591,201) ======== ========= ============ ===========
57 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (UNAUDITED)
CUMULATIVE FROM MAY 8, 1997 (DATE OF YEAR ENDED INCEPTION) THROUGH DECEMBER 31, DECEMBER 31, 1999 1999 ------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(5,671,493) $(13,576,272) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 218,594 296,802 Interest expense relating to issuance of warrants....... 170,000 170,000 Amortization of deferred consulting expense, net........ 300,000 562,500 Services and interest expense paid in preferred stock... -- 11,485 Accrued loss on contracts............................... 325,000 325,000 Changes in operating assets and liabilities: Prepaid expenses and other current assets............. 4,320 (15,987) Accounts payable...................................... (409,577) 413,146 Accrued compensation and benefits..................... 41,023 109,206 Accrued interest...................................... 164,140 164,140 Due to related party.................................. (18,611) -- Other accrued expenses and current liabilities........ 36,270 51,892 ----------- ------------ Net cash used in operating activities............... (4,840,334) (11,488,088) ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Increase in other assets.................................. (110,180) (157,150) Purchases of property and equipment....................... (350,881) (608,304) ----------- ------------ Net cash used in investing activities............... (461,061) (765,454) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of subscription receivable...................... -- 5,000,000 Issuance of Class C preferred stock....................... -- 30,000 Issuance of Class D redeemable preferred stock............ -- 4,486,237 Repayment of capital leases............................... (105,406) (178,345) Proceeds from notes payable issued to investors........... 3,150,000 3,150,000 ----------- ------------ Net cash provided by financing activities................. 3,044,594 12,487,892 ----------- ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (2,256,801) 234,350 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 2,491,151 -- ----------- ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 234,350 $ 234,350 =========== ============ SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of Class A Preferred Stock for subscription receivable.............................................. $ -- $ 5,000,000 =========== ============ Acquisition of assets with capital leases................. $ -- $ 254,411 =========== ============ Issuance of warrants in conjunction with financing........ $ 450,000 $ 450,000 =========== ============ Issuance of non-qualified stock options to consultants.... $ 65,318 $ 65,318 =========== ============
SEE NOTES TO FINANCIAL STATEMENTS. 58 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. NATURE OF BUSINESS AND OPERATIONS NATURE OF BUSINESS--Beacon Power Corporation (the "Company" or "Beacon") (a development stage company) was incorporated on May 8, 1997 as a wholly owned subsidiary of SatCon Technology Corporation ("SatCon"). Since its inception, Beacon has been engaged in the development of flywheel devices for storing and transmitting kinetic energy. As of December 31, 1999, the Company has not yet commenced its planned principal activities of marketing and manufacturing such devices and accordingly is accounted for as a development stage company under Statement of Financial Accounting Standards No. 7. As of December 31, 1999, a majority of the Company's outstanding shares is owned by SatCon. However, in conjunction with the October 1998 Class D preferred stock offering, the Company's minority investors were granted the right to appoint a majority of the members of the Company's Board of Directors. The Company has a single operating segment, manufacturing alternative power sources. The Company has no organizational structure dictated by product lines, geography or customer type. OPERATIONS--The Company has experienced net losses since its inception and, as of December 31, 1999, had an accumulated deficit of approximately $14.7 million. The Company is currently facing the challenge of finalizing development of a viable commercial product and raising adequate capital to sustain operations. As discussed in Note 15, during the period during January 1, 2000 to May 25, 2000, the Company secured additional financing of approximately $32 million. Management believes that this funding is sufficient to continue its operations as a going concern through at least December 31, 2000. 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION ACCOUNTING PRINCIPLES--The accompanying financial statements have been prepared using accounting principles generally accepted in the United States of America. RECAPITALIZATION--The accompanying financial statements reflect a recapitalization of the Company in 1997 when one shareholder exchanged shares of common stock for Class A preferred stock. STOCK SPLIT--The accompanying financial statements reflect a 1.125 for 1 split of the Company's preferred and common stock. All share and per share information herein has been retroactively restated to reflect this split. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES--The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS--Cash and cash equivalents include demand deposits and highly liquid investments with a maturity of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value. PROPERTY AND EQUIPMENT--Property and equipment, including leasehold improvements, are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. 59 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED FINANCING COSTS--Deferred financing costs consist of legal, administrative, financing and other related expenses incurred in connection with the Class E financing completed during the year ending December 31, 2000 and will be amortized over the terms of the obligations using the effective interest method. OTHER ASSETS--Other assets consist of unamortized legal expenses related to patents. CONTRACT LOSSES--Substantially all of the Company's sales commitments are firm fixed-price. Revenue and cost of revenue on such sales commitments are recorded as deliveries are made. Estimates of costs to complete are reviewed and revised periodically and accruals for estimated losses from such revisions are recorded in the accounting period in which the revisions are made. Losses on contracts are recorded in full as they are identified. LONG-LIVED ASSETS--At the occurrence of certain events or changes in circumstances, the Company reviews the carrying value of its long-lived assets to determine if impairment has occurred and, if necessary, adjusts the carrying value accordingly. No adjustments have been required to date. REVENUE RECOGNITION--Revenue relates to work performed under research and development contracts. Revenue is recognized as services are performed. STOCK-BASED COMPENSATION--Compensation expense associated with awards of stock or options to employees is measured using the intrinsic-value method. Compensation expense associated with awards to nonemployees is measured using the fair-value method and is amortized over the vesting period of three years. INCOME TAXES--Deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and tax loss and credit carryforwards using the currently enacted tax rates and laws. A valuation allowance is provided to the extent realization of deferred tax assets is not considered more likely than not. RESEARCH AND DEVELOPMENT--Research and development costs are expensed as incurred. FINANCIAL INSTRUMENTS--The carrying amount of cash and cash equivalents, accounts payable, accrued expenses, notes payable to investors and capital lease obligations approximate their fair values. CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. Substantially all of the Company's cash and cash equivalents are managed by one financial institution. At December 31, 1999, the Company had cash balances at a financial institution in excess of federally insured limits. However, the Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. COMPREHENSIVE LOSS--Comprehensive loss is the same as net loss for all periods presented. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging 60 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) activities. The statement, as amended, is effective for fiscal years beginning after June 15, 2000. Management is currently evaluating the effect of adopting SFAS No. 133 on the financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). SAB 101 established guidelines for revenue recognition and is effective for periods beginning no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. Management does not expect that the adoption of SAB 101 will have a material impact on the Company's financial condition or results of operations. NET LOSS PER SHARE LOSS PER SHARE--Loss per share has been computed using the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share was computed in the same manner. The impact of the Company's outstanding potential common shares, such as options and warrants (computed using the treasury stock method) and convertible preferred stock, were excluded from the calculation because such items were antidilutive. The weighted average number of shares of common stock issuable during the year ended December 31, 1999 and the period from May 8, 1997 (date of inception) to December 31, 1999 were 8,149,460 and 5,338,018, respectively, upon the exercise of options and warrants and the conversion of preferred stock outstanding. 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31 1999:
ESTIMATED USEFUL LIVES ---------- Machinery and equipment............................... 5 years $298,180 Furniture and fixtures................................ 7 years 41,521 Office equipment...................................... 3 years 159,894 Leasehold improvements................................ lease term 108,809 Equipment under capital lease obligations............. lease term 254,411 -------- Total............................................... 862,815 Less accumulated depreciation and amortization........ (296,802) -------- Property and equipment, net......................... $566,013 ========
4. NOTES PAYABLE TO INVESTORS At December 31, 1999, notes payable to investors consists of Senior Secured Convertible Promissory Notes (the "Senior Notes") held by the Company's primary investors. The Senior Notes bear interest, which is payable upon conversion, at an annual rate of 12.5%, increasing to 15% after six months if the Class E redeemable convertible preferred stock ("Class E Stock") funding had not occurred at that time. 61 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 4. NOTES PAYABLE TO INVESTORS (CONTINUED) The notes are secured by substantially all of the assets of the Company. In connection with the issuance of the Senior Notes, the investors received warrants to purchase shares of the Company's common stock (see Note 10). On April 7, 2000, the Senior Notes and accrued interest were converted into Class E Stock (see Note 15). 5. CAPITAL LEASE OBLIGATIONS The Company leases equipment under capital lease agreements expiring through 2001. Future obligations under such capital leases as of December 31, 1999 are as follows: 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 =======
