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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 1-11512
SATCON TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its Charter)
DELAWARE 04-2857552
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
161 FIRST STREET,
CAMBRIDGE, MASSACHUSETTS 02142
(Address of principal executive offices) (ZIP CODE)
(617) 661-0540
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act
TITLE OF CLASS
COMMON STOCK, $.01 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Registrant's Common Stock, $.01 par value
per share, held by non-affiliates of the Registrant was $106,871,599 based on
the last reported sale price of the Registrant's Common Stock on the Nasdaq
National Market as of the close of business on December 12, 2000 ($13.125).
There were 13,877,185 shares of Common Stock outstanding as of December 12,
2000.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 2001 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
SatCon was organized as a Massachusetts corporation in 1985 and
reincorporated as a Delaware corporation in 1992. We are developing enabling
technologies for the emerging distributed power generation and power quality
markets. We design, develop and manufacture high-efficiency, reliable and
long-lived electronics products and a variety of standard and custom
high-performance motors to suit specific applications. Our power and energy
management products convert, condition, store and manage electricity for
businesses and consumers that require high-quality, uninterruptible power. We
are utilizing our engineering and manufacturing expertise to develop products we
believe will be integral components of distributed power generation and power
quality systems. Our specialty motors are typically designed and manufactured
for unique customer requirements such as high power-to-size requirements or high
efficiency.
We have been developing technology in power and energy management since our
inception. Power and energy management is the combination of products and
technology to improve the efficiency of machines and systems in the generation,
storage or usage of energy. Over the past 15 years, we have been pursuing a dual
approach for growth in these markets. The first objective is to develop
technology that meets a market demand and then transition that technology into
commercial products. The second objective is to expand our manufacturing
capabilities and product base through acquisitions.
Prior to 1993, we were primarily funded through research and development
contracts with the U.S. government. These contracts were directed at developing
new technologies in motion control, control software and electronics. Through
this work, we built an engineering base in magnetics, motor/drive technology,
digital signal processing and high-speed electronics. From 1993 to 1996, we
expanded that base through commercially-funded research and development to
include high-power electronics, high-density packaging and advanced materials.
Together, these engineering skills formed the foundation for our power and
energy management technology. Since 1996, we have concentrated on employing that
technology to solving market needs and transitioning from technology development
to product development and manufacturing.
Beginning in 1996 we introduced our first two commercial products, the
"Inertial Battery 20C1000" and the "Century 1 ISAM", which were transitioning
from the laboratory to the marketplace. Today the "Inertial Battery 20C1000" has
evolved into the 2kWh (kilowatt hour) flywheel energy storage device of our
affiliate, Beacon Power Corporation. Our second product, the "Century 1 ISAM,"
or integrated suspension and motor system, now called MagLev-TM-, is used in
Applied Materials' rapid thermal processing equipment, and represents a large
portion of the revenue generated by our MagMotor division which manufactures
motors.
Over the past five years, we have continued to transition our technology
into new products that are sold commercially, including our RF, or radio
frequency, satellite uplinks, aluminum nitride power resistors for cellular
telephones, and high efficiency motors for industrial automation. Since 1996,
our revenue has increased from $9.4 million, primarily from funded research and
development, to $31.1 million in 2000, of which $22.4 million, or 72%, was
derived from product sales. We are also introducing new products, which we
expect to transition into commercial production over the next few years,
products such as our PowerGate-TM- power conversion system, GridLink-TM- utility
grid interface and our six-degree-of-freedom shaker test system for vibration
testing of electronic components.
Since 1996, we have expanded our business and capabilities through several
acquisitions. In January 1997, we acquired K&D MagMotor Corp., a manufacturer of
custom and standard electric motors, which is now our MagMotor division. In
April 1997, we acquired Film Microelectronics, Inc., a manufacturer of thin film
substrates and hybrid microelectronics. In January 1999, we acquired Inductive
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Components, Inc., a value-added supplier of customized electric motors, and
Lighthouse Software, Inc., a supplier of control software for machine tools. We
acquired HyComp, Inc., a manufacturer of hybrid microelectronics in April 1999
followed by Ling Electronics, Inc., a manufacturer of shaker vibration test
systems, power converters, amplifiers and controllers, which we acquired in
October 1999. In November 1999, we acquired intellectual property, tooling and
other assets from Northrop Grumman Corporation enabling us to manufacture and
sell electric drivetrains.
These acquisitions have provided us with increased revenues, a manufacturing
capability to transition our technology into commercial products, and a market
presence from which we can derive the need for new products based on our
technology. Over the past five years, we have sought to expand our markets in
power and energy management to include telecommunications, industrial
automation, semiconductor manufacturing, aircraft, satellites, electric and
hybrid-electric vehicles and distributed power generation.
In fiscal year 2000, we organized SatCon into three operating segments:
motion control products, electronics products and funded research and
development. In our motion control products segment, our MagMotor division's
annual revenue increased by 128% from fiscal year 1999 to fiscal year 2000. Of
the $3.6 million increase in our MagMotor division's sales, a large proportion
was due to sales of our MagLev-TM- systems to Applied Materials. There was also
an increase in sales of our value-added motor product lines. We sell these
motors into the semiconductor and factory automation markets such as those sold
into the machine tool markets. We also realized the benefits of a national sales
representative network that has increased our overall sales efforts.
In October 1999, we completed the acquisition of Ling Electronics. This
acquisition has brought $7.4 million in increased revenue to our motion control
products segment. Ling Electronics also offers us opportunities to introduce new
products based on our technology. Earlier in fiscal year 2000, we commenced the
development of a new six-degree-of-freedom magnetic levitation shaker system
that tests electronics components.
In our electronics products segment, annual revenue increased by 36% from
fiscal year 1999 to fiscal year 2000. The increase was primarily driven by new
product sales of Film Microelectronics' RF product lines, which include
satellite uplink amplifiers, communications uplinks and power resistors for
cellular telephones.
During fiscal year 2000, we introduced our new PowerGate-TM- power
conversion system, our GridLink-TM- utility grid interface system that allows
distributed power systems to operate in either grid-parallel (connected to the
grid) and/or grid-independent (disconnected from the grid) modes, and our
MegaVerter-TM- modular power inverter for higher power commercial and industrial
range distributed power generation systems.
We also successfully installed a new automated assembly line in our
Marlborough, Massachusetts facility. We anticipate having the initial capability
of manufacturing 25,000 PowerGate-TM- power converter systems per year by the
end of fiscal year 2001 and to be able to expand our capacity as demand
increases. The assembly line is already producing electronic circuits for other
applications, including RF amplifier circuits.
At our Technology Center, revenue from funded research and development
increased by $2.3 million from fiscal year 1999 to fiscal year 2000, primarily
as a result of work performed under the Department of Energy's AIPM, automotive
integrated power module, program to develop low-cost power conversion modules
for electric and hybrid-electric automobiles. The work builds on and further
develops our hybrid-electric automotive power conversion technology and
products.
Also, at the beginning of fiscal year 2000, we acquired the power
electronics products assets of Northrop Grumman. These assets, previously
developed as part of the electric vehicle group of Westinghouse, include power
electronics, controllers, and motors for electric and hybrid-electric vehicles,
micro-turbine power generation and energy storage products. In addition to their
power electronics
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product base, we received extensive intellectual property, including all product
development and designs and patents for several power electronics products and
system designs.
We and our affiliate, Beacon Power Corporation, are focusing our development
and manufacturing efforts on products for high-growth markets in the following
categories:
PRODUCT CATEGORY PRODUCTS MARKETS
- ---------------- -------- -------
Electronics and power Controllers, inverters, Distributed power generation
electronics hybrid microcircuits, thin (including fuel cells and
film substrates, and microturbines),
amplifiers telecommunications, aircraft,
satellites and medical
instruments
High-performance motors Industrial automation motors, Hybrid-electric vehicles,
shaker systems, and electric industrial automation,
drivetrains machine tools, semiconductor
manufacturers
Beacon Power's flywheel and Flywheels Uninterruptible power
energy storage supplies
We are working with companies in the distributed power generation and power
quality markets to develop products that we believe will establish industry
standards. Plug Power, Inc., H Power Corp. and IdaTech LLC, formerly Northwest
Power Systems LLC, are currently evaluating our PowerGate-TM- power electronics
and control software for use in residential fuel cell power generation systems.
In addition, we have received an order from Nuvera Fuel Cells for two of our
PowerGate-TM- power converters. We are also working with FuelCell Energy, Inc.
to develop our MegaVerter-TM- power electronics and control software for use in
industrial fuel cell power generation systems. A major automotive manufacturer
is evaluating our high-performance motors for auxiliary uses in fuel cell
hybrid-electric vehicles. Beacon Power has received an order for 100 flywheel
energy storage systems from TLER Associates Ltd. and an initial order for
flywheels from Cox Communications, Inc. In addition, Beacon Power is conducting
field tests of its flywheel energy storage systems with Bell Atlantic Network
Services, Inc., now part of Verizon Communications, Century Communications
Corporation, now part of Adelphia Communications Corporation, and WinDBreak
Cable. Beacon Power is developing flywheel energy storage systems using
technology developed by us and licensed to Beacon Power. As of November 30,
2000, we beneficially owned approximately 25.3% of Beacon Power's common stock.
We have specialized engineering expertise in the areas of power electronics,
electromechanics, mechanical and thermal dynamics, system controls and
microelectronic design. We have leveraged research and development funding from
industry and government sources to design, develop and manufacture electronics
for power conversion, amplification and storage, high-performance electric
motors, electric drivetrains, flywheel energy storage systems and system
controls software. We continue to pursue industry and government funding to
supplement the on-going development of our products.
INDUSTRY BACKGROUND
Distributed power, or on-site power independent of the electric utility
grid, locates power-generating capability closer to the end user, while power
quality systems maintain high quality electricity despite power surges and
shortages. These systems include fuel cell and microturbine power generation
systems, hybrid-electric vehicles and flywheel energy storage systems that store
electricity in mechanical form and are an alternative to traditional lead-acid
batteries.
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The distributed power generation and power quality industries are entering a
period of rapid expansion as products approach commercialization and mass
production. In the United States, this expansion is being driven by several
factors, including:
- INCREASING DEMAND FOR ELECTRICITY, DRIVEN BY THE PROLIFERATION OF
COMPUTERS AND E-COMMERCE. The demand for electricity has increased rapidly
in recent years due in large part to the use of computers, the Internet,
e-commerce and telecommunications products. According to the Energy
Information Administration, or EIA, over the past two decades, the
percentage of energy provided by electricity to U.S. housing units
increased from 23% of all energy consumed in 1978 to 35% in 1997. In a
1999 report, Greening Earth Society science advisor Mark Mills estimated
that the share of all U.S. electricity currently consumed by
computer-based microprocessors was 13% and that within two decades, 30% to
50% of the nation's electric supply may be required to meet the direct and
indirect needs of the Internet. This growth continues a long-term trend
toward electrification of energy use throughout the developed world.
