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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-31973
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BEACON POWER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3372365
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
234 BALLARDVALE STREET 01887-1032
Wilmington, Massachusetts 02184 (zip code)
(Address of principal executive offices)
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(978) 694-9121 PHONE
(978) 694-9127 FAX
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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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. / /
As of March 19, 2001, the market value of the voting stock of the Registrant
held by non-affiliates of the Registrant was $290,728,721.
The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of March 19, 2001 was 42,287,814
DOCUMENTS INCORPORATED BY REFERENCE
Pertinent extracts from the Registrant's Proxy Statement for the 2001 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
are incorporated by reference into Part III of this Form 10-K. Such information
incorporated by reference shall not be deemed to specifically incorporate by
reference the information referred to in Item 402(a)(8) of Regulation S-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
Item 4A. Executive Officers of the Company........................... 9
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 27
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 47
PART III
Item 10. Directors and Executive Officers............................ 48
Item 11. Executive Compensation...................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 48
Item 13. Certain Relationships and Related Transactions.............. 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 49
Signatures.................................................................. 53
1
NOTE REGARDING FORWARD LOOKING STATEMENTS:
This Annual Report on Form 10-K contains forward-looking statements
concerning, among other things, the Company's expected future revenues,
operations and expenditures and estimates of the potential markets for the
Company's services. Such statements made by the Company fall within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All such forward-looking statements
are necessarily only estimates of future results and the actual results achieved
by the Company may differ materially from these projections due to a number of
factors as discussed in the section entitled "Quantitative and Qualitative
Disclosure about Market Risk--Certain Factors Affecting Future Operating
Results" of this Form 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
We design and develop flywheel energy storage systems that we believe will
provide highly reliable, high-quality, uninterruptible electric power for
communications and computer networks, the Internet, industrial manufacturing,
commercial facilities and distributed generation products that allow the user to
generate power locally by converting fuel to electricity. The broad use of
digital electronics and computers throughout the information economy is causing
a dramatic increase in the demand for more reliable, higher quality power.
Distributed power is also emerging to overcome deficiencies in grid-supplied
power. Alternative energy storage technologies, including flywheel energy
storage, are emerging to meet this need.
Flywheel systems draw electrical energy from a primary power source such as
the electric grid or fuel cells, store that energy, and then convert that energy
to immediately provide peak power, voltage support and uninterruptible electric
power when the primary power source fails or is disrupted. We believe our
flywheels will offer significant advantages over conventional back-up power
systems that primarily use lead-acid batteries. The expected advantages include
improved certainty of operations, more reliable monitoring, higher reliability,
longer life, lower life-cycle cost, improved recharging capability, reduced
maintenance, more reliable monitoring, and greater environmental friendliness.
We have designed our initial products to specifically address the back-up
powering needs of the communications markets. Bell Atlantic, now part of Verizon
Communications, WinDBreak Cable and Telcordia Technologies Inc. have provided us
with application requirements that have helped with the definition, development
and testing of our 2kWh product. We have not entered into any agreements with,
or sold any units to, any of these entities. We have sales commitments for 114
of our 2kWh units, with deliveries expected to begin in 2001.
Over the longer term, we intend to capitalize on our strengths in the
communications markets to expand into other markets such as back-up power for
computers, internet services, industrial manufacturing and commercial
facilities. We will also target our future products toward enhancing the
performance of distributed generation products, such as gasoline or diesel
generators, fuel cells and microturbines. We believe that our flywheel systems
will be used in conjunction with these distributed generation products to
provide benefits that are not available from these products alone, such as an
instant-on capability and the ability to manage sudden changes in power.
In our initial public offering during the fourth quarter of 2000, we sold
9,200,000 shares of our common stock, inclusive of the underwriters' over
allotment, at an initial public offering price of $6 per share. We received net
proceeds from our initial public offering of approximately $49.3 million
reflecting gross proceeds of $55.2 million net of underwriter commissions of
approximately $3.9 million and other offering costs of approximately
$2.0 million.
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Since our inception, we have also raised $41,800,000 in cash from private
placement transactions from third-party investors, including GE Capital Equity
Investments, Inc., Penske Corporation, Mechanical Technology Incorporated,
SatCon Technology Corporation ("Satcon"), DQE Enterprises, Inc., Perseus
Capital, L.L.C., Micro-Generation Technology Fund, LLC and The Beacon Group
Energy Investment Fund II, L.P. Through these relationships, we expect to
improve our technology, operations and manufacturing practices, as well as our
marketing, sales and distribution capabilities. As part of the investment by GE
Equity, we have entered into an agreement with GE Corporate Research and
Development under which GE CR&D will provide us with technical expertise in
controls and materials.