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: 2000........................................................ $241,506 2001........................................................ 25,449
Total rent expense was $199,405 during 1999, and $345,660 for the period from May 8, 1997 (date of inception) to December 31, 1999. 7. PREFERRED STOCK CLASS A CONVERTIBLE PREFERRED STOCK--Each share of Class A convertible preferred stock ("Class A Stock") is convertible into one share of common stock at the option of the holder. The Class A Stock is nonvoting. Upon liquidation, holders of Class A Stock are entitled to receive, out of funds then generally available prior to any payment with respect to the holders of common stock, $4.45 per share, plus any declared and unpaid dividends thereon. Holders of the Class A Stock have the right to receive the same dividends as declared by the Board of Directors on common shares on an "as-if-converted" basis. The Class A Stock will automatically be converted into shares of common stock upon the closing of a public offering of common stock of the Company, upon a vote of the Board of Directors or upon the automatic conversion of the Class D preferred stock (see Note 8). Class A Stock is subordinate to Class D, E and F preferred stock and has parity with Class B and C preferred stock. The Class A stock does not have redemption features. 62 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 7. PREFERRED STOCK (CONTINUED) CLASS B AND C CONVERTIBLE PREFERRED STOCK--Each share of Class B convertible preferred stock ("Class B Stock") and Class C convertible preferred stock ("Class C Stock") is convertible into one share of common stock at the option of the holder. The holders of the Class B and C Stock have voting rights equivalent to the number of shares of common stock into which their shares of Class B and C Stock convert. The Class B and C Stock have the right to receive the same dividends as declared by the Board of Directors on common shares on an "as-if-converted" basis. The Class B and C Stock will automatically be converted into shares of common stock upon the closing of a public offering of common stock of the Company, upon a vote of the Board of Directors, upon the automatic conversion of the Class D preferred Stock (see Note 8), or upon conversion of the Class A Stock. Class B and C Stock have parity with Class A in liquidation and are subordinate to Class D, E and F preferred stock. The Class B and C Stock do not have redemption features. 8. REDEEMABLE PREFERRED STOCK CLASS D REDEEMABLE CONVERTIBLE PREFERRED STOCK--The Company has authorized 6,000,000 shares of Class D convertible preferred stock ("Class D Stock") with a par value of $.01 per share. On October 23, 1998, the Company issued 1,900,000 shares of Class D Stock and received net proceeds of approximately $4,486,000. Issuance costs totaled approximately $264,000 and are being accreted to the carrying value of the Class D Stock over the period to the stock's earliest redemption date. Each share of Class D Stock is convertible into one share of common stock at the option of the holder. The holders of the Class D Stock have voting rights equivalent to the number of shares of common stock into which their shares of Class D Stock convert. Holders of the Class D Stock are also entitled to appoint representatives to the Board of Directors. The Class D Stock earns cumulative dividends at an annual rate of 12.5% through May 23, 2000 and 6% on and after this date, payable quarterly. Dividends can be paid in shares of Class D Stock through May 23, 2000 and after this date, are payable only in cash. Cumulative dividends not paid on Class D Stock total $112,153 and $749,005 as of December 31, 1998 and 1999, respectively. Upon liquidation, holders of Class D Stock are entitled to receive, out of funds then generally available, unpaid dividends previously declared or accrued and a per share amount of $2.50. The Class D Stock is redeemable by the holder at any time after December 31, 2004 for the stated value of $2.50 per share plus accrued, but unpaid, dividends. The Class D Stock will automatically be converted into shares of common stock upon a change in ownership of 50% of the Company's outstanding voting stock, upon a merger or consolidation of the Company or upon the sale of significant assets of the Company, or upon the closing of a qualified public offering. Pursuant to the Stock Purchase Agreement related to the Class D Stock (the "Class D Agreement"), the Company is bound by certain covenants. The Class D Stock is senior to the Class A, B and C Stock, subordinate to Class F preferred stock and has parity with Class E preferred Stock (see Note 15). 9. COMMON STOCK DIVIDENDS--Dividends may be declared and paid on the common stock as and when determined by the Board of Directors subject to any preferential dividend rights of any then outstanding shares of preferred stock. 63 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 9. COMMON STOCK (CONTINUED) RESERVED SHARES--At December 31, 1999, 9,130,420 shares of common stock were reserved for issuance under the Company's stock option plan, outstanding warrants and for the potential conversion of preferred stock. 10. STOCK WARRANTS At its inception in 1997, the Company issued a warrant to purchase 562,500 shares of common stock to an investor at the price of $5.33 per share (the "1997 warrant"). The warrant expired unexercised on May 28, 1999. Value ascribed to this warrant was not material. Under the conditions of the Class D Stock offering, the Company issued warrants in October 1999 to three investors to purchase 386,250 shares of common stock at $3.33, 386,250 shares of common stock at $4.50, and 386,250 shares of common stock at $6 (the "October 1999 warrants"). The estimated fair value of the warrants at the date of their issuance was $280,000. This amount has been recorded as a dividend to the holders of the Class D Stock and credited to additional paid-in-capital. These warrants expire December 31, 2004. Additional warrants were issued under the Class D agreement during April 2000 (see Note 15). In conjunction with the issuance of the Senior Notes in August 1999, the Company issued warrants to four investors to purchase 315,000 shares of Class E Stock (or common stock if the warrant was exercised prior to the Class E Stock financing (see Note 15)) at an exercise price of $2.50 per share (the "August 1999 warrants"). The estimated fair value of the warrants at the date of grant was $170,000. This amount has been recorded as a discount on the Senior Notes and was charged to interest expense in 1999 as the Senior Notes are demand notes. These warrants expire on August 2, 2004. In conjunction with the Class E conversion in April 2000 (see Note 15), the August 1999 warrants were cancelled. All warrants were valued on the date of grant using the Black-Scholes (common stock) or the Binary Option Pricing Model (preferred stock). The assumptions used to value these warrants were as follows:
AUGUST OCTOBER 1997 1999 1999 WARRANT WARRANTS WARRANTS ---------- ---------- ---------- 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%
11. STOCK OPTIONS The Company's option plans provide for the granting of stock options to purchase up to 4,500,000 shares of the Company's common stock. Options may be granted to employees, officers, directors and consultants of the Company with terms of up to 10 years. Under the terms of the option plans, incentive stock options ("ISOs") are to be granted at fair market value of the Company's stock at the date of grant, and nonqualified stock options ("NSOs") are to be granted at a price determined by the Board of 64 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 11. STOCK OPTIONS (CONTINUED) Directors. ISOs and NSOs generally vest ratably over 36 months from the grant date and have contractual lives of up to 10 years. Stock option activity since inception is as follows:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE NUMBER OF EXERCISE FAIR SHARES PRICE VALUE ---------- --------- --------- Outstanding, January 1, 1999................................ 418,500 1.78 Granted................................................... 733,500 1.78 0.80 Canceled, forfeited or expired............................ (147,844) 1.78 ---------- ----- Outstanding, December 31, 1999.............................. 1,004,156 $1.78 ========== =====
The following table summarized information about stock options outstanding at December 31, 1999:
VESTED WEIGHTED- -------------------------- AVERAGE WEIGHTED- WEIGHTED- NUMBER REMAINING AVERAGE AVERAGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING LIFE PRICE OF OPTIONS PRICE -------------- ----------- ----------- --------- ---------- --------- 1.7$8 1,004,156 8.64 $1.78 189,122 $1.78 ====== ========= ==== ====== ======= ======
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:
CUMULATIVE FROM MAY 8, 1997 (DATE OF INCEPTION) YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1999 1999 ------------ ------------------- Net loss to common shareholders as reported................. $(6,630,016) $(14,653,856) Net loss pro forma.......................................... (7,154,362) (15,478,335) Loss per share--as reported................................. (787.04) (1,739.54) Loss per share--pro forma................................... (849.28) (1,837.41)
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:
1999 -------- Risk-free interest rate..................................... 6.0% Expected life of option..................................... 3 years Expected dividend payment rate, as a percentage of the stock price on the date of grant................................ 0% Assumed volatility.......................................... 60%
65 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 11. STOCK OPTIONS (CONTINUED) The option-pricing model used was designed to value readily tradable stock options with relatively short lives. However, management believes that the assumptions used to value the options and the model applied yield a reasonable estimate of the fair value of the grants made under the circumstances. 12. INCOME TAXES The components of the provision (benefit) for income taxes consisted of the following:
CUMULATIVE FROM MAY 8, 1997 (DATE OF INCEPTION) YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1999 1999 ------------ ------------------- Federal--deferred........................................... $(1,995,158) $(4,627,983) State--deferred............................................. (352,087) (816,703) Increase in valuation allowance............................. 2,347,245 5,444,686 ----------- ----------- Provision (benefit) for income taxes........................ $ -- $ -- =========== ===========
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: Statutory federal rate benefit.............................. (34)% State, net of federal effect................................ (6) Valuation allowance provided................................ 40 --- Effective rate.............................................. --% ===
The components of the Company's deferred tax assets and liabilities consisted of the following at December 31, 1999:
Long-term assets: Net operating loss carryforwards.......................... $ 4,728,408 Research and development credits.......................... 524,958 Loss on contracts......................................... 130,000 Other..................................................... 61,320 ----------- Net deferred tax assets before valuation allowance.......... 5,444,686 Less valuation allowance.................................... (5,444,686) ----------- Net deferred tax assets..................................... $ -- ===========
The valuation allowance increased by $2,347,245 in 1999, primarily due to the generation of net operating loss carryforwards and credits for which realization is not reasonably assured. 66 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 12. INCOME TAXES (CONTINUED) The Company has available for future periods federal and state tax net operating loss carryforwards for federal and state purposes of approximately $11,850,000 and $11,616,000, respectively, as of December 31, 1999. In addition, the Company has business credits of approximately $524,958 as of December 31, 1999. The net operating loss carryforwards expire beginning in 2012 and 2002 for federal and state tax purposes, respectively. The federal research and development credits begin to expire in 2012. The Company did not pay any income taxes from inception to December 31, 1999. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may have limited, or may limit in the future, the amount of net operating loss carryforwards which could be utilized annually to offset future taxable income and income tax liabilities. The amount of any annual limitation is determined based upon the Company's value prior to an ownership change. 13. BENEFIT PLAN In 1998, the Company created a 401(k) Profit Sharing Plan (the "Plan") for its full-time employees. Each participant in the Plan may elect to contribute a percentage of his or her annual compensation to the Plan on a pre-tax basis up to the annual limit established by the Internal Revenue Service ($10,200 for 1999). The Company matches employee contributions at a rate of 50% up to the first 6% of the employee's contributions. The Company may also elect to make a profit-sharing contribution based on the discretion of the Board of Directors. Employee contributions are fully vested. Company matching and profit sharing contributions vest 20% after two years of service consisting of at least 1,000 hours per calendar year and 20% annually thereafter. Company contributions were $41,963 and $61,339 during 1999, and the period from May 8, 1997 (date of inception) to December 31, 1999, respectively. 14. RELATED-PARTY TRANSACTIONS CONSULTING AGREEMENTS--The Company entered into consulting agreements with three investors in 1998 and 1997. The contracts are seven-year agreements, renewable annually thereafter, for consulting services to be provided by the investors in exchange for annual issuances of shares of the Company's Class A Stock. During 1999 and the period from May 8, 1997 (date of inception), $300,000, and $562,500, respectively, was recorded as consulting expense relating to these agreements, and 145,000 and 265,000 shares of Class A Stock in 1999 and the period from May 8, 1997 (date of inception) to December 31, 1999, respectively, were issued or issuable as compensation under these contracts. Prepaid and accrued consulting expenses have been recorded annually, based on the terms and dates of the consulting agreements. The services provided by the investors were recorded based upon the value of the securities issued. These contracts all expire immediately upon an initial public offering of the Company's common stock. PATENTS--The Company has entered into an agreement with SatCon whereby SatCon granted the Company a perpetual license to use the technology patented by SatCon relating to the field of flywheel energy storage products, systems and processes for stationary terrestrial applications. SERVICES AGREEMENTS--SatCon performs certain research and development, administrative and other services for the Company. Amounts paid to SatCon for such services rendered amounted to approximately $59,000 and $1,853,000 during 1999 and the period from May 8, 1997 (date of inception) to December 31, 1999, respectively. 67 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 14. RELATED-PARTY TRANSACTIONS (CONTINUED) DISTRIBUTION AGREEMENT--In 1997, the Company signed a 20-year agreement which granted an investor (DQE Enterprises, Inc.) exclusive rights to distribute certain of the Company's products in a territory comprised of seven Mid-Atlantic states and the District of Columbia. However, the Company retained the right to distribute products directly to cable television and telephone companies. 15. SUBSEQUENT EVENTS BRIDGE FINANCING--On January 7, 2000, the Company received $600,000 of bridge loans bearing annual interest at a rate of 12.5%; $200,000 of these loans were repaid in February 2000 and the remaining loans were converted into Class E redeemable convertible preferred stock (the "Class E Stock") in conjunction with the Class E conversion (see below). In February, March and April 2000, the Company received additional bridge financing of $1,400,000 from previous investors and $4,100,000 from new and previous investors (the "Class F Bridge Loans"). The Class F Bridge Loans bear annual interest at a rate of 6%. $5,200,000 of these loans were converted into Class F redeemable convertible preferred stock ("Class F Stock") in May 2000, (see below). The remaining $300,000 plus interest was repaid in April 2000. In conjunction with the April bridge loans, investors were granted warrants to purchase 41,000 shares of the Company's common stock at $4.20 per share. These warrants expire April 21, 2005. The estimated fair value of such warrants is $27,000 based on the Black-Scholes Pricing Model. WARRANTS ISSUED UNDER CLASS D AGREEMENT--Under the conditions of the Class D Stock offering, the Company issued warrants in April 2000 to three investors to purchase 356,250 shares of common stock at $3.33, 356,250 shares of common stock at $4.50, and 356,250 shares of common stock at $6. Upon issuance of these warrants the Company recorded a dividend of approximately $1,300,000 for the fair market value of these warrants based on the Black-Scholes Pricing Model. These warrants expire December 31, 2004. CLASS E CONVERSION--During April 2000, the Company authorized 2,000,000 shares of $.01 par value per share Class E Stock. On April 7, 2000, the Company converted $3,550,000 of bridge loans plus interest of $275,559 into 1,226,141 shares of Class E Stock (the "Class E conversion"). Each share of Class E Stock is convertible into one share of common stock at the option of the holder. Holders of the Class E Stock have voting rights equivalent to the number of shares of common stock into which their shares of Class E Stock convert. Holders of the Class E Stock also share with the Class D Stock shareholders the right to appoint representatives to the Board of Directors. The Class E Stock earns cumulative dividends at an annual rate of 12.5% through May 23, 2000 and 6% on and after this date, payable quarterly. Dividends are payable in shares of Class E Stock through May 23, 2000 and after this date, are payable in cash. Upon liquidation, holders of Class E Stock are entitled to receive, out of funds then generally available unpaid dividends previously declared or accrued and a per share amount of $3.12. The Class E Stock is redeemable by the holder at any time after December 31, 2004 for the stated value of $3.12 per share plus accrued but unpaid dividends. The Class E Stock will automatically be converted into shares of common stock upon a change in ownership of 50% of the Company's outstanding voting stock, upon a merger or consolidation of the Company, upon the sale of significant assets of the Company, or upon consummation of a qualified public offering. Class E Stock is senior to Class A, B and C Stock, on parity with Class D Stock and subordinate to Class F Stock. 68 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 15. SUBSEQUENT EVENTS (CONTINUED) In conjunction with the Class E conversion, warrants totaling 315,000, issued in conjunction with the issuance of the Senior Notes in August 1999 (Note 10), were cancelled. In exchange, warrants to purchase 306,535 shares of Class E Stock at $2.50 per share were issued. These warrants expire April 7, 2005. The estimated fair market value of these warrants is approximately $344,000 based on the Binary Option Pricing Model. Pursuant to the stock purchase agreement related to the Class E Stock, the Company is bound by certain covenants. CLASS F ISSUANCE--During May 2000 the Company authorized 7,500,000 shares of $.01 par value Class F Stock. On May 23, 2000, the Company sold 6,785,711 shares of Class F Stock for a total of $28.5 million, and accordingly, the outstanding Class F Bridge Loans of $5,200,000 were converted to Class F Stock. Each share of Class F Stock is convertible into one share of common stock at the option of the holder. Holders of the Class F Stock have voting rights equivalent to the number of shares of common stock into which their shares of Class F Stock convert. The Class F Stock earns cumulative dividends at an annual rate of 6%, payable quarterly. Dividends are payable in cash. The Class F Stock will automatically be converted into shares of common stock immediately prior to a merger or consolidation of the Company or upon the sale of significant assets of the Company, or the consummation of a qualified public offering. The Class F shareholders are entitled to appoint representatives to the Board of Directors. The Class F stock is redeemable by the holder at any time after May 23, 2005 at a price per share equal to the sum of the Class F stated value, initially $4.20 per share, multiplied by the number of shares to be redeemed, plus all accrued but unpaid dividends. The Class F Stock is senior to all other classes of preferred stock. Upon liquidation, holders of the Class F stock are entitled to receive, out of funds then generally available, unpaid dividends previously paid or accrued and a per share amount equal to the Class F stated value. Pursuant to the Stock Purchase Agreement related to the Class F Stock (the "Class F Agreement"), the Company is bound by certain covenants. Under the conditions of the Class F Agreement, the Company will issue warrants for shares of common stock equal to $14,250,000 divided by the warrant price. The warrant price is defined as 75% of the lower of: (i) the effective price per share of common stock paid by the acquirer in a sale transaction as determined by a nationally recognized banking firm chosen by the Company and approved by a majority of the purchasers that hold a majority of the aggregate preferred shares and conversion shares (shares of common stock issuable upon conversion of the Class F Stock) as of the date of consummation of such sale transaction and (ii) the initial price in the first qualified offering of the Company's common stock. These warrants expire on May 23, 2005 and no warrants have been issued at this time. * * * * * * 69 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Beacon Power Corporation: We have audited the accompanying balance sheet of Beacon Power Corporation (the "Company")(a development stage company) as of December 31, 1998 and the related statements of operations, stockholders' deficiency and cash flows for the year then ended and for the period May 8, 1997 (date of inception) through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Beacon Power Corporation as of December 31, 1998, and the results of its operations and its cash flows for the year then ended and for the period May 8, 1997 (date of inception) through December 31, 1998 in conformity with accounting principles generally accepted in the United States of America. /S/ DELOITTE & TOUCHE LLP Boston, Massachusetts May 25, 2000 70 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET
DECEMBER 31, 1998 ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $2,491,151 Prepaid expenses and other current assets................. 20,307 ---------- Total current assets.................................. 2,511,458 PROPERTY AND EQUIPMENT, Net................................. 433,726 DEPOSITS.................................................... 42,595 OTHER ASSETS................................................ 4,375 ---------- TOTAL ASSETS................................................ $2,992,154 ========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES: Accounts payable.......................................... $ 822,723 Accrued compensation and benefits......................... 68,183 Due to related party...................................... 18,611 Other accrued expenses.................................... 15,622 Current portion of capital lease obligations.............. 105,406 ---------- Total current liabilities............................. 1,030,545 ---------- DIVIDENDS PAYABLE........................................... 112,153 ---------- CAPITAL LEASE OBLIGATIONS, Net of current portion........... 76,166 ---------- COMMITMENTS (Note 5) CLASS D REDEEMABLE CONVERTIBLE PREFERRED STOCK (Liquidation preference of $4,750,000)...... 4,493,145 ---------- STOCKHOLDERS' (DEFICIENCY) EQUITY: Preferred stock: Class A Convertible, $.01 par value; 6,000,000, shares authorized 4,622,907 shares issued and outstanding (liquidation preference, $20,571,936)................. 5,345,218 Class B Convertible, $.01 par value; 1 share authorized; no shares issued and outstanding...................... -- Class C Convertible, $.01 par value; 6 shares authorized, issued and outstanding.................... 29,933 Common stock, $.01 par value; 30,000,000 shares authorized; 8,424 shares issued and outstanding....... 84 Deferred consulting expense, net.......................... (37,500) Accumulated deficit during the development stage.......... (8,057,590) ---------- Total stockholders' deficiency........................ (2,719,855) ---------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY.............. $2,992,154 ==========
SEE NOTES TO FINANCIAL STATEMENTS. 71 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
CUMULATIVE FROM MAY 8, 1997 (DATE OF YEAR ENDED INCEPTION) THROUGH DECEMBER 31, DECEMBER 31, 1998 1998 ------------ ------------------ REVENUE..................................................... $ -- $ 232,316 ----------- ------------ OPERATING EXPENSES: Selling, general and administrative....................... 1,188,165 2,356,636 Research and development.................................. 3,523,572 5,815,446 Depreciation and amortization............................. 78,208 78,208 ----------- ------------ Total operating expenses................................ 4,789,945 8,250,290 ----------- ------------ LOSS FROM OPERATIONS........................................ (4,789,945) (8,017,974) ----------- ------------ OTHER INCOME (EXPENSE): Interest income........................................... 11,277 127,925 Interest expense.......................................... (14,730) (14,730) ----------- ------------ Total other income (expense), net....................... (3,453) 113,195 ----------- ------------ NET LOSS.................................................... (4,793,398) (7,904,779) PREFERRED STOCK DIVIDENDS................................... (112,153) (112,153) ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK......... (6,908) (6,908) ----------- ------------ LOSS TO COMMON SHAREHOLDERS................................. $(4,912,459) $ (8,023,840) =========== ============ LOSS PER SHARE--BASIC AND DILUTED........................... $ (583.15) $ (952.50) =========== ============ WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING.................. 8,424 8,424 =========== ============
72 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' DEFICIENCY
CLASS A CLASS C DEFERRED PREFERRED STOCK PREFERRED STOCK COMMON STOCK CONSULTING ---------------------- --------------------- --------------------- EXPENSE, SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT NET --------- ---------- ---------- -------- ---------- -------- ---------- BALANCE, JANUARY 1, 1998........... 4,498,313 $5,033,733 6 $29,933 8,424 $ 84 $ 87,500 Issuance of Class A preferred stock for services............. 120,000 300,000 -- -- -- -- (150,000) Issuance of Series A preferred stock for services and interest on loans....................... 4,594 11,485 -- -- -- -- -- Dividend on Class D preferred stock.......................... -- -- -- -- -- -- -- Repayment of subscription receivable..................... -- -- -- -- -- -- -- Amortization of deferred consulting expense, net........ -- -- -- -- -- -- 25,000 Accretion of redeemable preferred stock to redemption value...... -- -- -- -- -- -- -- Net loss......................... -- -- -- -- -- -- -- --------- ---------- ---------- ------- ---------- -------- --------- BALANCE, DECEMBER 31, 1998......... 4,622,907 $5,345,218 6 $29,933 8,424 $ 84 $ (37,500) ========= ========== ========== ======= ========== ======== ========= DEFICIT ACCUMULATED STOCK DURING THE TOTAL SUBSCRIPTION DEVELOPMENT STOCKHOLDERS' RECEIVABLE STAGE DEFICIENCY ------------ ------------ ------------- BALANCE, JANUARY 1, 1998........... $(2,007,508) $(3,145,131) $ (1,389) Issuance of Class A preferred stock for services............. -- -- 150,000 Issuance of Series A preferred stock for services and interest on loans....................... -- -- 11,485 Dividend on Class D preferred stock.......................... -- (112,153) (112,153) Repayment of subscription receivable..................... 2,007,508 -- 2,007,508 Amortization of deferred consulting expense, net........ -- -- 25,000 Accretion of redeemable preferred stock to redemption value...... -- (6,908) (6,908) Net loss......................... -- (4,793,398) (4,793,398) ----------- ------------ ------------ BALANCE, DECEMBER 31, 1998......... $ -- $(8,057,590) $ (2,719,855) =========== ============ ============
73 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
CUMULATIVE FROM MAY 8, 1997 (DATE OF YEAR ENDED INCEPTION) THROUGH DECEMBER 31, DECEMBER 31, 1998 1998 ------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(4,793,398) $(7,904,779) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 78,208 78,208 Amortization of deferred consulting expense, net........ 175,000 262,500 Services and interest expense paid in preferred stock... 11,485 11,485 Changes in operating assets and liabilities: Accounts receivable................................... 14,487 -- Prepaid expenses and other current assets............. (20,307) (20,307) Accounts payable...................................... 772,723 822,723 Accrued compensation and benefits..................... 37,141 68,183 Due to related party.................................. 18,611 18,611 Other accrued expenses and current liabilities........ (16,359) 15,622 ----------- ----------- Net cash used in operating activities............... (3,722,409) (6,647,754) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in other assets.................................. (19,823) (46,970) Repayment (issuance) of note receivable from officer...... 40,000 -- Purchases of property and equipment....................... (257,423) (257,423) ----------- ----------- Net cash used in investing activities............... (237,246) (304,393) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of subscription receivable...................... 2,007,508 5,000,000 Issuance of Class C preferred stock....................... -- 30,000 Issuance of Class D redeemable preferred stock............ 4,486,237 4,486,237 Repayment of capital leases............................... (72,939) (72,939) ----------- ----------- Net cash provided by (used in) financing activities....... 6,420,806 9,443,298 ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS....................... 2,461,151 2,491,151 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 30,000 -- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,491,151 2,491,151 =========== =========== SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of Class A preferred stock for subscription receivable.............................................. $ -- $ 5,000,000 =========== =========== Acquisition of assets with capital leases................. $ 254,411 $ 254,411 =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS. 74 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND OPERATIONS NATURE OF BUSINESS--Beacon Power Corporation (the "Company" or "Beacon") (a development stage company) was incorporated on May 8, 1997 as a wholly owned subsidiary of SatCon Technology Corporation ("SatCon"). Since its inception, Beacon has been engaged in the development of flywheel devices for storing and transmitting kinetic energy. As of December 31, 1998, the Company has not yet commenced its planned principal activities of marketing and manufacturing such devices and accordingly is accounted for as a development stage company under Statement of Financial Accounting Standards No. 7. As of December 31, 1998, a majority of the Company's outstanding shares is owned by SatCon. However, in conjunction with the October 1998 Class D preferred stock offering, the Company's minority investors were granted the right to appoint a majority of the members of the Company's Board of Directors. The Company has a single operating segment, manufacturing alternative power sources. The Company has no organizational structure dictated by product lines, geography or customer type. OPERATIONS--The Company has experienced net losses since its inception and, as of December 31, 1998, had an accumulated deficit of approximately $8 million. The Company is currently facing the challenge of finalizing development of a viable commercial product and raising adequate capital to sustain operations. As discussed in Note 15, during the period during January 1, 1999 to May 25, 2000, the Company secured additional financing of approximately $32 million. Management believes that this funding is sufficient to continue its operations as a going concern through at least December 31, 2000. 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION ACCOUNTING PRINCIPLES--The accompanying financial statements have been prepared using accounting principles generally accepted in the United States of America. RECAPITALIZATION--The accompanying financial statements reflect a recapitalization of the Company in 1997 when one shareholder exchanged shares of common stock for Class A preferred stock. STOCK SPLIT--The accompanying financial statements reflect a 1.125 for 1 split of the Company's preferred and common stock. All share and per share information herein has been retroactively restated to reflect this split. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES--The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS--Cash and cash equivalents include demand deposits and highly liquid investments with a maturity of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value. PROPERTY AND EQUIPMENT--Property and equipment, including leasehold improvements, are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. 75 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETS--At the occurrence of certain events or changes in circumstances, the Company reviews the carrying value of its long-lived assets to determine if impairment has occurred and, if necessary, adjusts the carrying value accordingly. No adjustments have been required to date. REVENUE RECOGNITION--Revenue relates to work performed under research and development contracts. Revenue is recognized as services are performed. STOCK-BASED COMPENSATION--Compensation expense associated with awards of stock or options to employees is measured using the intrinsic-value method. Compensation expense associated with awards to nonemployees is measured using the fair-value method and is amortized over the vesting period of three years. INCOME TAXES--Deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and tax loss and credit carryforwards using the currently enacted tax rates and laws. A valuation allowance is provided to the extent realization of deferred tax assets is not considered more likely than not. RESEARCH AND DEVELOPMENT--Research and development costs are expensed as incurred. FINANCIAL INSTRUMENTS--The carrying amount of cash and cash equivalents, accounts payable, accrued expenses, notes payable to investors and capital lease obligations approximate their fair values. CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. Substantially all of the Company's cash and cash equivalents are managed by one financial institution. At December 31, 1998, the Company had cash balances at a financial institution in excess of federally insured limits. However, the Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. COMPREHENSIVE LOSS--Comprehensive loss is the same as net loss for all periods presented. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement, as amended, is effective for fiscal years beginning after June 15, 2000. Management is currently evaluating the effect of adopting SFAS No. 133 on the financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). SAB 101 established guidelines for revenue recognition and is effective for periods beginning no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. Management does not expect that the adoption of SAB 101 will have a material impact on the Company's financial condition or results of operations. NET LOSS PER SHARE LOSS PER SHARE--Loss per share has been computed using the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share was computed in the same manner. The impact of the Company's outstanding potential common shares, such as options and warrants 76 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (computed using the treasury stock method) and convertible preferred stock, were excluded from the calculation because such items were antidilutive. The weighted average number of shares of common stock issuable during the year ended December 31, 1998 and the period from May 8, 1997 (date of inception) through December 31, 1998 aggregated 7,247,769 and 4,294,283, respectively, upon the exercise of options and warrants and the conversion of preferred stock outstanding. 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31 1998:
ESTIMATED USEFUL LIVES ---------- Machinery and equipment............................... 5 years $214,635 Furniture and fixtures................................ 7 years 19,423 Office equipment...................................... 3 years 10,904 Leasehold improvements................................ lease term 12,561 Equipment under capital lease obligations............. lease term 254,411 -------- Total............................................... 511,934 Less accumulated depreciation and amortization........ (78,208) -------- Property and equipment, net......................... $433,726 ========
4. CAPITAL LEASE OBLIGATIONS The Company leases equipment under capital lease agreements expiring through 2001. Future obligations under such capital leases as of December 31, 1998 are as follows: 1999........................................................ $113,406 2000........................................................ 77,530 2001........................................................ 3,067 -------- 194,003 Less amount representing interest........................... 12,431 -------- 181,572 Less current portion of capital lease obligations........... 105,406 -------- Capital lease obligations, excluding current portion........ $ 76,166 ========
5. COMMITMENTS The Company leases office and light manufacturing space under operating leases expiring through January 30, 2001 and an operating lease for office equipment expiring October 2001. 77 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. COMMITMENTS (CONTINUED) Future minimum annual lease payments under noncancelable operating leases as of December 31, 1998 are as follows: 1999........................................................ $199,405 2000........................................................ 241,506 2001........................................................ 25,449
Total rent expense was $146,255 for 1998 and the period from May 8, 1997 (date of inception) to December 31, 1998. 6. PREFERRED STOCK CLASS A CONVERTIBLE PREFERRED STOCK--Each share of Class A convertible preferred stock ("Class A Stock") is convertible into one share of common stock at the option of the holder. The Class A Stock is nonvoting. Upon liquidation, holders of Class A Stock are entitled to receive, out of funds then generally available prior to any payment with respect to the holders of common stock, $4.45 per share, plus any declared and unpaid dividends thereon. Holders of the Class A Stock have the right to receive the same dividends as declared by the Board of Directors on common shares on an "as-if-converted" basis. The Class A Stock will automatically be converted into shares of common stock upon the closing of a public offering of common stock of the Company, upon a vote of the Board of Directors or upon the automatic conversion of the Class D preferred stock (see Note 7). Class A Stock is subordinate to Class D, E and F preferred stock and has parity with Class B and C preferred stock. The Class A stock does not have redemption features. 78 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. PREFERRED STOCK (CONTINUED) CLASS B AND C CONVERTIBLE PREFERRED STOCK--Each share of Class B convertible preferred stock ("Class B Stock") and Class C convertible preferred stock ("Class C Stock") is convertible into one share of common stock at the option of the holder. The holders of the Class B and C Stock have voting rights equivalent to the number of shares of common stock into which their shares of Class B and C Stock convert. The Class B and C Stock have the right to receive the same dividends as declared by the Board of Directors on common shares on an "as-if-converted" basis. The Class B and C Stock will automatically be converted into shares of common stock upon the closing of a public offering of common stock of the Company, upon a vote of the Board of Directors, upon the automatic conversion of the Class D preferred Stock (see Note 7), or upon conversion of the Class A Stock. Class B and C Stock have parity with Class A in liquidation and are subordinate to Class D, E and F preferred stock. The Class B and C Stock do not have redemption features. 7. REDEEMABLE PREFERRED STOCK CLASS D REDEEMABLE CONVERTIBLE PREFERRED STOCK--The Company has authorized 6,000,000 shares of Class D convertible preferred stock ("Class D Stock") with a par value of $.01 per share. On October 23, 1998, the Company issued 1,900,000 shares of Class D Stock and received net proceeds of approximately $4,486,000. Issuance costs totaled approximately $264,000 and are being accreted to the carrying value of the Class D Stock over the period to the stock's earliest redemption date. Each share of Class D Stock is convertible into one share of common stock at the option of the holder. The holders of the Class D Stock have voting rights equivalent to the number of shares of common stock into which their shares of Class D Stock convert. Holders of the Class D Stock are also entitled to appoint representatives to the Board of Directors. The Class D Stock earns cumulative dividends at an annual rate of 12.5% through May 23, 2000 and 6% on and after this date, payable quarterly. Dividends can be paid in shares of Class D Stock through May 23, 2000 and after this date, are payable only in cash. Cumulative dividends not paid on Class D Stock total $112,153 as of December 31, 1998. Upon liquidation, holders of Class D Stock are entitled to receive, out of funds then generally available, unpaid dividends previously declared or accrued and a per share amount of $2.50. The Class D Stock is redeemable by the holder at any time after December 31, 2004 for the stated value of $2.50 per share plus accrued, but unpaid, dividends. The Class D Stock will automatically be converted into shares of common stock upon a change in ownership of 50% of the Company's outstanding voting stock, upon a merger or consolidation of the Company or upon the sale of significant assets of the Company, or upon the closing of a qualified public offering. Pursuant to the Stock Purchase Agreement related to the Class D Stock (the "Class D Agreement"), the Company is bound by certain covenants. The Class D Stock is senior to the Class A, B and C Stock, subordinate to Class F preferred stock and has parity with Class E preferred Stock (see Note 14). 8. COMMON STOCK DIVIDENDS--Dividends may be declared and paid on the common stock as and when determined by the Board of Directors subject to any preferential dividend rights of any then outstanding shares of preferred stock. RESERVED SHARES--At December 31, 1998, 7,548,772 shares of common stock were reserved for issuance under the Company's stock option plan, outstanding warrants and for the potential conversion of preferred stock. 79 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. STOCK WARRANTS At its inception in 1997, the Company issued a warrant to purchase 562,500 shares of common stock to an investor at the price of $5.33 per share. The warrant expired unexercised on May 28, 1999. Value ascribed to this warrant was not material. The warrant was valued on the date of grant using the Black-Scholes Option Pricing Model. The assumptions used to value this warrant were as follows: Risk-free interest rate..................................... 6.25% Expected life of warrant.................................... 24 months Expected dividend payment rate, as a percentage of the stock price on the date of grant................................ 0% Assumed volatility.......................................... 48%