- GROWING DEMAND FOR HIGH-QUALITY POWER, AS MORE MISSION-CRITICAL AND
SENSITIVE ELECTRONICS ARE CONNECTED TO THE ELECTRIC UTILITY GRID. The
growing importance of e-commerce and the proliferation of electronics and
computer networks that are power-quality sensitive has heightened the
awareness of the importance of the quality and reliability of electricity.
Power-quality problems such as power outages, voltage instability and low
voltage in the power delivery network are significant problems for modern
computers and telecommunications equipment. As the Internet economy grows,
avoiding downtime and damaged equipment due to power-related problems will
become increasingly important. According to the Electric Power Research
Institute, or EPRI, power disruptions cost the economy approximately
$30 billion each year.
- CAPACITY CONSTRAINTS ON THE ELECTRIC UTILITY GRID THAT HAVE RESULTED IN
DECREASED RELIABILITY IN CERTAIN POWER MARKETS. Historically, the growth
in the demand for electricity has met the expansion of the existing
infrastructure, including additional investments in centralized generating
plants, high-voltage transmission lines and distribution wires. Reliance
upon this infrastructure has been and continues to be problematic for a
number of reasons. First, according to the Department of Energy, capacity
reserve margins have shown a declining trend since 1982, indicating the
increased potential for power outages during peak periods. Second, some
areas of the country have experienced capacity constraints and
weather-related outages due to the nature of the existing transmission and
distribution system. Finally, there is difficulty in finding suitable
locations for additional generating plants and transmission towers, due to
environmental concerns and local zoning laws.
- HEIGHTENING ENVIRONMENTAL CONCERNS REGARDING TRANSPORTATION VEHICLES AND
CONVENTIONAL POWER GENERATION. Among the most significant environmental
effects of energy production and consumption is the emission of greenhouse
gases, such as carbon dioxide, methane and nitrous oxide. The United
States, as one of the world's largest producers and consumers of fossil
fuels, is responsible for a major portion of the global energy-related
emissions. Utilities, due to their reliance on coal-burning power plants,
and automobiles are two of the largest sources of air pollution.
Environmental concerns, such as those that prompted the Kyoto Protocol,
are emphasizing the need to find cleaner forms of transportation and power
generation.
As a result of these market dynamics, power generation and environmental
concerns, business and residential consumers are seeking more reliable, cleaner
and cost-effective alternatives to traditional power generation. We believe that
distributed power generation and power quality products will meet these demands.
We are focused on selling our enabling products into the distributed power
generation, hybrid-electric vehicle and uninterruptible power supply markets.
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DISTRIBUTED POWER GENERATION
With the deregulation of the electric utility industry, the ability to offer
new forms of electrical power generation such as distributed power generation is
creating new markets, products and opportunities. Distributed power, or on-site
power independent of the electric utility grid, locates power generating
capability closer to the end user. The distributed generation of electrical
power from fuel cells or microturbine systems is potentially an environmentally
cleaner, more efficient and more reliable means of producing electricity
compared to conventional generation and distribution methods. Distributed power
generation systems can also alleviate congestion on highly loaded utility
distribution networks and offer an alternative to power line extensions in
remote regions. In response to the many power outages in 1999, the U.S.
Department of Energy's Power Outage Study Team recommended the increased use of
distributed power. Fuel cells and microturbines are two technologies that are
being developed to address the distributed power generation market.
Fuel cells are power generation devices that combine hydrogen, derived from
a source such as natural gas or propane, with oxygen to create electricity
through an electrochemical reaction rather than through internal combustion. As
a result, fuel cells release only a minimal amount of carbon dioxide into the
atmosphere. The only other by-products of fuel cell power generation systems are
water and heat, which can be used as a supplemental source of heat for homes and
buildings. Fuel cells typically generate a varying level of low-voltage direct
current, or DC, electricity which is then converted to useable alternating
current, or AC, electricity using power electronics and control software.
Microturbines are small turbines that generate electricity. Microturbines
operate on the same principle as a jet engine but can use a variety of
commercially available fuels, such as natural gas, diesel, kerosene and propane.
Microturbines generate a high-frequency AC electricity, which is then converted
to useable household or industrial current through power electronics and control
software.
HYBRID-ELECTRIC VEHICLES
Prices of oil and refined products will strongly influence the demand for
hybrid-electric vehicles. In the last year, significant increases in crude oil
and gasoline prices have renewed a national public policy debate regarding
substitute fuel sources. We believe these higher prices, if sustained, will
increase demand for substitute fuel sources and may result in regulatory
incentives to develop and commercialize vehicles powered by alternative fuel
sources.
In addition, automobiles are a major contributor to air pollution, and we
believe that new hybrid-electric vehicles can help to solve this problem. The
Clean Air Act Amendments of 1990 and the National Energy Policy Act of 1992 have
caused automobile manufacturers to concentrate on the development of
low-emission vehicles and zero-emission vehicles such as hybrid-electric or
electric vehicles. The California Air Resource Board also has adopted
regulations that require 10% of a manufacturer's new car sales in California be
zero-emission vehicles by 2003.
While electric cars offer the promise of zero emissions, they are unable to
provide the driving range and performance demanded by consumers due to
performance limitations of existing battery power technology. Hybrid-electric
vehicles can reduce air pollution while offering greater driving range and
performance than electric vehicles. Hybrid-electric vehicles function by
creating mechanical energy from a source such as an internal combustion engine
or fuel cell. The mechanical energy is then transformed into electricity by a
generator and transferred to an electric drivetrain which propels the vehicle.
Excess electricity is stored in an energy storage system consisting of a battery
or flywheel. All hybrid-electric vehicles require complex power and control
electronics to convert, condition and manage electricity, as well as
high-performance motors, electric drivetrains and energy storage systems.
We believe that fuel cell hybrid-electric vehicles have the potential to be
the leading alternative to internal combustion engines in meeting clean air
initiatives while offering greater driving range and
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performance than electric vehicles. The U.S. government has formed the
Partnership for a New Generation of Vehicles with Ford Motor Co., General Motors
Corp. and DaimlerChrysler AG to develop hybrid-electric vehicles that will be
capable of achieving 80 miles per gallon by 2004, and we believe that each of
these automakers has made significant progress in developing hybrid-electric
vehicles.
UNINTERRUPTIBLE POWER SUPPLIES
Uninterruptible power supply, or UPS, systems maintain a predictable quality
of electricity during power outages or periods of low power quality. As a
result, UPS systems are used to support the operation of computers,
manufacturing facilities and communication and other electronic networks in the
event of power losses. Of these applications, we believe the communications
market will be among the earliest adopters of UPS systems. Low power quality
represents problems for industries where equipment can lose synchronization and
shut down during brief power disruptions. The growth of the Internet, e-commerce
and automated manufacturing is driving the demand for UPS systems. As technology
further impacts all segments of the economy, a larger group of businesses and
individuals are demanding more reliable, high-quality power.
A leading market for UPS systems is voice, data and cable networks since
these networks must maintain operation in the event of power loss. Currently,
when power is lost or its quality drops, lead-acid batteries provide back-up
electricity until a generator can be engaged. Batteries are typically stored in
central locations in easily maintained, climate-controlled rooms. However, the
increased demand for communication bandwidth, the growth of fiber-optic
technology and the desire to locate telephone switching equipment closer to end
users is driving the trend to locate back-up battery systems in remote storage
cabinets throughout communication networks. Because these remote storage
cabinets are not climate-controlled, batteries have poor reliability and reduced
life expectancy. The dangers of explosion and acid spills are additional
environmental concerns associated with lead-acid batteries.
We believe that flywheel energy storage systems present an attractive
alternative to lead-acid batteries due to their long life and ability to operate
effectively in remote locations. An electric motor spins a flywheel to its
operating speed. The flywheel spins on magnetic bearings in a vacuum. Magnetic
bearings use magnetic fields instead of mechanical bearings and lubricants to
"float" rotating objects such as a flywheel so that there is no surface contact
and minimal friction. While the flywheel spins, it stores kinetic energy, or
energy created by motion. During power outages or periods of low power quality,
the flywheel motor converts to a generator and, like a battery, transfers the
stored electricity to the end user.
OUR OPPORTUNITY
The increased demand for reliable, high-quality, cleaner power is creating a
growing market for distributed power generation and power quality systems. All
of these systems require power and energy management products to convert,
condition, store and manage electricity. In order to be commercially viable and
operate effectively, these power and energy management products must be highly
reliable, efficient, low-cost and compact. Many of these products must be highly
customized to meet the evolving needs of the distributed power generation and
power quality marketplace. We believe that a significant opportunity exists to
manufacture and supply power and energy management products that meet these
criteria.
OUR SOLUTION
Our solution is to provide critical power products and systems necessary for
the successful commercialization of distributed power generation and power
quality systems. Our products and systems include our PowerGate-TM- and
MegaVerter-TM- power electronics, our control software, our GridLink-TM- utility
interface, high-performance motors and electric drivetrains and a flywheel
energy storage system being
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developed by Beacon Power. We believe our solution encompasses the following key
attributes demanded by the emerging distributed power and power quality markets:
- PERFORMANCE. At a minimum, distributed power generation and power quality
systems must provide the same degree of quality power that is provided by
the traditional electric utility system that supplies electric power for
commercial, industrial and residential usage. Our products use proprietary
designs to ensure that high-quality power is produced during peak as well
as steady-state operations.
- RELIABILITY. We design our products to support the long-life, always-on
requirements of the distributed power generation and power quality
markets. We have experience designing and manufacturing high-reliability,
long-life electronics for applications such as aircraft navigation systems
and satellite uplink electronics. We design, manufacture and test our
electronics to last at least fifteen years.
- EFFICIENCY. The overall efficiency of a distributed power generation
system, or its ability to deliver power with minimum energy loss, is vital
to its effective commercialization and depends on the efficiency of all of
its component parts. We apply our power electronics expertise to design
and manufacture our products to meet the efficiency needs of our customers
as defined by their specifications and the end use of the product.
- LOW-COST. The widespread commercial acceptance of distributed power
systems is dependent upon the reduction in cost of key components. We
design our products to be low-cost by making them as compact and as easy
to manufacture as possible. During 2000, we installed equipment for a
semi-automated production line in our Marlborough, Massachusetts facility
which will further automate the manufacturing process for fuel cell power
conversion products thereby reducing the cost of these systems. This
production line became operational in late November 2000 at which point we
commenced production of RF satellite uplink electronics as well as
components for our power converters. We expect the production line to be
capable of producing 25,000 power conversion systems by the end of 2001
but will employ the line to build products for which we have orders in
order to expedite the development of low-cost manufacturing processes
using this capability.