COMMUNICATIONS MARKETS
Communications systems, which include telephony, broadband, cable and
wireless (cellular) networks, must remain functional during power outages or
disruptions. Most wire-line telephony providers design and equip their systems
to meet a goal of 100% reliability. Until recently, power was often provided
from central stations where lead-acid batteries typically provided back-up power
until a generator could be engaged. With the onset of the Internet and the
increased demand for telephone lines came an expanding demand for communications
bandwidth by customers. As fiber cables are being utilized to provide the
increased bandwidth, powering has begun to be decentralized in suburban and
rural areas where battery backup is unattended and contained in a non-climate
controlled environment. Because batteries are less reliable and have a
dramatically reduced life when used in a non-climate controlled environment, we
believe our flywheels provide significant advantages.
INTERNET SERVICE PROVIDERS
To support the growth in the Internet economy, Internet service providers,
or ISPs, are building new computer and communication system facilities. As
24-hour operations have become a necessity, ISPs must be able to provide their
customers with continuous, uninterrupted operations. To meet this goal, ISPs are
adding power quality and power reliability equipment to protect these systems.
We will develop products to address the high-power quality and reliability needs
of the new technology economy.
INDUSTRIAL MANUFACTURING
The growing reliance on automation equipment means that even a split-second
deviation in the voltage of electricity serving a manufacturing plant can cause
sensitive equipment to fail. This downtime can damage equipment and cause missed
deliveries and lost production, which can result in significant costs. We plan
on developing products to address the needs of industrial manufacturing.
COMMERCIAL FACILITIES
Power instabilities are a threat to data processing centers, call centers,
telecommunication switching facilities, emergency services, hospitals and other
mission critical commercial facilities. Also, many commercial facilities such as
office buildings, hotels and universities have extensive computer, server and
data center operations to maintain corporate records and information. Flywheel
storage systems create the opportunity to provide more reliable and
cost-effective back-up power at these facilities.
DISTRIBUTED GENERATION
The combination of the reduction in the reliability of grid-provided
electricity, the need for higher reliability electrical power for the
information economy, and the demand for off-grid powering is expected to result
in a significant market for distributed generation products, including gasoline
or diesel generators, fuel cells and microturbines. Whether distributed
generation technologies are connected to the grid or are used off-grid, we
believe these technologies represent a significant
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potential market for our next-generation flywheel energy storage products. For
grid connected systems, our flywheel systems will be designed to eliminate the
inherent lag in transferring a customer from utility power to fuel cell or
microturbine stand-by power in the event of a utility outage. For off-grid
applications, our systems will be designed to maintain power and voltage
constancy.
OUR PRODUCTS
Our initial product will provide 2kWh of energy at up to 1 kW of power.
Thus, the 2kWh flywheel would be able to provide 10 hours of back-up power to a
telecommunications site that requires 200 watts of power. For a site using the
full 1 kW capacity of the conversion electronics, the flywheel would provide
back-up power for two hours. At Verizon Communications, Century Communications,
now part of Adelphia Communications, and WinDBreak Cable, we have successfully
maintained power during loss of utility power with no degradation of service in
planned and unplanned tests. The amount of power and time can be increased by
paralleling flywheels as was done at the Verizon Communications site.
To meet a broad set of applications, we intend to build a set of modules
ranging from 20W to 250kW of power and a family of flywheels ranging from 200W
to 12kWh of energy. By combining a relatively small set of powering modules with
a similarly small set of energy modules, we intend to create a broad set of
products to meet a variety of application requirements. Our product strategy is
to add products to our line that will increase the possible applications of our
products and effective back-up time available to the communications market. In
addition, we intend to develop products that are targeted at power quality and
distributed generation applications. This product plan is depicted in the
following table:
POWER RELIABILITY AND POWER QUALITY FLYWHEEL PRODUCTS AND PRODUCT PLAN
MAXIMUM
ENERGY OUTPUT POWER OUTPUT EFFECTIVE BACK-UP TIME TARGET MARKETS
- ---------------------- ------------ ---------------------- -------------------------------------------
2kWh.................. 1kW 2-10 hours Communications, Smaller Remote Terminals
6kWh.................. 2kW 3-20 hours Communications, Larger Remote Terminals
Small Wireless
10-12kWh.............. 2kW 4-40 hours Communications, Larger Remote Terminals
Larger Wireless
2kWh.................. 30kW 4-30 minutes Computers and the Internet
Industrial Manufacturing
Commercial Facilities
Distributed Generation
Communications
2kWh.................. 250kW 30-150 seconds Computers and the Internet
Industrial Manufacturing
Commercial Facilities
Communications
As discussed under "Our Products" on the prior pages, our business plan
contemplates the development of higher and lower energy products and of higher
power products. We may experience delays in the development and
commercialization of those products if our systems exhibit technical defects or
are unable to meet cost or performance goals, which could have a material
adverse effect on the success of our business.