10. STOCK OPTIONS The Company's option plans provide for the granting of stock options to purchase up to 4,500,000 shares of the Company's common stock. Options may be granted to employees, officers, directors and consultants of the Company with terms of up to 10 years. Under the terms of the option plans, incentive stock options ("ISOs") are to be granted at fair market value of the Company's stock at the date of grant, and nonqualified stock options ("NSOs") are to be granted at a price determined by the Board of Directors. ISOs and NSOs generally vest ratably over 36 months from the grant date and have contractual lives of up to 10 years. Stock option activity since inception is as follows:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE NUMBER OF EXERCISE FAIR SHARES PRICE VALUE ---------- --------- --------- Outstanding, January 1, 1998................................ 323,937 1.78 Granted................................................... 99,563 1.78 0.75 Canceled, forfeited or expired............................ (5,000) 1.78 ---------- Outstanding, December 31, 1998.............................. 418,500 1.78 ==========
The following table summarized information about stock options outstanding at December 31, 1998:
VESTED WEIGHTED- -------------------------- AVERAGE WEIGHTED- WEIGHTED- NUMBER REMAINING AVERAGE AVERAGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING LIFE PRICE OF OPTIONS PRICE -------------- ----------- ----------- --------- ---------- --------- 1.7$8 418,500 8.68 $1.78 108,188 $1.78 ====== ======= ==== ====== ======= ======
80 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTIONS (CONTINUED) As described in Note 2, the Company uses the intrinsic-value method to measure compensation expense associated with grants of stock options to employees. If the Company had used the fair value method to measure compensation, reported net loss would have been as follows:
CUMULATIVE FROM MAY 8, 1997 (DATE OF INCEPTION) YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1998 1998 ------------ ------------------- Net loss to common shareholders as reported................. $(4,912,459) $ (8,023,840) Net loss pro forma.......................................... (4,987,251) (8,323,973) Loss per share--as reported................................. (583.15) (952.50) Loss per share--pro forma................................... (592.03) (988.13)
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:
Risk-free interest rate..................................... 5.75% Expected life of option..................................... 3 years Expected dividend payment rate, as a percentage of the stock price on the date of grant................................ 0% Assumed volatility.......................................... 58%
The option-pricing model used was designed to value readily tradable stock options with relatively short lives. However, management believes that the assumptions used to value the options and the model applied yield a reasonable estimate of the fair value of the grants made under the circumstances. 11. INCOME TAXES The components of the provision (benefit) for income taxes consisted of the following:
CUMULATIVE FROM MAY 8, 1997 (DATE OF INCEPTION) YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1998 1998 ------------ ------------------- Federal--deferred........................................... $(1,594,955) $(2,632,825) State--deferred............................................. (282,933) (464,616) Increase in valuation allowance............................. 1,877,888 3,097,441 ----------- ----------- Provision (benefit) for income taxes........................ $ -- $ -- =========== ===========
Taxes during interim periods are computed using the estimated rate effective for the entire year. Changes to the estimated rate are reflected in periods in which the estimated charge occurs. 81 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES (CONTINUED) A reconciliation of the statutory federal rate to the effective rate for all periods is as follows: Statutory federal rate benefit.............................. (34)% State, net of federal effect................................ (6) Valuation allowance provided................................ 40 --- Effective rate.............................................. --% ===
The components of the Company's deferred tax assets and liabilities consisted of the following at December 31, 1998: Long-term assets: Net operating loss carryforwards.......................... $ 2,643,962 Research and development credits.......................... 444,513 Loss on contracts......................................... -- Other..................................................... 8,966 ----------- Net deferred tax assets before valuation allowance.......... 3,097,441 Less valuation allowance.................................... (3,097,441) ----------- Net deferred tax assets..................................... $ -- ===========
The valuation allowance increased by $1,877,888 in 1998 primarily due to the generation of net operating loss carryforwards and credits for which realization is not reasonably assured. The Company has available for future periods federal and state tax net operating loss carryforwards for federal and state purposes of approximately $6,639,000 and $6,405,000, respectively, as of December 31, 1998. In addition, the Company has business credits of $444,513 as of December 31, 1998. The net operating loss carryforwards expire beginning in 2012 and 2002 for federal and state tax purposes, respectively. The federal research and development credits begin to expire in 2012. The Company did not pay any income taxes from inception to December 31, 1998. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may have limited, or may limit in the future, the amount of net operating loss carryforwards which could be utilized annually to offset future taxable income and income tax liabilities. The amount of any annual limitation is determined based upon the Company's value prior to an ownership change. 12. BENEFIT PLAN In 1998, the Company created a 401(k) Profit Sharing Plan (the "Plan") for its full-time employees. Each participant in the Plan may elect to contribute a percentage of his or her annual compensation to the Plan on a pre-tax basis up to the annual limit established by the Internal Revenue Service. The Company matches employee contributions at a rate of 50% up to the first 6% of the employee's contributions. The Company may also elect to make a profit-sharing contribution based on the discretion of the Board of Directors. Employee contributions are fully vested. Company matching and profit sharing contributions vest 20% after two years of service consisting of at least 1,000 hours per calendar year and 20% annually thereafter. Company contributions were $19,376 during 1998 and the period from May 8, 1997 (date of inception) to December 31, 1998. 82 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. RELATED-PARTY TRANSACTIONS CONSULTING AGREEMENTS--The Company entered into consulting agreements with three investors in 1998 and 1997. The contracts are seven-year agreements, renewable annually thereafter, for consulting services to be provided by the investors in exchange for annual issuances of shares of the Company's Class A Stock. During 1998 and the period from May 8, 1997 (date of inception) to December 31, 1998, $175,000, and $262,500, respectively, was recorded as consulting expense relating to these agreements, and 120,000 shares of Class A Stock were issued or issuable in 1998 as compensation under these contracts. Prepaid and accrued consulting expenses have been recorded annually, based on the terms and dates of the consulting agreements. The services provided by the investors were recorded based upon the value of the securities issued. These contracts all expire immediately upon an initial public offering of the Company's common stock. PATENTS--The Company has entered into an agreement with SatCon whereby SatCon granted the Company a perpetual license to use the technology patented by SatCon relating to the field of flywheel energy storage products, systems and processes for stationary terrestrial applications. SERVICES AGREEMENTS--SatCon performs certain research and development, administrative and other services for the Company. Amounts paid to SatCon for such services rendered amounted to approximately $443,000, and $1,794,000 during 1998 and the period from May 8, 1997 (date of inception) to December 31, 1998, respectively. As of December 31, 1998, there was $18,611 due to SatCon relating to such services. DISTRIBUTION AGREEMENT--In 1997, the Company signed a 20-year agreement which granted an investor (DQE Enterprises, Inc.) exclusive rights to distribute certain of the Company's products in a territory comprised of seven Mid-Atlantic states and the District of Columbia. However, the Company retained the right to distribute products directly to cable television and telephone companies. 14. SUBSEQUENT EVENTS BRIDGE FINANCING--On August 2, 1999, the Company issued Senior Secured Convertible Promissory Notes (the "Senior Notes") to the Company's primary investors. The Senior Notes bear interest, which is payable upon conversion, at an annual rate of 12.5%, increasing to 15% after six months if the Class E redeemable convertible preferred stock ("Class E Stock") funding had not occurred at that time. The notes are secured by substantially all of the assets of the Company. In connection with the issuance of the Senior Notes, the investors received warrants to purchase shares of the Company's common stock. On April 7, 2000, the Senior Notes and accrued interest were converted into Class E Stock (see below). In conjunction with the issuance of the Senior Notes in August 1999, the Company issued warrants to four investors to purchase 315,000 shares of Class E Stock (or common stock if the warrant was exercised prior to the Class E Stock financing) at an exercise price of $2.50 per share (the "August 1999 warrants"). The estimated fair value of the warrants at the date of grant was $170,000. These warrants expire on August 2, 2004. In conjunction with the Class E conversion in April 2000, the August 1999 warrants were cancelled. WARRANTS ISSUED UNDER CLASS D AGREEMENT--Under the conditions of the Class D Stock offering, the Company issued warrants in October 1999 to three investors to purchase 386,250 shares of common stock at $3.33, 386,250 shares of common stock at $4.50, and 386,250 shares of common stock at $6 (the 83 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. SUBSEQUENT EVENTS (CONTINUED) "October 1999 warrants"). The estimated fair value of the warrants at the date of their issuance was $280,000 based on the Black-Scholes Pricing Model. These warrants expire December 31, 2004. In April 2000, the Company issued additional warrants to three investors to purchase 356,250 shares of common stock at $3.33, 356,250 shares of common stock at $4.50, and 356,250 shares of common stock at $6. The fair market value of these warrants was approximately $1,300,000 based on the Black-Scholes Pricing Model. These warrants expire December 31, 2004. BRIDGE FINANCING--On January 7, 2000, the Company received $600,000 of bridge loans bearing annual interest at a rate of 12.5%; $200,000 of these loans were repaid in February 2000 and the remaining loans were converted into Class E redeemable convertible preferred stock (the "Class E