- HIGH POWER DENSITY. High power density, or the ability to convert,
condition and manage large amounts of energy within a compact design, is
required for cost reduction and is critical in applications such as
automobiles where weight and space requirements are stringent. We design
our products to meet the distributed power market's demands for high power
density.
- FLEXIBILITY. Due to the rapidly evolving nature of the distributed power
and power quality industries, our engineers work closely with our
customers to address overall systems design issues as well as to ensure
that our products meet their system specifications. We develop and
manufacture our products for use in various distributed power generation
and power quality systems such as fuel cells, microturbines, cogeneration
systems and UPS systems that are modular and scalable to meet a wide range
of power requirements.
STRATEGY
Our objective is to be a leading provider of the power and energy management
products necessary for the successful commercialization of distributed power
generation systems, such as fuel cells and microturbines, hybrid-electric
vehicles and power quality products, such as flywheel energy storage systems. We
believe that by designing and developing our products across multiple markets
and multiple applications, our success should be less dependent upon the
adoption of a specific application or on the
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business of a single market participant. To accomplish our objective, we are
pursuing the following key strategies:
- DESIGN AND DEVELOP INNOVATIVE POWER AND ENERGY MANAGEMENT PRODUCTS. We are
developing proprietary products that are integral components in
distributed power generation and power quality systems such as our
PowerGate-TM- converter, GridLink-TM- utility interface and MegaVerter-TM-
converter. We believe that we have a competitive advantage resulting from
our engineering expertise in the areas of power electronics,
electromagnetics, mechanical and thermal dynamics, system controls and
microelectronic design that we have been working on since 1985. We have
leveraged research and development funding from government and industry
sources to build a technology base within these areas that has resulted in
59 U.S. patents and 13 patent applications pending with the U.S. patent
and trademark office. In addition, 36 other patents have been issued to
our employees and assigned to DaimlerChrysler in connection with the
Chrysler Patriot racecar project.
- ESTABLISH OUR PRODUCTS AS INDUSTRY STANDARDS. We seek to establish our
power conversion products as industry standards and become a major
supplier to the distributed power generation and power quality markets by
working with our customers to determine cost and performance requirements
as we design and build our products to meet those requirements. Since we
are establishing these requirements early in the product life cycle while
we are one of the few suppliers, we hope that our products will set the
industry standard. We believe that our engineering expertise, experience
in manufacturing highly reliable products and relationships with current
power generation system manufacturers such as Plug Power, H Power, Nuvera
Fuel Cells and FuelCell Energy is positioning us to establish standards
for our distributed power generation and power quality products. We will
continue to focus on establishing strategic relationships with leading
companies in the distributed power generation industry such as our
relationship with FuelCell Energy for the development of our
MegaVerter-TM- power electronic and control software for use in their
industrial fuel cell power generation system.
- INSTALL LOW-COST, HIGH-VOLUME MANUFACTURING CAPABILITIES. We seek to
establish low-cost, high-volume manufacturing capabilities to give us a
competitive advantage in our markets. We are developing semi-automated
manufacturing processes and expanding our manufacturing capacity in order
to reduce costs as production volumes increase. During 2000, we installed
equipment for a semi-automated production line in our Marlborough,
Massachusetts facility that we expect to be capable of producing up to
25,000 of our residential fuel cell power conversion systems annually.
This production line became operational in late November 2000 at which
point we commenced production of RF satellite uplink electronics as well
as components for our power converters. We expect the production line to
be capable of producing 25,000 power conversion systems by the end of 2001
but will employ the line to build products for which we have orders in
order to expedite the development of low-cost manufacturing processes
using this capability. In the future, we expect to add additional
production lines for fuel cell power conversion systems as demand
dictates.
- ACQUIRE NEW PRODUCTS, MANUFACTURING CAPABILITIES AND TECHNOLOGIES. We
believe that the acquisition of new products, manufacturing capabilities
and technologies will enhance our competitive position and growth
opportunities. Historically, the acquisition of products or companies has
been a key element of our business strategy. The acquisition of MagMotor
provided us with revenue in the industrial automation market, a
manufacturing capability with which to build our new MagLev systems for
Applied Materials and opportunities for expansion of MagMotor's product
line into new markets and with new customers as we did with the machine
tool market. We had similar experiences with Film Microelectronics and
Ling Electronics, and we anticipate that acquisitions will continue to
play a role in our strategy.
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PRODUCTS
We design, develop and manufacture high-efficiency, high-reliability and
long-lived power and energy management products that convert, condition, store
and manage electricity. We are using our electronics and manufacturing expertise
to develop products that meet the high-reliability, high-efficiency, low-cost
and compact-size requirements of the distributed power generation and power
quality markets. Our products are sold through our operating divisions in the
following segments:
ELECTRONICS SEGMENT. The electronics segment includes power electronics and
control software such as controllers, fuel cell power conversion systems, hybrid
microcircuits, thin film substrates and amplifiers. Revenues for fiscal year
2000 within this category totaled $8.6 million, $8.3 million of which was
generated in hybrid microcircuits, thin film substrates and amplifiers.
Approximately $300,000 of revenue was generated by fuel cell power conversion
systems, which are still in the development and test stage. The following are
descriptions of our product categories within the electronics segment.
POWER ELECTRONICS AND CONTROL SOFTWARE
- CONTROLLERS. We sell controllers, which are a combination of electronics
and software, that monitor and regulate power flow from various system
components to ensure that end-use power requirements are satisfied. Our
controllers include proprietary digital signal processing software that
allows them to control a wide range of power sources, including batteries,
flywheels, fuel cells and microturbines. We sell controllers for a variety
of applications including distributed power generation and power quality
systems, motors and magnetic levitation systems. Our controller regulates
the flow of electricity to and from the various components of the fuel
cell power generation system.
- FUEL CELL POWER CONVERSION SYSTEM. We have developed a PowerGate-TM-
residential fuel cell power conversion system that combines DC to DC
converters, a DC to AC inverter and a controller with control software. We
have also developed our GridLink-TM- utility interface which is designed
to allow distributed power generation systems such as fuel cells,
microturbines, UPS systems and others to operate in either grid-parallel
(connected to the grid) or grid-independent (disconnected from the grid)
modes. The following diagram outlines the various components of a typical
fuel cell power generation system and identifies our products that have
been developed for use in the system:
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Within a box, there is a diagram entitled "PowerGate-TM- Power Conversion
System." Preceding the diagram is the following text: "In a typical residential
fuel cell power generation system, a fuel processor separates hydrogen from a
hydrocarbon source, such as natural gas. The fuel cell stack then creates low
voltage DC electricity through an electrochemical reaction. By-products from the
fuel cell stack are heat and hot water which can be used in the home. Since the
fuel cell stack generates the average amount of electricity needed, the energy
storage device, such as a lead-acid battery or Beacon Power's flywheel, stores
electricity to handle peak loads created when several appliances call for more
than the average amount of power. Our power conversion system, shown below,
transitions the power into useable AC electricity while transferring the power
between the fuel cell power generation system."
The diagram follows, which is a graphic portrayal of the different components of
the PowerGate-TM- Power Conversion System, with arrows flowing from and to
numbered boxes, and a graphical representation of a power utility transmission
tower and a residential dwelling. The boxes are shaded to denote which products
are manufactured by SatCon and which products are manufactured by SatCon's
Beacon Power affiliate, with a corresponding legend.
Beneath the diagram, is the following text, numbered to correspond to the
numbers in the boxes in the diagram above:
"1. Motors and motor controllers are used for auxiliary functions, such as pumps
that provide compressed air for the fuel cell.
2. The power converter controller and software determines where the DC
electricity needs to be routed--either to the home or to the energy storage
device.
3. The DC to DC converters transfers DC power between the fuel cell stack, the
energy storage device and the DC to AC inverter.
4. The DC to AC inverter provides high-quality AC electricity to the home.
5. The GridLink-TM- utility interface allows the power generation system to
operate in either grid-parallel (connected to the electric utility grid) or
grid-independent (disconnected from the electric utility grid) modes.
6. An energy storage device, such as a lead-acid battery or Beacon Power's
flywheel, can be used to provide power to support higher load requirements
when operating independent from the electric utility grid."
The entire PowerGate-TM- Power Conversion System graphic and explanatory text is
surrounded by a box.
Our products have been developed for use in both residential and larger
industrial fuel cell power generation systems. Plug Power, H Power and IdaTech
are currently evaluating our PowerGate-TM- power electronics and control
software for use in their residential fuel cell power generation systems, and we
have received orders for 30 of our residential fuel cell power conversion
systems from Plug Power, orders for three systems from H Power, orders for two
systems from Nuvera Fuel Cells and an order for one system from IdaTech.
We have also developed a technology to make modular inverter units that can
be combined and scaled to handle high-power requirements. Using this technology,
we developed the MegaVerter-TM- for use in connection with large, commercial
sized, fuel cell or microturbine power generation systems that
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produce power ranging from 200 kilowatts to 5 megawatts. We have a collaborative
arrangement with FuelCell Energy to develop power electronics and control
software for use in their industrial fuel cell power generation system. Under
this agreement, we plan to install a MegaVerter-TM- in a 250 kilowatt fuel cell
power generation system that is currently powering FuelCell Energy's facility in
Danbury, Connecticut.
- HYBRID MICROCIRCUITS. We manufacture standard and custom hybrid
microcircuits, which are a combination of several electronic components
imbedded in a miniature printed circuit board. Due to their size,
versatility and high reliability, these hybrid microcircuits are used in a
broad spectrum of applications including communications, industrial,
medical, military and aerospace. Some of our microcircuit products have
been employed by our customers as follows:
- Radio frequency amplifiers that are currently used in satellite uplink
systems such as the Mobil SpeedPass, satellite television and wireless
Internet service,
- Motor controllers, such as high reliability motor controllers for
helicopter hoist systems, and
- Video amplifiers, such as those used for a cruise missile video camera
system.
- THIN FILM SUBSTRATES. Thin film substrates are miniature printed circuits
onto which small electronic components are mounted, such as those used in
hybrid microcircuits. Our thin film products are integrated into
electronic devices that require small, high-reliability components such as
cellular telephones and other wireless communications devices. We
manufacture power resistors for cellular telephones using aluminum nitride
as the thin film substrate instead of beryllium oxide. Beryllium oxide is
hazardous, and its use in manufacturing is restricted in the United States
and banned in Europe. In addition to producing thin film substrates for
other manufacturers, we use our thin film substrates in our own hybrid
microcircuit products.