OUR TECHNOLOGY
Since our formation, we have been developing a flywheel energy storage
system to offer customers superior reliability and performance at a lower life
cycle cost. The flywheel is a rotating wheel on
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hybrid, magnetic bearings that operates in a near frictionless vacuum
environment. Energy is stored as kinetic energy in the rotating flywheel rim.
The flywheel is powered up to its operational speed, like a motor, using
electricity from a power source. The flywheel is able to spin for extended
periods with great efficiency, because the friction and drag are virtually
eliminated by employing magnetic bearings and a vacuum in the container. Because
it has very low friction, little power is required to maintain the flywheel's
operating speed. When the power source is eliminated, the spinning flywheel
drives a motor or generator, and its bi-directional inverter converts the
kinetic energy into electrical energy, providing it to an end-user just as a
battery back-up system would do. This conversion continues, and the flywheel
slows, until the electricity is discharged.
Flywheels have been used since the industrial revolution. Recent attempts at
commercializing flywheel systems have been based on technology developed for
aerospace applications that attempt to maximize the amount of stored energy with
the minimum system weight. Compact high-energy flywheels that can be
commercially cost competitive are a recent development. We are using new
enabling materials and products such as high-strength fiber, efficient electric
drives, and low-loss, long-life bearings to create new generations of flywheel
products. Our flywheels are fabricated from high-strength, lightweight fiber
composites, such as graphite and fiberglass combined with resins, which allow
the flywheel to rotate at high speeds and store large amounts of energy relative
to similar size and weight machines made from metals. For example, a 600-pound
steel flywheel running at 8,000 revolutions per minute, or RPM, will store
approximately 900 watt-hours of energy. In contrast, our 150-pound, composite
flywheel running at 22,500 RPM stores 2,700 watt-hours of energy and delivers
2,000 watt-hours of energy to the load. On a per pound basis, storing more
energy with steel flywheels is difficult. We believe we can, over time, nearly
double the speed of our composite flywheel product providing four times the
energy per pound of composite.
BACKLOG
At December 31, 2000, our backlog of orders was approximately $1.7 million
consisting of 114 units. We expect to ship 14 of these units with a value of
approximately $0.2 million during 2001 beginning in the second quarter. We did
not have orders in backlog at December 31, 1999.
RESEARCH AND DEVELOPMENT
We believe that our research and development efforts are essential to our
ability to successfully deliver our products to our targeted communications
customers, as well as our next generation of products to customers in the
computer, Internet, industrial manufacturing, commercial facilities and
distributed generation markets. Our research and development team has worked
closely with potential communications customers to define product features and
performance to address specific needs. Our research and development expenses,
including engineering expenses, were approximately $12,715,000 in 2000,
$3,506,000 in 1999 and $3,524,000 in 1998. We anticipate maintaining significant
levels of research and development expenditures in the future. At December 31,
2000, we employed 50 engineers and technicians who were engaged in research and
development.
MANUFACTURING
We currently have most components of our flywheel systems contract
manufactured to our design drawings and processes to facilitate more rapid
growth by taking advantage of installed manufacturing capacity. For a limited
number of non-proprietary components, we will generate performance
specifications and obtain either standard or custom components. We will perform
the final assembly and testing. Many of our manufacturing staff have been
trained in and are skilled in six sigma quality control techniques. Six sigma is
a strategic implementation of total quality management principles. We expect to
make these skills a key element of our manufacturing strategy to develop and
maintain production processes that result in high-quality, low-cost products.
5
The energy storage portion of our flywheels, the rim, is made from
composites, a combination of fibers and resins, as an alternative to
conventional metals. The rim is the most expensive component in our system.
While we outsource the manufacture of the composite rims, we are continually
evaluating whether to continue this outsourcing or to manufacture the rims
ourselves. To this end, we are building a state-of-the-art composite
flywheel-manufacturing laboratory to:
- accelerate the rate of cost reduction;
- assume increased control over composites, intellectual property and the
associated manufacturing processes; and
- enable us to manufacture the rim if that proves to be the most efficient
course.
To manage cost and supplier risk, we are positioning ourselves so that we
will have the ability to manufacture composite rims if we determine that to be
the right decision. To accomplish this, we have hired personnel skilled in
business management, design, and the manufacturing of composites. These people,
using our composite laboratory and suppliers, are evaluating manufacturing
processes and developing both the equipment and personnel skills required to
manage our suppliers' manufacturing processes.