Stock") in conjunction with the Class E conversion (see below). In February, March and April 2000, the Company received additional bridge financing of $1,400,000 from previous investors and $4,100,000 from new and previous investors (the "Class F Bridge Loans"). The Class F Bridge Loans bear annual interest at a rate of 6%. $5,200,000 of these loans were converted into Class F redeemable convertible preferred stock ("Class F Stock") in May 2000, (see below). The remaining $300,000 plus interest was repaid in April 2000. In conjunction with the April bridge loans, investors were granted warrants to purchase 41,000 shares of the Company's common stock at $4.20 per share. These warrants expire April 21, 2005. The estimated fair value of such warrants is $27,000 based on the Black-Scholes Pricing Model. CLASS E CONVERSION--During April 2000, the Company authorized 2,000,000 shares of $.01 par value per share Class E Stock. On April 7, 2000, the Company converted $3,550,000 of bridge loans plus interest of $275,559 into 1,226,141 shares of Class E Stock (the "Class E conversion"). Each share of Class E Stock is convertible into one share of common stock at the option of the holder. Holders of the Class E Stock have voting rights equivalent to the number of shares of common stock into which their shares of Class E Stock convert. Holders of the Class E Stock also share with the Class D Stock shareholders the right to appoint representatives to the Board of Directors. The Class E Stock earns cumulative dividends at an annual rate of 12.5% through May 23, 2000 and 6% on and after this date, payable quarterly. Dividends are payable in shares of Class E Stock through May 23, 2000 and after this date, are payable in cash. Upon liquidation, holders of Class E Stock are entitled to receive, out of funds then generally available unpaid dividends previously declared or accrued and a per share amount of $3.12. The Class E Stock is redeemable by the holder at any time after December 31, 2004 for the stated value of $3.12 per share plus accrued but unpaid dividends. The Class E Stock will automatically be converted into shares of common stock upon a change in ownership of 50% of the Company's outstanding voting stock, upon a merger or consolidation of the Company, upon the sale of significant assets of the Company, or upon consummation of a qualified public offering. Class E Stock is senior to Class A, B and C Stock, on parity with Class D Stock and subordinate to Class F Stock. In conjunction with the Class E conversion, warrants totaling 315,000, issued in conjunction with the issuance of the Senior Notes in August 1999 were cancelled. In exchange, warrants to purchase 306,535 shares of Class E Stock at $2.50 per share were issued. These warrants expire April 7, 2005. The estimated fair market value of these warrants is approximately $344,000 based on the Binary Option Pricing Model. 84 BEACON POWER CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. SUBSEQUENT EVENTS (CONTINUED) Pursuant to the stock purchase agreement related to the Class E Stock, the Company is bound by certain covenants. CLASS F ISSUANCE--During May 2000 the Company authorized 7,500,000 shares of $.01 par value Class F Stock. On May 23, 2000, the Company sold 6,785,711 shares of Class F Stock for a total of $28.5 million, and accordingly, the outstanding Class F Bridge Loans of $5,200,000 were converted to Class F Stock. Each share of Class F Stock is convertible into one share of common stock at the option of the holder. Holders of the Class F Stock have voting rights equivalent to the number of shares of common stock into which their shares of Class F Stock convert. The Class F Stock earns cumulative dividends at an annual rate of 6%, payable quarterly. Dividends are payable in cash. The Class F Stock will automatically be converted into shares of common stock immediately prior to a merger or consolidation of the Company or upon the sale of significant assets of the Company, or the consummation of a qualified public offering. The Class F shareholders are entitled to appoint representatives to the Board of Directors. The Class F stock is redeemable by the holder at any time after May 23, 2005 at a price per share equal to the sum of the Class F stated value, initially $4.20 per share, multiplied by the number of shares to be redeemed, plus all accrued but unpaid dividends. The Class F Stock is senior to all other classes of preferred stock. Upon liquidation, holders of the Class F stock are entitled to receive, out of funds then generally available, unpaid dividends previously paid or accrued and a per share amount equal to the Class F stated value. Pursuant to the Stock Purchase Agreement related to the Class F Stock (the "Class F Agreement"), the Company is bound by certain covenants. Under the conditions of the Class F Agreement, the Company will issue warrants for shares of common stock equal to $14,250,000 divided by the warrant price. The warrant price is defined as 75% of the lower of: (i) the effective price per share of common stock paid by the acquirer in a sale transaction as determined by a nationally recognized banking firm chosen by the Company and approved by a majority of the purchasers that hold a majority of the aggregate preferred shares and conversion shares (shares of common stock issuable upon conversion of the Class F Stock) as of the date of consummation of such sale transaction and (ii) the initial price in the first qualified offering of the Company's common stock. These warrants expire on May 23, 2005 and no warrants have been issued at this time. * * * * * * 85 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On May 12, 1999, we dismissed PricewaterhouseCoopers LLP from its position as our independent public accountants. The decision to change accountants was recommended by our Audit Committee and approved by our Board of Directors. None of the reports of PricewaterhouseCoopers LLP on our financial statements for the years ended September 30, 1998 and 1997 contained an adverse opinion or disclaimer of opinion, or was qualified or modified at to uncertainty, audit scope or accounting principles. During the years ended September 30, 1998 and 1997, and any subsequent interim period immediately preceding the date of dismissal of PricewaterhouseCoopers LLP, we had no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to make reference to such matter of disagreement(s) in connection with its report on our financial statements. None of the reportable events listed in Item 304 (a) (1) (v) of Regulation S-K under the Securities Act of 1934, as amended, occurred with respect to the years ended September 30, 1998 and 1997 or the subsequent interim period preceding the dismissal of PricewaterhouseCoopers LLP. On May 25, 1999, we engaged Arthur Andersen LLP as our independent public accountants. The decision to engage Arthur Andersen LLP was recommended by our Audit Committee and approved by our Board of Directors. During our two most recent fiscal years, and any subsequent interim period prior to engaging Arthur Andersen LLP, (i) neither we nor anyone on our behalf consulted Arthur Andersen LLP regarding the application of accounting principles to a specific completed or proposed transaction or the type of audit opinion that might be rendered on our financial statements; and (ii) no written report or oral advice concerning the same was provided to us that Arthur Andersen LLP concluded was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue. 86 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to directors required under this item is incorporated herein by reference to the information set forth under the section entitled "Election of Directors" in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders which was held on March 15, 2000 (the "2000 Proxy Statement"). Information relating to certain filings of Forms 3, 4, and 5 of the Company is contained in the 2000 Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION The information required under this item is incorporated by reference to the section entitled "Compensation of Executive Officers" in the 2000 Proxy Statement. The sections entitled "Compensation Committee Report on Executive Compensation" and "Comparative Stock Performance Graph" in the 2000 Proxy Statement are not incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this item is incorporated by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the 2000 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this item is incorporated by reference to the section entitled "Certain Relationships and Related Transactions" in the 2000 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. CONSOLIDATED FINANCIAL STATEMENT OF SATCON TECHNOLOGY CORPORATION AND ITS SUBSIDIARIES: Consolidated Balance Sheets as of September 30, 1999 and 1998 Consolidated Statements of Operations for the Years Ended September 30, 1999 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1999 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended September 30, 1999 1998 and 1997 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULE OF SATCON TECHNOLOGY CORPORATION AND ITS SUBSIDIARIES: Schedule II; Valuation and Qualifying Accounts for the Years Ended September 30, 1999 1998 and 1997 All other financial statement schedules not listed have been omitted because they are either not required, not applicable, or the information has been included elsewhere in the consolidated financial statements or notes thereto. 3. FINANCIAL STATEMENTS OF BEACON POWER CORPORATION Balance Sheets at December 31, 1998 and 1999 87 Statements of Operations for the Period May 8, 1997 (Date of Inception) to December 31, 1997 and for the Years Ended December 31, 1998 and 1999 Statements of Stockholders' Equity (Deficiency) for the Period May 8, 1997 (Date of Inception) to December 31, 1997 and for the Years Ended December 31, 1998 and 1999 Statement of Cash Flows for the Period May 8, 1997 (Date of Inception) to December 31, 1997 and for the Years Ended December 31, 1998 and 1999 Notes to Financial Statements 3. EXHIBITS: The Exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K: On August 26, 1999, we filed a Current Report on Form 8-K, dated August 25, 1999, in connection with our completion of an $8 million private placement of 8,000 shares of our Series A Convertible Preferred Stock, $0.01 par value per share, with Brown Simpson Strategic Growth Funds. On November 5, 1999, we filed a Current Report on Form 8-K, dated October 21, 1999, in connection with our acquisition of Ling Electronics, Inc. and Ling Electronics, Ltd. from Mechanical Technology Incorporated and an investment by Mechanical Technology Incorporated of approximately $7,000,000. On November 24, 1999, we filed a Current Report on Form 8-K, dated November 16, 1999, in connection with our purchase of certain intellectual property, equipment and other assets from Northrop Grumman Corporation. 88 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cambridge, Commonwealth of Massachusetts on August 14, 2000. SATCON TECHNOLOGY CORPORATION By: /s/ DAVID B. EISENHAURE ----------------------------------------- David B. Eisenhaure PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, This report has been signed by the following persons in the capacities and on the dates indicated.