- AMPLIFIERS. We sell amplifiers which take an input signal and replicate it
using amplified power to boost the signal. We sell amplifiers for a
variety of applications, including telecommunications uplinks, power
amplifiers for aircraft applications and video amplifiers for cruise
missiles.
MOTION CONTROL SEGMENT. The motion control segment includes high-performance
motors and electric drivetrains such as motors for fuel cells, magnetic
levitation systems, shaker vibration test systems, electric drivetrains,
industrial automation and machine tool motors. Revenues for fiscal year 2000
within this category totaled $13.8 million. The majority of the revenues, $7.4
million, were generated by the sale of Ling Electronics' shaker vibration test
systems. Revenues of $3.3 million were generated by the sale of magnetic
levitation systems to Applied Materials. Industrial automation and machine tool
motors generated $3.1 million in revenues. Motors for fuel cell automobiles
generated little revenue as these motors are in the development and test phase.
Electric drivetrains also contributed little revenue as we are just beginning to
re-market these products that were acquired as part of the asset purchase of the
electronics products group of Northrop Grumman.
HIGH-PERFORMANCE MOTORS AND ELECTRIC DRIVETRAINS
We design and manufacture a variety of standard and custom high-performance
motors to suit specific applications. Our specialty motors are typically
designed and manufactured for unique customer requirements such as high
power-to-size requirements or high efficiency. We believe that our technical and
design expertise enables us to shorten the time between receiving customer
specifications and designing and building motors that meet these specifications.
Some of our products include:
- FUEL CELL MOTORS. We are currently developing a line of high-performance
motors for auxiliary uses, such as fuel pumps, in fuel cell
hybrid-electric vehicles. We are also developing these high-performance
motors for use in commercial and residential fuel cell power generation
systems.
- MAGNETIC LEVITATION SYSTEMS. We manufacture magnetic levitation, or
MagLev-TM-, systems that enable machinery to rotate or move without
contacting other machine parts. Our MagLev-TM- systems use
electro-magnetic fields to lift mechanical components without any surface
contact. Sensors within
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the system determine the actual position of the levitated object and send
signals to a high-speed digital controller, which commands electricity to
activate the electro-magnets thereby making the object move away from any
surface it is about to contact. This is done at extremely high speeds in
order to maintain the stability of the levitated object and can be
accomplished with objects that spin, such as motors, or objects that move
in one direction, like pistons or push rods. Our largest selling
MagLev-TM- system is the integrated suspension and motor, or ISAM, system
that is sold to Applied Materials, Inc. for silicon wafer manufacturing.
Because none of the rotating parts contact any other parts, the ISAM
system does not require lubrication and is ideal for applications such as
silicon wafer production where a contaminant-free environment is critical.
Applied Materials has the exclusive right to use this product in rapid
thermal processing equipment for silicon wafers, and we are Applied
Materials' sole source provider. MagLev-TM- technology is also used in the
manufacture of magnetic bearings for Beacon Power's flywheel. We have also
developed MagLev-TM- systems for applications such as vibration isolators
and magnetic bearings for jet engines and turbines. We are currently
developing new applications for use in silicon wafer manufacturing, laser
printing, equipment testing and other manufacturing applications.
- SHAKER VIBRATION TEST SYSTEMS. We sell shaker vibration test systems that
enable manufacturers to understand how their mechanical and electronic
products will perform after exposure to vibrations. Our shaker vibration
test systems are designed to replicate vibrations ranging from continuous
shaking to high impact forces such as those arising from dropping a
product on the floor or landing a plane. Our shaker vibration test systems
are used for testing a variety of products, including small electronic
components, computer hardware, consumer electronics, automobiles and
aerospace and satellite structures. In addition, since our acquisition of
Ling Electronics in October 1999, we have begun to sell a line of
digitally modulated power amplifiers. We sell these amplifiers
individually and as components of our shaker vibration test systems.
- ELECTRIC DRIVETRAINS. In November 1999, we acquired certain intellectual
property and assets from Northrop Grumman Corporation to give us the
ability to manufacture and sell electric drivetrains which convert
electricity into mechanical energy for propulsion of automobiles. Northrop
Grumman developed this intellectual property while designing a
100-horsepower electric drivetrain for DaimlerChrysler for light duty,
high-power electric vans and utility vehicles and a 230-horsepower
electric drivetrain for a 33,000 pound vehicle such as a bus or truck.
Prior to November 1999, over 300 of the 100-horsepower motors were
installed in DaimlerChrysler's electric powered interurban commuter
minivans, and a 230-horsepower electric drivetrain was installed in a Blue
Bird Corporation bus as part of the Cedar Rapids Electric Transportation
Coalition. We are currently pursuing opportunities to sell these products
in the electric drivetrain marketplace.
- INDUSTRIAL AUTOMATION MOTORS. We manufacture brush and brushless DC motors
for the industrial automation market. These small, high-efficiency motors
are available with a variety of options including optical encoders,
tachometers, brakes, custom cables and connectors. Our industrial
automation motors are typically used in semiconductor equipment
manufacturing, medical device assembly and other automated assembly
processes.
- MACHINE TOOL MOTORS. We manufacture a line of precise positioning motors
for use with machine tools such as computer numerical controlled machines.
These include machining centers, lathes and milling machines.
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ENERGY STORAGE SYSTEMS.
FLYWHEEL ENERGY STORAGE SYSTEMS
We have been developing flywheels for energy storage and other applications
since 1985. Our flywheel development programs included the development of
flywheel energy storage systems for the Chrysler Patriot hybrid-electric
vehicle, for a U.S. Marine Corps field communications system and for a combined
satellite control and energy storage system. In 1995, we began development of a
stationary flywheel energy storage system to provide uninterruptible back-up
power. In 1997, after we formed Beacon Power, we contributed this technology to
Beacon Power pursuant to an exclusive license, enabling Beacon Power to pursue
the development of a stationary, terrestrial flywheel energy storage system.
Currently, we do not have revenues generated by flywheel energy storage systems.
This business currently resides within our affiliate, Beacon Power. However, we
retain the right to market flywheels for such applications as space vehicles. As
a result, the primary value of this category is our beneficial ownership, as of
November 30, 2000, of 25.3% of Beacon Power's common stock. See "Beacon Power
Corporation."
FUNDED RESEARCH AND DEVELOPMENT SEGMENT
We perform funded research and development in connection with government
programs and for third parties. We pursue funded research and development in
areas where we have technical expertise and where we believe there is
significant commercial application for the developed technology. We have
performed funded research and development in connection with the development of
each of our product areas. Funded research and development accounted for
$8.6 million in revenues in fiscal year 2000.
In 1999, we entered into an agreement with the U.S. Department of Energy, or
DOE, for the research, development and demonstration of a power conversion
system for a new generation of hybrid-electric vehicles. Under this government
contract, we expect to design a power conversion system that can be manufactured
at high volume and low cost. We believe that the resulting design will enable us
to enhance our manufacturing capabilities to produce our power conversion
products for distributed power generation systems. This program will be funded
half by us and half by DOE. The total DOE approved budget for this program is
$10.0 million through September 29, 2002. As of November 30, 2000, DOE has
funded $5.4 million of this budget. Revenues in fiscal year 2000 and 1999 for
this program totaled $3.4 million and $1.0 million, respectively. The additional
DOE funding of $4.6 million is subject to congressional appropriation and DOE
approval.
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BEACON POWER CORPORATION
BUSINESS. Since its formation, Beacon Power has been developing stationary
flywheel energy storage systems to offer customers an environmentally cleaner,
more reliable alternative to lead-acid batteries for energy storage and power
quality management. Lead-acid batteries have three primary deficiencies. Weather
extremes and frequent discharging and recharging limit their reliability and
useful lives, they cannot be remotely monitored currently, and they represent an
environmental risk due to the threat of explosion and battery acid spills.
Beacon Power is developing its flywheel energy storage system to operate in
all weather conditions, to offer remote monitoring, to have no limitations on
charge and discharge cycles and to have a longer useful life than batteries.
Beacon Power's flywheel energy storage system consists of a rotating, composite
rim that spins on magnetic bearings in a vacuum. The flywheel is powered up to
its operational speed by an internal motor. Because of negligible friction,
little power is required to maintain the flywheel's operating speed. During
power outages or periods of low power quality, the flywheel motor converts to a
generator and, like a battery, transfers the stored electricity to the end user.
The following is a diagram of a flywheel energy storage system:
Graphic of a flywheel (cutaway to reveal internal components inside protective
casing), with arrows pointing on the left hand side from the following text
descriptions to the diagram: "Vacuum Housing," "Motor/Generator," "Magnetic
Bearings" and "Composite Rim." On the right hand side of the diagram, there are
four bullets with the following text, descending from top to bottom:
- "Motor/generator draws power from a power source to spin up the flywheel.
- Flywheel spins in a vacuum on magnetic bearings with negligible friction.
- Energy is stored in the flywheel.
- To provide power, the motor transitions into a generator."
The entire flywheel cutaway graphic and explanatory text is surrounded by a box.
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Because of its advantages over lead-acid batteries, Beacon Power's flywheel
energy storage system may be a viable alternative for use in applications where
the loss or disruption of electricity could have potentially significant
economic impacts. Beacon Power's current market focus is to provide flywheel
energy storage systems to telecommunication service providers who must maintain
service during power outages. We believe that the lifetime costs and
functionality of a flywheel energy storage system will compare favorably to
lead-acid batteries in many applications. Over the long-term, if the cost of
manufacturing flywheel energy storage systems is significantly lowered, these
systems could potentially replace batteries that are planned for use in fuel
cell power generation systems.
In January 2000, Beacon Power received a sales commitment for 100 flywheel
energy storage systems for $15,000 per system from TLER. These systems will be
used for back-up power for a residential telephone system in Mexico. These
systems are required to be delivered by June 2001. In June 2000, Beacon Power
received an initial order for flywheels from Cox Communications. In addition,
Beacon Power has conducted field tests of its flywheel energy storage systems
with Bell Atlantic Network Services, Inc., now part of Verizon Communications,
Century Communications Corporation, now part of Adelphia Communications
Corporation, and WinDBreak Cable. Beacon Power is located in Woburn,
Massachusetts, where it occupies an approximately 20,000 square foot facility.
Beacon Power has signed a lease and expects to move into an approximately 52,000
square foot facility in the Wilmington, Massachusetts area in the first quarter
of 2001. As of September 30, 2000, Beacon Power had a total of 80 full-time
employees and one independent contractor, of which approximately 60 were
engineers, scientists and other degreed professionals.
FORMATION AND FINANCING HISTORY. In May 1997, we formed Beacon Power to
develop stationary, terrestrial flywheel energy storage systems for commercial
applications. At that time, DQE Enterprises, Inc., who is currently one of our
investors, made a $5 million investment in SatCon, and we were required to
contribute the $5 million to the capital of Beacon Power to fund its development
efforts. As a condition of DQE Enterprises' investment in us, we granted Beacon
Power a perpetual, worldwide, royalty-free, exclusive right and license to our
flywheel technology for stationary, terrestrial applications.
On October 23, 1998, Beacon Power completed a $4.8 million private placement
of its class D preferred stock and warrants to Perseus Capital L.L.C., DQE
Enterprises and Micro-Generation Technology Fund, L.L.C. At that time, we
relinquished significant control of Beacon Power and Beacon Power came under the
control of its third-party investors. From June 1999 through March 31, 2000,
Beacon Power was financed through the issuance of approximately $4.7 million of
bridge notes and warrants to its investors, including approximately
$1.0 million from us. On April 7, 2000, Beacon Power issued 1,226,141 shares of
its class E preferred stock and warrants to purchase 306,535 shares of its
class E preferred stock in exchange for the conversion of all of its outstanding
bridge notes of which we received 347,407 shares of Beacon Power's class E
preferred stock and a warrant to purchase 86,852 shares of its class E preferred
stock.
On April 21, 2000, Beacon Power raised an additional $4.1 million through
the sale of additional bridge notes and warrants to purchase 82,000 shares of
Beacon Power's common stock. We did not participate in this financing. On
May 23, 2000, Beacon Power issued 6,785,711 shares of its class F preferred
stock and additional warrants to purchase shares of Beacon Power's common stock.
The exercise price and the number of shares subject to these additional warrants
were based on the initial public offering price of Beacon Power's common stock.
The shares of class F preferred stock and the additional warrants were issued in
consideration for the cancellation of $5.2 million in bridge notes and an
additional $23.3 million cash investment by existing and new investors. We did
not participate in this financing either.
Beacon Power's class D preferred stock, class E preferred stock and class F
preferred stock accrue quarterly dividends in arrears at a rate of 12.5% through
May 23, 2000 and 6% thereafter. Beacon Power also has consulting arrangements
with Perseus, DQE Enterprises and Micro pursuant to which Beacon Power must pay
consulting fees in shares of its class A preferred stock.
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In November 2000, Beacon Power completed an initial public offering of its
common stock and issued 8,000,000 shares of its common stock at $6.00 per share.
As of November 30, 2000, we beneficially owned approximately 25.3% of Beacon
Power's common stock.
BOARD COMPOSITION. Beacon Power's board of directors currently consists of
seven members. By agreement of Beacon Power's stockholders, two members are
currently designated by Perseus Capital, one member is designated by DQE
Enterprises, one member is designated by Mechanical Technology Incorporated, one
member is designated by GE Capital Equity Investments, Inc. and one member is
designated by us, which is currently David B. Eisenhaure, our chairman of the
board, president and chief executive officer. The seventh member of Beacon
Power's board of directors is William E. Stanton, Beacon Power's president and
chief executive officer.
OUR OPERATING DIVISIONS
We currently develop and market our products and services through the
following three operating segments:
ELECTRONICS PRODUCTS. Our electronics products segment consists of the
following two divisions:
ADVANCED FUEL CELL POWER PRODUCTS. Our Advanced Fuel Cell Power Products
division is establishing manufacturing facilities and processes for the
production of power electronics for the distributed power generation and
power quality markets. It also manufactures various multi-chip modules. We
acquired our Advanced Fuel Cell Power Products division's Marlborough,
Massachusetts facility in April 1999. As of September 30, 2000, we had 22
employees working in our Advanced Fuel Cell Power Products division.
FILM MICROELECTRONICS. Our Film Microelectronics division, or FMI,
designs and manufactures standard and custom microelectronic circuits for
telecommunications, commercial and government aerospace, industrial,
medical and automotive markets. We acquired FMI in April 1997. FMI is
located in North Andover, Massachusetts and, as of September 30, 2000, had
75 employees.
MOTION CONTROL PRODUCTS. Our motion control products segment consists of
the following two divisions:
MAGMOTOR. Our MagMotor division designs and manufactures standard and
custom high-performance motors for the industrial machinery, factory
automation and automotive markets. We acquired MagMotor in January 1997.
In January 1999, we acquired Inductive Components which we integrated into
our MagMotor division. MagMotor is located in Worcester, Massachusetts
and, as of September 30, 2000, had 61 employees.
LING ELECTRONICS. Our Ling Electronics division manufactures shaker
vibration test systems, power converters, amplifiers and controllers. We
acquired Ling in October 1999 from Mechanical Technology Incorporated.
Ling is located in Anaheim, California and, as of September 30, 2000, had
57 employees.
FUNDED RESEARCH AND DEVELOPMENT. Our funded research and development
segment consists of the following two divisions:
TECHNOLOGY CENTER. Our Technology Center, located in Cambridge,
Massachusetts, focuses on funded research and development. It also
supports the product development efforts of our other operating divisions.
The business of Lighthouse Software that we acquired in January 1999 has
been integrated into our Technology Center. As of September 30, 2000, our
Technology Center had 80 employees of which 31 were engineers. Our
engineers have 19 advanced degrees including 8 doctorates.
ELECTRONIC POWER PRODUCTS. Our Electronic Power Products division was
formed in connection with the acquisition of certain intellectual property
and other assets from Northrop Grumman in
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November 1999. Through this acquisition, we acquired expertise in power
electronics and the design and development of electric drivetrains for use
in electric and hybrid-electric vehicles. This division is engaged
primarily in contract research and development. The Electronic Power
Products division is located in Baltimore, Maryland and, as of
September 30, 2000, had 10 employees.
SIGNIFICANT CUSTOMERS
The U.S. Department of Defense accounted for 9.8%, 20.6% and 22.1% of our
total revenue for our fiscal years ended September 30, 2000, 1999 and 1998,
respectively. For the fiscal year ended September 30, 2000, revenue from the
U.S. Department of Energy and Applied Materials accounted for 11.5% and 10.6% of
our total revenue, respectively.
RESEARCH AND DEVELOPMENT
We believe that the continued and timely development of new products and
enhancements to our existing products are necessary to maintain our competitive
position. We use technologies developed by our Technology Center and our
Electronic Power Products division, together with information supplied by our
distributors and customers, to design and develop new products and product
enhancements and to reduce the time-to-market for our products.
$8.6 million, or 27.8%, of our revenue during the year ended September 30,
2000 was attributable to research and development activities funded by
commercial customers and U.S. government agency sponsors. Under the agreements
funded by the U.S. government, the government retains a royalty-free license to
use the technology developed for government purposes and we retain exclusive
rights to the technology for commercial and industrial applications. The rights
to technology developed under contracts funded by commercial customers are
negotiated on a case-by-case basis. We expended $3.5 million, $726,000 and
$346,000 on internally-funded research and development during our years ended
September 30, 2000, 1999 and 1998, respectively. During the year ended
September 30, 2000, our most concentrated effort was directed toward building
the power inverter for a fuel cell on-site power generation system.
SALES AND MARKETING
We sell our products and services both domestically and internationally
through our direct sales force and through independent distributors and
representatives. Our direct sales staff manages our key customer accounts,
provides customer support and identifies significant market opportunities in
their respective markets.
Each of our divisions manages its own marketing organization and is
responsible for developing sales and advertising literature, such as product
announcements, catalogs, brochures and magazine articles in trade and other
publications. Publication of significant events or material information is
handled through our corporate office.
We maintain close contact with our customers' design and engineering staffs
in order to provide the appropriate products for our customers' applications. We
maintain this close working relationship with our customers throughout the life
of a product, and we believe that it has been a key component of our customers'
satisfaction.
We compete for and market our research and development contracts through
several methods, including pursuing new and existing customer relationships in
the commercial and government sectors, responding to Small Business Innovative
Research calls for proposals and calls for proposals listed in the daily
publication, COMMERCE BUSINESS DAILY, seeking to maintain a strong technical
reputation within the community, responding to unsolicited requests for
proposals and through our Internet site.
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BACKLOG
Our backlog consists primarily of research and development contracts and
orders for power electronic and motion control products. At September 30, 2000,
the backlog was $23.3 million for work to be performed and products to be
shipped during the year ending September 30, 2001 and beyond. Many of our
contracts and sales orders may be canceled at any time with limited or no
penalty. In addition, contract awards may be subject to funding approval from
the U.S. government and commercial entities, which involves political, budgetary
and other considerations over which we have no control. Our backlog at
September 30, 1999 was $7.3 million.
COMPETITION
The market for our products is competitive and subject to rapid
technological change. The market is significantly affected by new product
introductions and other market activities of industry participants. We currently
or potentially compete with:
- manufacturers of converters and inverters for fuel cells such as Trace
Engineering, a division of Xantrex Technology, Inc., Asea Brown
Boveri Ltd., Siemens Corporation and Alstom S.A.,
- manufacturers of hybrid microcircuits such as Omnirel L.L.C.,
Aeroflex Inc., Teledyne Inc. and DDC & R, Inc.,
- manufacturers of thin film substrates such as MIC Technology, an Aeroflex
Company and Ultrasource, Inc.,
- manufacturers of electric vehicle drivetrains such as Lockheed Martin
Corp., Solectria Corporation, Delphi Automotive Systems, Corp., Siemens
Corporation and Visteon Corporation,
- manufacturers of motors such as MCG Inc., Reliance Electric CO/DE, CMC
Industries, Inc. and other regional and specialty motor manufacturers,
- manufacturers of shaker vibration test systems such as Ling Dynamics
Systems, Ltd. and Unholtz-Dickie, Corp., and
- developers of flywheel technology such as Active Power, Inc., Trinity
Flywheel Power and U.S. Flywheel Systems.
Many of our competitors have significantly greater financial resources than
we do and are able to devote greater resources to the development, promotion,
sale and support of their products and may have more manufacturing expertise and
capacity. In addition, many of our competitors have more extensive customer
bases and broader customer relationships than we do.
We believe that competitive factors for our products include:
- performance
- reliability
- efficiency
- pricing
- functionality
- reputation of the vendor
- service
- ease of use
- flexibility
- manufacturing capacity
- customization capabilities
We believe that we are positioned to compete favorably on the basis of each
of these factors in each of our markets.
MANUFACTURING
We manufacture our products in approximately 80,000 square feet of
manufacturing space at four facilities in Marlborough, Massachusetts; Worcester,
Massachusetts; North Andover, Massachusetts and Anaheim, California. We have
existing manufacturing capacity to meet our current needs. Our goal is to mass
manufacture high volume, low-cost products. We have a semi-automated production
line in our
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Marlborough, Massachusetts facility that we expect to be capable of producing up
to 25,000 of our residential fuel cell power conversion systems annually. We
intend to add additional production lines for our products in the future as
demand dictates. We have made and expect to continue to make technological
improvements that reduce the costs to manufacture our products.