NAME CAPACITY DATE ---- -------- ---- President, Chief Executive /s/ DAVID B. EISENHAURE Officer and Chairman of the ---------------------------------------- Board of Directors August 14, 2000 David B. Eisenhaure (Principal Executive Officer) Vice President, Chief /s/ SEAN F. MORAN Financial Officer and ---------------------------------------- Treasurer (Principal August 14, 2000 Sean F. Moran Financial and Principal Accounting Officer) /s/ MICHAEL C. TURMELLE Director, Vice President, ---------------------------------------- Chief Operating Officer and August 14, 2000 Michael C. Turmelle Secretary /s/ JAMES L. KIRTLEY, JR. ---------------------------------------- Director, Vice President, and August 14, 2000 James L. Kirtley, Jr. Chief Scientist /s/ MARSHALL J. ARMSTRONG ---------------------------------------- Director August 14, 2000 Marshall J. Armstrong /s/ ALAN P. GOLDBERG ---------------------------------------- Director August 14, 2000 Alan P. Goldberg /s/ THOMAS A. HURKMANS ---------------------------------------- Director August 14, 2000 Thomas A. Hurkmans ---------------------------------------- Director Gerald L. Wilson
89 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ------------------------------------------------------------ 2.1(1) --Amended and Restated Asset Purchase Agreement among SatCon Film Microelectronics, Inc., Film Microelectronics Inc., and Albert R. Snider, dated as of April 3, 1997. 2.2(2) --Stock Purchase Agreement, dated as of October 21, 1999, by and among the Registrant, Mechanical Technology Incorporated, Ling Electronics, Inc. and Ling Electronics, Ltd. 2.3(3) --Asset Purchase Agreement, dated as of November 16, 1999, by and between the Registrant and Northrop Grumman Corporation. 3.1(4) --Certificate of Incorporation of the Registrant. 3.2(4) --Bylaws of the Registrant. 3.3(5) --Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on May 12, 1997. 3.4(5) --Bylaws Amendment of the Registrant. 3.5(6) --Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on March 17, 1999. 3.6(6) --Certificate of Designation of Series and Statement of Variations of Relative Rights, Preferences and Limitations of Preferred Stock, dated as of August 25, 1999, relating to the Series A Preferred Stock. 4.1(4) --Specimen Certificate of Common Stock, $.01 par value. 10.1(4)(*) --Employment Agreement, dated July 1, 1992, between the Registrant and David B. Eisenhaure. 10.2(4)(*) --Employment Agreement, dated July 1, 1992, between the Registrant and Michael C. Turmelle. 10.3(4)(*) --1992 Stock Option Plan. 10.4(7)(*) --1994 Stock Option Plan. 10.5(8)(*) --1996 Stock Option Plan. 10.6(9)(*) --1998 Stock Incentive Plan. 10.7(*)(17) --1999 Stock Incentive Plan. 10.8(4) --Lease, dated October 21, 1993, between the Registrant and Gunwyn/First Street Limited Partnership. 10.9(5) --Manufacturing Agreement between Applied Materials, Inc. and its wholly-owned subsidiaries and the Registrant, dated as of February 20, 1997. 10.10(10) --Securities Purchase Agreement, dated as of May 28, 1997, by and among the Registrant, Beacon Power Corporation and Duquesne Enterprises. 10.11(11) --Securities Purchase Agreement, dated as of October 23, 1998, by and among Beacon Power Corporation, Perseus Capital, L.L.C., Duquesne Enterprises, Micro Generation Technology Fund, L.L.C. and the Registrant. 10.12(11) --Amended and Restated License Agreement, dated as of October 23, 1998, by and among the Registrant and Beacon Power Corporation.
90
EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ------------------------------------------------------------ 10.13(11) --Registration Rights Statement, dated as of October 23, 1998, by and among Beacon Power Corporation, Perseus Capital, L.L.C., Duquesne Enterprises, Micro Generation Technology Fund, L.L.C., and the Registrant, setting forth certain registration rights granted by the Registrant. 10.14(11) --Registration Rights Statement, dated as of October 23, 1998, by and among Beacon Power Corporation, Perseus Capital, L.L.C., Duquesne Enterprises, Micro Generation Technology Fund, L.L.C. and the Registrant, setting forth certain registration rights granted by Beacon Power Corporation. 10.15(12) --Form of Common Stock Purchase Warrant issued to certain individuals and entities on June 15, 1998. 10.16(12) --Form of Common Stock Purchase Warrant issued to certain individuals and entities on November 11, 1998. 10.17(12) --Lease, dated February 27, 1996, by and between the Registrant and Diamond Management, Inc. 10.18(12) --Lease, dated March 5, 1998, by and between the Registrant and Harold W. Slovin. 10.19(12) --Discretionary Demand Line of Credit Letter Agreement, dated as of December 16, 1998, between the Registrant, SatCon Film Microelectronics, Inc., K&D MagMotor Corp. and BankBoston, N.A., together with Promissory Note, dated as of December 16, 1998, made in favor of BankBoston, N.A. by the Registrant, SatCon Film Microelectronics, Inc. and K&D MagMotor Corp. and Security Agreement, dated as of December 16, 1998, between the Registrant and BankBoston N.A. 10.20(17) --Modification, dated April 9, 1999, to Discretionary Demand Line of Credit Letter Agreement, dated as of December 16, 1998, between the Registrant, SatCon Film Microelectronics, Inc., K&D MagMotor Corp. and BankBoston N.A. together with modification, dated May 7, 1999, to Discretionary Demand Line of Credit Letter Agreement, dated as of December 16, 1998, between the Registrant, SatCon Film Microelectronics, Inc., K&D MagMotor Corp. , HyComp Acquisition Corp. and BankBoston, N.A. 10.21(12) --North America Distributor Agreement, dated June 4, 1998, by and between SatCon Film Microelectronics, Inc., a division of the Registrant, and Falcon Electronics, Inc. 10.22(13) --Asset Purchase Agreement, dated as of January 4, 1999, among K&D MagMotor Corp., the Registrant, Inductive Components, Inc., Lighthouse Software, Inc. and Thomas Glynn. 10.23(14) --Asset Purchase Agreement dated as of March 31, 1999 by and between HyComp, Inc. and HyComp Acquisition Corp., a wholly-owned subsidiary of the Registrant. 10.24(14) --Note Purchase Agreement dated as of June 22, 1999 by and among Beacon Power Corporation, Perseus Capital, L.L.C., Duquesne Enterprises, Inc., Micro Generation Technology Fund, L.L.C. and the Registrant. 10.25(14) --Note and Warrant Purchase Agreement dated as of August 2, 1999 by and among Beacon Power Corporation, Perseus Capital, L.L.C., Duquesne Enterprises, Inc., Micro Generation Technology Fund, L.L.C. and the Registrant. 10.26(15) --License and Technical Assistant Agreement dated as of June 7, 1999 by and between Delco Remy America, Inc. and the Registrant. 10.27(6) --Securities Purchase Agreement, dated as of August 25, 1999, among the Registrant and the purchasers listed on Schedule I thereto.
91
EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ------------------------------------------------------------ 10.28(6) --Registration Rights Agreement, dated as of August 25, 1999, among the Registrant and the investors named on the signature pages thereof. 10.29(6) --Form of Warrants issued on August 25, 1999 in connection with the sale of the Series A Preferred Stock. 10.30(2) --Securities Purchase Agreement, dated as of October 21, 1999, between the Registrant and Mechanical Technology Incorporated. 10.31(2) --SatCon Registration Rights Agreement, dated as of October 21, 1999, between the Registrant and Mechanical Technology Incorporated. 10.32(2) --MTI Registration Rights Agreement, dated as of October 21, 1999, between Mechanical Technology Incorporated and the Registrant. 10.33(2) --Form of Stock Purchase Warrant issued on October 21, 1999 by the Registrant to Mechanical Technology Incorporated. 10.34(2) --Form of Stock Purchase Warrant issued on October 21, 1999 by Mechanical Technology Incorporated to the Registrant. 10.35(3) --Sublease, dated November 16, 1999, between the Registrant and Northrop Grumman Corporation. 10.36(3) --Transition Services Agreement, dated as of November 16, 1999, between the Registrant and Northrop Grumman Corporation. 10.37(3) --Memorandum of Understanding, entered into on November 16, 1999, between the Registrant and Northrop Grumman Corporation. 10.38(3) --Registration Rights Agreement, dated as of November 16, 1999, between the Registrant and Northrop Grumman Corporation. 10.39(3) --Form of Stock Purchase Warrant issued on November 16, 1999 by the Registrant to Northrop Grumman Corporation. 10.40(3) --Form of Stock Purchase Warrant to be issued to Northrop Grumman Corporation upon the satisfaction of certain conditions. 16(16) --Letter Regarding Registrant's Change in Certifying Accountant. 21.1(17) --Subsidiaries of the Registrant. 23.1 --Consent of Arthur Andersen LLP. 23.2 --Consent of PricewaterhouseCoopers LLP. 23.3 --Consent of Deloitte & Touche LLP. 27 --Financial Data Schedule. 99 --Risk Factors.
------------------------ (1) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated April 16, 1997. (2) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated October 21, 1999 (3) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 16, 1999. 92 (4) Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286). (5) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997. (6) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated August 25, 1999. (7) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1994. (8) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996. (9) Incorporated by reference to Exhibit B to the Registrant's Definitive Schedule 14A filed January 26, 1999. (10) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated May 28, 1997. (11) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated October 23, 1998. (12) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the period ended September 30, 1998. (13) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated January 4, 1999. (14) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1999. (15) Incorporated by reference to Exhibits to the Registrant's Amendment No. 1 to the Quarterly Report on Form 10-Q for the period ended March 31, 1999. (16) Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated May 12, 1999. (17) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1999. (*) Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K. 93