We believe that most of the raw materials used in our products are readily
available from a variety of vendors. Additionally, we design and develop our
products to use commodity parts in order to simplify the manufacturing process.
INTELLECTUAL PROPERTY
Our success and competitiveness depend on our ability to develop and
maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright law and contract restrictions to
protect the proprietary aspects of our technology. We seek to limit disclosure
of our intellectual property by requiring employees, consultants, and any third
parties with access to our proprietary information to execute confidentiality
agreements and by restricting access to that information. These legal
protections afford only limited protection for our technology.
We currently own 59 U.S. patents and have 13 patent applications pending
with the U.S. patent and trademark office. In addition, 36 other patents have
been issued to our employees and assigned to DaimlerChrysler in connection with
the Chrysler Patriot racecar project. DaimlerChrysler granted us a
non-exclusive, royalty-free license to these patents for non-automotive
applications. Our 59 U.S. patents and the 36 patents assigned to DaimlerChrysler
are distributed among the following five application areas:
- motor related applications,
- magnetic levitation and magnetic bearings,
- flywheels,
- distributed power generation and hybrid-electric vehicles, and
- power electronics and controls.
The expiration dates of these patents range from 2007 to 2018. With the
exception of two patents, most of our patents expire in or after 2012, with the
majority expiring in 2014 and 2016.
In 1997, we granted Beacon Power a perpetual, worldwide, royalty-free,
exclusive right and license to our flywheel technology for stationary,
terrestrial applications. As a qualifying small business, we have retained
commercial ownership rights to proprietary technology developed under various
U.S. government contracts and grants, including small business innovation
research contracts. Our patent and trade secret rights are of material
importance to us and to our future prospects.
Most of the 59 U.S. patents described above are the result of retaining
ownership of inventions made under U.S. government-funded research and
development programs. With respect to any invention made with government
assistance, the government has a nonexclusive, nontransferable, irrevocable,
paid-up license to use the technology or have the technology employed for or on
behalf of the U.S. government throughout the world. Under certain conditions,
the U.S. government also has "march-in rights." These rights enable the U.S.
government to require us to grant a nonexclusive, partially exclusive, or
exclusive license in any field of use to responsible applicants, upon terms that
are reasonable under the circumstances. If we refuse, the government can grant
the license itself, provided that it determines that such action is necessary
because we have not achieved practical application of the invention, or to
alleviate health or safety needs, or to meet requirements for public use
specified by federal regulations, or because products using such inventions are
not being produced substantially in the United States. The exercise of these
rights by the government could create potential competitors for us if we later
determine to further develop the technologies and utilize the inventions in
which the government has exercised these rights.
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Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products or
technologies is difficult. Litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. Any such resulting litigation could result
in substantial costs and diversion of resources and could have a material
adverse effect on our business, results of operations and financial condition.
We cannot assure you that third parties will not claim infringement with
respect to our current or future products. Any such claims, with or without
merit, could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all. A successful claim of intellectual property infringement against us and our
failure or inability to license the infringed technology or develop or license
technology with comparable functionality could have a material adverse effect on
our business, results of operations and financial condition.
We depend upon intellectual property developments which sometimes derive in
whole or in part from U.S. government contracts and subcontracts. Our rights to
these intellectual property developments vary by contract, depending upon such
factors as whether the government wholly or only partly funded the contract, and
the terms of the negotiation between us and the government department. Some
contracts may give us exclusive rights to commercialize the invention, reserving
to the government only those rights which it needs for government functions.
Other contracts may give broader rights to the government. At the least, most of
these contracts provide us with a non-exclusive, non-assignable license to use a
development for commercial purposes, however most of our technology developed
through government-funded contracts is protected through patents and exclusive
rights.
GOVERNMENT REGULATION
We presently are subject to various federal, state and local laws and
regulations relating to, among other things, safe working conditions, handling
and disposal of hazardous and potentially hazardous substances and emissions of
pollutants into the atmosphere. To date, we believe that we have obtained all
necessary government permits and have been in substantial compliance with all of
these applicable laws and regulations.
GOVERNMENT CONTRACTS
We act as a prime contractor or major subcontractor for many different U.S.
government programs, including those that involve the development of
electro-mechanical transportation, navigation and energy-related products. Over
its lifetime, a program may be implemented by the award of many individual
contracts and subcontracts, or contracts with option years, or partially funded
contracts.
U.S. government contracts include provisions permitting termination, in
whole or in part, without prior notice, at the U.S. government's discretion. The
U.S. government pays compensation for work actually done and commitments made at
the time of termination, and some allowance for profit on the work performed.
The U.S. government may also terminate for default in performance and pay only
the value delivered to the U.S. government. It can also hold the contractor
responsible for reprocurement costs.
Our government contract business is also subject to specific procurement
statutes and regulations and a variety of socioeconomic and other requirements.
Failure to comply with these regulations and requirements could lead to loss of
contract or suspension or debarment from U.S. government contracting or
subcontracting for a period of time. Examples of these statutes and regulations
are those related to procurement integrity, export control, employment
practices, the accuracy of records and the recording of costs.
21
Sales to the U.S. government may be affected by changes in research
interests in the areas in which we engage, changing government department
budgets, and changing procurement policies.
EMPLOYEES
At September 30, 2000, we had a total of 278 full-time employees, three
part-time employees and 24 contract employees. Of the total, 110 persons were
employed in engineering, 127 in manufacturing, 45 in administration and 23 in
sales and marketing. None of our employees are represented by a union. We
believe that our relations with our employees are good.
ITEM 2. PROPERTIES
We lease office, manufacturing and research and development space in the
following locations:
APPROXIMATE NUMBER EXPIRATION
LOCATION PRIMARY USE OF SQUARE FEET OF LEASE
- ---------------------------- ----------------------------------- ------------------ ----------
Cambridge, Massachusetts Corporate headquarters and research
and development 33,000 2003
North Andover, Massachusetts Manufacturing 15,000 2002
Worcester, Massachusetts Manufacturing 17,000 2003
Marlborough, Massachusetts Manufacturing 20,000 2005
Baltimore, Maryland Research and development 16,000 2002
Anaheim, California Manufacturing 60,000 2003
Our Cambridge, Massachusetts lease contains an additional 13,000 square feet
of space which is subleased to a third party until December 31, 2002. Our
Anaheim, California lease contains an additional 25,000 square feet of
manufacturing space for a total of 85,000 square feet. The additional space is
subleased to a third party until May 31, 2001. We also lease 8,800 square feet
in Tucson, Arizona until March 31, 2001, which we have subleased to a third
party through that lease term.
We believe our facilities are adequate for our current needs and that
adequate facilities for expansion, if required, are available. See also
"Business--Our Operating Divisions."
ITEM 3. LEGAL PROCEEDINGS
On October 15, 1997, we received a letter from the Department of the Air
Force stating that it may terminate for default an approximately $1.6 million
contract between the Air Force and us for development of a satellite component,
unless perceived performance problems were cured. As of that date, we received
payments of approximately $1.4 million in connection with this contract. In the
event of an actual default, we could be liable for extra costs incurred by the
U.S. government in developing the component and could be required to return a
portion of the monies we received for this contract. On December 15, 1997, the
Air Force issued a "Show Cause Notice" to us requiring us to demonstrate to the
Air Force why the contract should not be terminated "for cause." On
December 31, 1997, we responded to the Air Force's "Show Cause Notice,"
explaining our view that we should not be terminated for cause. On May 11, 2000,
we contacted the Air Force again to offer to settle our differences and to
explore obtaining additional settlement amounts. On August 3, 2000, we sent a
memorandum to the Air Force explaining the basis of a settlement request of
$353,248. Also on August 3, 2000, we received from the Air Force a proposed
settlement offer. On September 15, 2000, we entered into a settlement agreement
in which the contract was to be closed and considered completed through a
contract modification with no additional payment, but without termination for
cause. The contract is still subject to normal audit and accounting of final
cost.
On November 6, 1999, APACE, Inc. commenced an action against us in the
Supreme Court of the State of New York claiming that we had been awarded a prime
contract by the U.S. Department of Energy and that we had failed or refused to
negotiate a subcontract with APACE, allegedly in breach of a contract
22
between us and APACE. APACE is seeking in excess of $1,000,000 in damages. We
denied the allegations, moved to stay the action and filed for arbitration with
the American Arbitration Association in Boston, Massachusetts. The American
Arbitration Association decided that the arbitration would go forward in Boston.
In the meantime, APACE requested that the court permit the action to go forward
and for the arbitration to be stayed. On March 21, 2000, the Supreme Court of
the State of New York issued an order compelling arbitration and staying APACE's
action pending arbitration to be conducted by the American Arbitration
Association in Boston.
On June 26, 2000, APACE served us with an amended answering statement and
counterclaim, including additional allegations that we have engaged in unfair
and deceptive trade practices and that our actions were willful and knowing.
Based on these allegations, APACE is seeking multiple damages, as well as
attorneys' fees and expenses. On July 19, 2000, we filed an answer to APACE's
amended answering statement and counterclaim, denying the allegations and
asserting various affirmative defenses.
An arbitrator has been selected and the arbitration is scheduled to go
forward in Boston for nine days in February, March and April of 2001. The
parties have exchanged some discovery, and expect to make a further exchange
early in 2001.
Sean F. Moran, our Chief Financial Officer, is named as a defendant in three
shareholder class action complaints filed in the United States District Court
for the District of Massachusetts. The complaints, captioned RO NEMETH-COSLETT
V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN (filed on or about
June 8, 2000), MARK CASAZZA V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND
SEAN MORAN (filed on or about June 26, 2000), and RODNEY M. ROCKEFELLER AND LARA
LEE ROCKEFELLER V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN
(filed on or about August 2, 2000), allege violations of the federal securities
laws by Anika Therapeutics, Inc., J. Melville Engle, who serves as Anika's Chief
Executive Officer, and Sean F. Moran, who served as Anika's Chief Financial
Officer from February 1993 to January 2000. The complaints allege a two-year
putative class period through May 30, 2000, and allege that Anika and the
individual defendants violated the federal securities laws by making material
misrepresentations and omissions that relate to Anika's press releases and
historical financial statements for 1998 and the first three quarters of 1999.
Anika has previously reported publicly that it was the subject of an
informal investigation by the SEC as disclosed by Anika in March 2000, which
later became a formal investigation by the SEC as disclosed by Anika in May
2000. Anika has reported that in connection with the formal investigation, the
SEC has required Anika to provide information in connection with certain revenue
recognition matters. Anika has reported that these matters related to Anika's
historical accounting for sales of its product under a long-term supply and
distribution agreement. In March 2000, Anika restated its financial results for
1998 and the first three quarters of 1999 to change its revenue recognition
policy under this long-term supply contract.
From time to time, we are a party to routine litigation and proceedings in
the ordinary course of business. We are not aware of any current or pending
litigation to which we are or may be a party that we believe could materially
adversely affect our results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the year covered by this report through the solicitation of proxies
or otherwise.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is publicly traded on the Nasdaq National Market under the
symbol "SATC."
The following table sets forth the range of high and low sales prices of our
common stock as reported on the Nasdaq National Market for fiscal years 1999 and
2000:
HIGH LOW
-------- --------
YEAR ENDED SEPTEMBER 30, 1999
First Quarter............................................... $ 7.75 $ 3.69
Second Quarter.............................................. 6.56 3.63
Third Quarter............................................... 9.88 4.50
Fourth Quarter.............................................. 10.44 7.06
YEAR ENDED SEPTEMBER 30, 2000
First Quarter............................................... $10.44 $ 7.31
Second Quarter.............................................. 44.75 8.00
Third Quarter............................................... 28.81 10.50
Fourth Quarter.............................................. 41.00 23.50
On December 20, 2000, the last reported sale price of our common stock as
reported on the Nasdaq National Market was $9.3438 per share. As of
December 12, 2000, there were 13,877,185 shares of our common stock outstanding
held by approximately 190 holders of record.
DIVIDEND POLICY
We have never paid dividends on our common stock. We currently intend to
retain earnings, if any, to fund the development and growth of our business and
do not anticipate paying cash dividends for the foreseeable future. Payment of
future dividends, if any, will be at the discretion of our board of directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
RECENT SALES OF UNREGISTERED SECURITIES
On September 27, 2000, we issued 100,000 shares of our common stock to
Northrop Grumman Corporation in connection with the exercise by Northrop Grumman
Corporation of a warrant we issued to Northrop Grumman Corporation at an
exercise price of $9.75 per share. The common stock was issued in reliance upon
the exemptions from registration under Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, relative to sales by an issuer not
involving any public offering.
24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our financial statements for the years ended September 30, 1999, 1998, 1997
and 1996 have been restated. All financial information included in this Annual
Report on Form 10-K reflect the restatements. For a discussion of the
restatements, see our financial statements and related notes included elsewhere
in this Annual Report on Form 10-K.
You should read the data set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes appearing elsewhere in
this Annual Report on Form 10-K. The selected consolidated financial data set
forth below for the fiscal years ended September 30, 2000, 1999 and 1998 and the
consolidated balance sheet data as of September 30, 2000 and 1999 are derived
from our audited consolidated financial statements appearing elsewhere in this
Annual Report on Form 10-K. The selected consolidated statement of operations
data for the fiscal years ended September 30, 1997 and 1996 and the consolidated
balance sheet data as of September 30, 1998, 1997 and 1996 are derived from our
audited consolidated financial statements that are not included in this Annual
Report on Form 10-K. The statement of operations for the fiscal year ended
September 30, 2000 includes the results of Ling Electronics beginning from
October 21, 1999, the date on which we acquired Ling Electronics.
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Product revenue..................................... $ 22,427 $ 9,123 $ 7,520 $ 3,728 $ --
Funded research and development revenue............. 8,628 6,355 8,011 8,738 9,385
-------- -------- ------- ------- -------
Total revenue....................................... 31,055 15,478 15,531 12,466 9,385
Cost of product revenue............................. 19,069 9,511 5,474 2,683 --
-------- -------- ------- ------- -------
Gross margin........................................ 11,986 5,967 10,057 9,783 9,385
-------- -------- ------- ------- -------
Research and development expenses................... 10,301 6,554 6,794 11,443 8,213
Selling, general and administrative expenses........ 9,970 8,819 4,523 6,198 5,569
Amortization of intangibles......................... 1,217 371 291 120 --
-------- -------- ------- ------- -------
Total operating expenses............................ 21,488 15,744 11,608 17,761 13,782
-------- -------- ------- ------- -------
Operating loss...................................... (9,502) (9,777) (1,551) (7,978) (4,397)
Other income (expense), net......................... 460 (224) 170 269 464
-------- -------- ------- ------- -------
Net loss before income taxes and loss from Beacon
Power............................................. (9,042) (10,001) (1,381) (7,709) (3,933)
Benefit/(provision) for income taxes................ -- -- (4) -- 144
Loss from Beacon Power Corporation.................. (899) (4,341) (3,473) -- --
-------- -------- ------- ------- -------
Net loss............................................ (9,941) (14,342) (4,858) (7,709) (3,789)
Accretion of redeemable convertible preferred stock
discount.......................................... (3,106) (51) -- -- --
-------- -------- ------- ------- -------
Net loss attributable to common stockholders........ $(13,047) $(14,393) $(4,858) $(7,709) $(3,789)
======== ======== ======= ======= =======
Net loss per share, basic and diluted............... $ (1.03) $ (1.57) $ (0.54) $ (0.97) $ (0.52)
======== ======== ======= ======= =======
Weighted average number of common shares, basic and
diluted........................................... 12,630 9,176 8,957 7,959 7,286
======== ======== ======= ======= =======
AS OF SEPTEMBER 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents............................... $ 8,814 $ 2,533 $ 1,202 $ 4,257 $ 3,771
Assets transferred to Beacon Power Corporation.......... -- -- 577 -- --
Total assets............................................ 44,487 17,815 16,689 18,219 16,354
Working capital......................................... 18,390 7,714 7,905 10,595 11,011
Liabilities transferred to Beacon Power Corporation..... -- -- 1,564 -- --
Total long-term liabilities, net of current portion..... 214 64 239 323 --
Contingent obligation to Class D preferred stockholders
of Beacon Power Corporation........................... 5,794 5,309 -- -- --
Redeemable convertible preferred stock.................. -- 4,894 -- -- --
Stockholders' equity.................................... 31,118 4,421 12,372 15,589 15,175
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On four separate occasions since January 1, 1999, we have restated our
financial results. These restatements, announced on January 13, 1999, August 16,
1999, August 8, 2000 and September 12, 2000, affected various reporting periods
during our fiscal years ended September 30, 1996 through 1999 and our nine-month
period ended June 30, 2000. The restatements primarily related to the accounting
for our investment in Beacon Power, and other various accounting matters
including accounting for stock options and warrants, providing additional
reserves for accounts receivable, inventory, warranty and sales returns and
writing off certain property and equipment. On September 18, 2000, the SEC's
enforcement division requested that we meet with them to explain the
circumstances surrounding the restatements announced on August 8, 2000 and
September 12, 2000. On September 22, 2000, David B. Eisenhaure and Sean F.
Moran, our President and Chief Financial Officer, respectively, along with our
independent public accountants and outside counsel, met with various
representatives of the SEC in response to their inquiry. We explained the
circumstances surrounding our August 2000 and September 2000 restatements and
responded to the SEC's questions. We expect that the SEC will have additional
questions. The SEC may seek to meet with individuals, which may include our
employees as well as representatives of Beacon Power and our former and current
independent accountants. We will cooperate fully with any further SEC inquiry.
The following discussion reflects the restatement of our financial
statements for fiscal years 1998 and 1999. For a discussion of the restatements,
see our financial statements and related notes included elsewhere in this Annual
Report on Form 10-K.
OVERVIEW
We are developing enabling technologies for the emerging distributed power
generation and power quality markets. We manufacture power and energy management
products that convert, condition, store and manage electricity for businesses
and consumers that require high-quality, uninterruptible power. We are utilizing
our engineering and manufacturing expertise to develop products to serve the
distributed power generation and power quality markets, including products for
fuel cell and microturbine power generation systems, hybrid-electric vehicles
and flywheel energy storage systems. We believe the family of products we are
developing will be integral components of distributed power generation and power
quality systems.
In the past three years, we have expanded our business and capabilities
through the following acquisitions:
- K&D Magmotor Corp.--a manufacturer of custom and standard electric motors,
acquired in January 1997.
- Film Microelectronics, Inc.--a manufacturer of thin film substrates and
hybrid microelectronics, acquired in April 1997.
- Inductive Components, Inc.--a value-added supplier of customized electric
motors, acquired in January 1999.
- Lighthouse Software, Inc.--a supplier of control software for machine
tools, acquired in January 1999.
- HyComp, Inc.--a manufacturer of hybrid microelectronics, acquired in
April 1999.
- Ling Electronics, Inc.--a manufacturer of shaker vibration test systems,
power converters, amplifiers and controllers, acquired in October 1999.
All of these acquisitions were accounted for using the purchase method of
accounting. In addition, in November 1999, we acquired intellectual property,
tooling and other assets from Northrop Grumman
26
Corporation enabling us to manufacture and sell electric drivetrains. See
Note O to our Consolidated Financial Statements in this Annual Report on
Form 10-K for more information regarding our acquisitions.
In May 1997, we formed Beacon Power Corporation to develop stationary,
terrestrial flywheel energy storage systems for commercial applications. On
October 23, 1998, Beacon Power completed a $4.8 million private placement of its
class D redeemable preferred stock and warrants to third-party investors, and we
relinquished significant control of Beacon Power. As of October 23, 1998, we
owned 0.1% of Beacon Power's voting stock and 67.0% of Beacon Power's
outstanding capital stock. From June 1999 through March 31, 2000, Beacon Power
was financed through the issuance of approximately $4.7 million of bridge notes
and warrants to its investors, including $1.0 million from us. On April 7, 2000,
Beacon Power issued 1,226,141 shares of its class E redeemable preferred stock
and warrants to purchase 306,535 shares of its class E preferred stock in
exchange for the conversion of all of its outstanding bridge notes of which we
received 347,407 shares of Beacon Power's class E redeemable preferred stock and
a warrant to purchase 86,852 shares of its class E preferred stock. As of
April 7, 2000, we owned 11.0% of Beacon Power's voting stock and 61.0% of Beacon
Power's outstanding capital stock. On April 21, 2000, Beacon Power raised an
additional $4.1 million through the sale of additional bridge notes and warrants
to purchase 41,000 shares of Beacon Power's common stock. We did not participate
in this financing. On May 23, 2000, Beacon Power issued 6,785,711 shares of its
class F preferred stock and additional warrants to purchase shares of Beacon
Power's common stock. The shares of class F preferred stock and the additional
warrants were issued in consideration for the cancellation of $5.2 million in
bridge notes and an additional $23.3 million cash investment by existing and new
investors. We did not participate in this financing either. As of May 23, 2000,
we owned 3.5% of Beacon Power's voting stock and 33.0% of Beacon Power's
outstanding capital stock. As of September 30, 2000, we owned approximately 3.5%
of the outstanding voting stock of Beacon Power and 32.1% of the capital stock
of Beacon Power on a common equivalent basis after taking all dividend accruals
into account.
The results of our operations include a $3.1 million loss of Beacon Power
from May 8, 1997 to December 24, 1997 under the consolidation method of
accounting. On December 24, 1997, we began accounting for our investment in
Beacon Power in accordance with SEC Staff Accounting Bulletin No. 30/Topic 5.E.
(SAB) "Accounting for Divesture of a Subsidiary or Other Business Operation" and
have included 100% of Beacon Power's $7.1 million loss for the period from
December 25, 1997 through May 1999 in a manner similar to the equity method of
accounting, at which time, our initial investment of $1.9 million, the $30,000
additional investment and the additional deemed investment of $4.8 million and
accrued dividends of $410,000 had been written down to zero. In June 1999, we
committed up to $1.0 million of additional financing to Beacon Power,
representing a minority share of a funding commitment received by Beacon Power
and we began accounting for our investment in Beacon Power under the equity
method of accounting and have included in our results through September 30, 2000
our share of Beacon Power's losses of $1.9 million. As of September 30, 2000,
our additional investment in Beacon Power had been reduced to zero and our
contingent obligation to Beacon Power's class D preferred stockholders was
$5.8 million. We will continue to record additional losses from Beacon Power to
the extent of additional dividends accrued on the contingent obligation to the
class D preferred stockholders of Beacon Power.
In November 2000, Beacon Power completed an initial public offering of its
common stock and issued 8,000,000 shares of common stock at $6.00 per share.
Upon the closing of Beacon Power's initial public offering, we owned
approximately 25% of Beacon Power's voting stock. In connection with the closing
of the initial public offering, the put right, as described in Note E to our
financial statements, was terminated and the contingent obligation to class D
preferred stockholders of Beacon Power will be reclassified as additional paid
in capital. In addition, our preferred stock in Beacon Power was converted into
9,694,812 shares of Beacon Power's common stock. In accordance with SEC Staff
Accounting Bulletin No. 51, our investment and additional paid in capital will
be written up during the first quarter of fiscal 2001 to reflect our beneficial
interest in the book value of the stockholders' equity of Beacon Power, which
27
we estimate to be approximately $15.0 million. After the write-up of our
investment in Beacon Power, we will continue to account for our investment in
Beacon Power under the equity method of accounting and record our share of
losses from Beacon Power on a one-quarter trailing basis until our investment in
Beacon Power has been reduced to zero. If in the future, our ownership interest
in Beacon Power's outstanding capital stock is reduced to below 20% and we
determine that we do not have the ability to exercise significant influence over
the operating and financial policies of Beacon Power, our investment in Beacon
Power will be accounted for using the fair value method as set forth in SFAS No.
115 based upon the carrying value of our investment in Beacon Power at the time
our interest is reduced to below 20%. At that time, we will no longer be
required to record our share of any losses from Beacon Power. Under the fair
value method, the value of the investment will be carried at fair market value
with any unrealized holding gains or losses to be included in stockholders'
equity as a component of other accumulated comprehensive income.
We recognize revenue from product sales in accordance with Staff Accounting
Bulletin No. 101 "Revenue Recognition." Product revenue is recognized when there
is persuasive evidence of an arrangement, delivery of the product to the
customer has occurred, at which time title generally is passed to the customer,
and we have determined that collection of a fixed fee is probable, all of which
occur upon shipment of the product. If the product requires installation to be
performed by us, all revenue related to the product is deferred and recognized
upon the completion of the installation. We provide for a warranty reserve at
the time the product revenue is recognized.
We perform funded research and development and product development for
commercial companies and government agencies under both cost reimbursement and
fixed-price contracts. Cost reimbursement contracts provide for the
reimbursement of allowable costs and, in some situations, the payment of a fee.
These contracts may contain incentive clauses providing for increases or
decreases in the fee depending on how costs compare with budget. On fixed-price
contracts, revenue is generally recognized on the percentage of completion
method based upon the proportion of costs incurred to the total estimated costs
for the contract. Revenue from reimbursement contracts is recognized as services
are performed. In each type of contract, we receive periodic progress payments
or payment upon reaching interim milestones. All payments to us for work
performed on contracts with agencies of the U.S. government are subject to audit
and adjustment by the Defense Contract Audit Agency. Adjustments are recognized
in the period made. When the current estimates of total contract revenue for
commercial product development contracts indicate a loss, a provision for the
entire loss on the contract is recorded. Any losses incurred in performing
funded research and development projects are recognized as research and
development expense as incurred.
Cost of revenue includes cost of product revenue, including materials, labor
and overhead. Costs incurred in connection with funded research and development
arrangements are included in research and development expenses.
We have incurred significant costs to develop our technology and products.
These costs have exceeded total revenues. As a result, we have incurred net
losses for the fiscal years ended 2000, 1999, 1998, 1997 and 1996. As of
September 30, 2000, we had an accumulated deficit of $40.2 million. We intend to
significantly increase our capital expenditures and operating expenses to
rapidly expand our manufacturing capabilities and for general corporate
purposes, including product development activities, sales and marketing and
administrative activities. Because we expect to continue to invest in our
business ahead of anticipated future revenues, we expect to incur operating
losses at least through the next two years.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains or incorporates forward-looking
statements within the meaning of section 27A of the Securities Act of 1933 and
section 21E of the Securities Act of 1934. You can identify these
forward-looking statement by our use of the words "believes," "anticipates,"
"plans," "expects," "may," "will," "intends," "estimates," and similar
expressions, whether in the negative or in the
28
affirmative. Although we believe that these forward-looking statements
reasonably reflect our plans, intentions and expectations, our actual results
could differ materially from the plans, intentions and expectations disclosed in
the forward-looking statements we make. We have included important factors in
the cautionary statements below under the heading "Factors Affecting Future
Results" that we believe could cause our actual results to differ materially
from the forward-looking statements that we make. These factors also include,
without limitation, those set forth in Exhibit 99 to this Form 10-K, which are
expressly incorporated by reference herein. We do not intend to update
information contained in any forward-looking statements we make.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1999
PRODUCT REVENUE. Product revenue increased by $13.3 million or 146% from
$9.1 million to $22.4 million. This increase was attributable to $7.4 million in
revenue from Ling Electronics, $2.3 million from increased volume in our
microelectronics products, primarily from radio frequency amplifiers that are
currently used in satellite uplink systems, satellite television and wireless
Internet service, $2.3 million from increased volume in our magnetic levitation
products and $1.3 million from increased volume from high performance motors.
FUNDED RESEARCH AND DEVELOPMENT REVENUE. Funded research and development
revenue increased by $2.3 million or 36% from $6.4 million to $8.6 million. This
increase was attributable to an additional $2.4 million in funded research and
development revenue from a Department of Energy program to develop low-cost
power conversion modules for electric and hybrid-electric vehicles and was
partially offset by our increased focus on internally funded research projects
including the development of power conversion products for the distributed power
generation market.
GROSS MARGIN. Gross margin increased by $6.0 million or 101% from
$6.0 million to $12.0 million. Gross margin from products increased by
$3.7 million and funded research and development increased by $2.3 million.
Gross margin from product revenue as a percentage of product revenue increased
to 15% from (4%). The improvement in gross margin from product revenue as a
percentage of product revenue is due to improved plant utilization at MagMotor
and Film Microelectronics and the inclusion of revenue and gross margin from
Ling Electronics.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $3.7 million or 57% from $6.6 million to $10.3 million. The
increase was primarily attributable to an additional $2.9 million in funded
research and development expenses related to the Department of Energy contract
as well as our increased focus on internally funded research projects including
the development of power conversion products for the distributed power
generation market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.2 million or 13% from $8.8 million to
$10.0 million. The increase was primarily due to the inclusion of $2.9 million
of costs from Ling Electronics, $800,000 of costs for facilities and staffing in
an effort to meet expected growth and demand for our products and the inclusion
of a full year of expenses related to Inductive Components and Lighthouse
Software which were acquired in January 1999 and HyComp which was acquired in
April 1999. These increases were offset by the recording of $2.2 million of
non-cash stock-based compensation expense related to the issuance of stock
options and warrants to consultants and $1.0 million of additional reserves for
unbilled contract costs and fees and accounts receivable in 1999. Based on the
facts and circumstances during 1999, we established a reserve of $521,000 for
unbilled contract costs and fees related to a contract with the Department of
the Air Force which was terminable by the Department of the Air Force if it
determined that we were in default under the contract. In addition, we provided
$513,000 in reserve for unbilled contract costs and fees and accounts receivable
to properly reflect the reserve requirements.
29
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $846,000
or 228% from $371,000 to $1.2 million. This increase was the result of
amortization of intangibles recorded in connection with the acquisitions of
Inductive Components and Lighthouse Software in January 1999, Ling Electronics
in October 1999 and certain intellectual property and other intangible assets
from Northrop Grumman in November 1999.
OTHER INCOME (EXPENSE), NET. Other income, net increased to $460,000 from
$224,000 of other expense, net. The increase was the result of an increase in
cash and cash equivalents being maintained in interest-bearing accounts and a
decrease of interest expense associated with our line of credit.
LOSS FROM BEACON POWER CORPORATION. Loss from Beacon Power decreased by
$3.4 million or 79% from $4.3 million to $899,000. During the year ended
September 30, 2000, we recorded our share of Beacon Power's losses of $899,000,
under the equity method of accounting. As of December 31, 1999, our investment
in Beacon Power had been reduced to zero, however, we continued to record losses
from Beacon Power to the extent of additional interest accrued on the contingent
obligation to the class D preferred stockholders of Beacon Power. During the
year ended September 30, 1999, we recorded 100% of Beacon Power's losses of
$3.6 million in accordance with SAB Topic 5.E., in a manner similar to the
equity method of accounting through May 1999 and in June 1999, we began
accounting for our investment in Beacon Power under the equity method of
accounting and recorded our share of Beacon Power's losses of $734,000 from June
1999 to September 1999.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1998
PRODUCT REVENUE. Product revenue increased $1.6 million or 21% from
$7.5 million to $9.1 million. This increase was attributable to $1.0 million
from the introduction of our magnetic levitation products and $396,000 from
increased volume in our microelectronics products, primarily from radio
frequency amplifiers that are currently used in satellite uplink systems,
satellite television and wireless Internet service and $202,000 from increased
volume from high performance motors.
FUNDED RESEARCH AND DEVELOPMENT REVENUE. Funded research and development
revenue decreased by $1.7 million or 21% from $8.0 million to $6.4 million.
During the year ended September 30, 1999, we devoted more resources to
internally funded research and development programs including the development of
power conversion products for the distributed power generation market.
GROSS MARGIN. Gross margin decreased by $4.1 million from $10.1 million to
$6.0 million. Gross margin from products decreased by $2.4 million and funded
research and development revenue decreased by