We rely on outside suppliers for the supply of several of the key components
for our products, including the composite rim, electronics and housing. We have
not entered into any formal or informal agreements with any of our suppliers.
While the loss of supply from any one of our suppliers could impact our ability
to produce and sell our systems and thus our financial results, we believe that
we can replace any supplier with a new supplier. As timing and volume merit, we
will enter into long-term supply contracts with certain of our suppliers.
SALES AND MARKETING
We intend to market our products as highly reliable power systems that
exceed our customers' requirements. By combining superior products with
excellent customer service, we intend to become the market leader in the
communications markets for flywheel energy storage products.
In the communications markets, we expect to sell directly to our customers.
Our initial sales and marketing strategy is to identify key prospects in the
communications markets, and to work with those companies to formulate our
product plan, pricing, initial installation and service strategies. We have
conducted on-site demonstration testing at four of these companies, Verizon
Communications, Century Communications, now part of Adelphia Communications,
WinDBreak Cable and Telcordia, in order to begin the buying cycle and to
accelerate sales volume. We plan to expand these activities with other potential
customers. We have sales commitments for 100 units to TLER, 10 units to Cox
Communications and four units to Electric Power Research Institute.
Additionally, we have received a letter of intent, subject to certain testing
and certification conditions from Petroleos Mexicanos to purchase 300 to 500
units.
Since the communications markets consist of a relatively small number of
customers, initial sales will be made directly by means of our sales force. As
sales volume expands, this sales force will be expanded as appropriate. We
intend to expand our sales force in 2001. We will also consider the use of
manufacturer's representative organizations and strategic alliances with
original equipment manufacturers.
CUSTOMER SERVICE
We intend to use customer service to meet and exceed our customers'
requirements. We will intensively support installation and operation of our
flywheel systems. We intend to develop superior installation, operation, and
maintenance manuals for our customers and to provide them with excellent
training in all aspects of using flywheel systems. During the first few years we
will perform monitoring and diagnostics on our installed systems.
6
COMPETITION
Back-up power is provided today, almost entirely, by lead-acid batteries or
generators with lead-acid batteries, however, like Beacon, various energy
technology companies are attempting to compete in this space. We compete with:
- manufacturers and developers of battery technologies, such as Exide
Corporation, C&D Technologies Inc., Yuasa, Inc. and Fiamm;
- developers of flywheel technology such as Active Power, Inc., Trinity
Flywheel Power, U.S. Flywheel Systems and Acumentrics.
There are other companies selling fuel cells, diesel generators and micro
turbines as competitors. However, we believe that in most cases, our flywheels
will be complementary to their equipment. The power quality and power
reliability markets are intensely competitive, with the principal bases for
competition being system reliability and quality, brand recognition and price,
including the initial cost of the system to the customer and the total cost of
ownership.
INTELLECTUAL PROPERTY
Our success and ability to compete are dependent 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, however, may afford only limited protection for our technology.
We hold a perpetual, exclusive, royalty-free, worldwide right and license to
use SatCon's flywheel technologies and patents for stationary terrestrial
flywheel applications. Those rights include eight issued U.S. patents and 13
U.S. and foreign patent applications that expire on various dates between 2012
and 2018. This license covers SatCon's technologies and patents and all
improvements made by SatCon through the date of our initial public offering. We
are not entitled to any future improvements to its flywheel technology that
SatCon develops after our initial public offering. We own all technology
improvements we develop that are based on the technology licensed by us to
SatCon. We have granted SatCon a perpetual, worldwide, royalty-free, exclusive
right and license to use any improvements upon the flywheel energy storage
technology for any applications made by us other than stationary terrestrial
applications. SatCon's rights to further improvements made by us in our flywheel
technology terminated upon the consummation of our initial public offering. We
also have three pending U.S. patent applications, and eight other applications
being prepared for filing. Our patent and trade secret rights are of material
importance to us, and to our future prospects. We are actively pursuing both
national and foreign patent protection. At the direction of our board of
directors, management has established a patent committee that is charged with
pursuing the protection of intellectual property.
7
GOVERNMENT REGULATION
We do not believe that we will be subject to existing federal and state
regulatory commissions governing traditional electric utilities and other
regulated entities. We do believe that our products and their installation will
be subject to oversight and regulation at the local level in accordance with
state and local ordinances relating to building codes, safety, pipeline
connections and related matters. We intend to encourage the standardization of
industry codes to avoid having to comply with differing regulations on a
state-by-state or locality-by-locality basis.
EMPLOYEES
At December 31, 2000, we had a total staff of 99 full-time employees and 13
independent contractors, of which approximately 31 were involved in
manufacturing and assembly of our products, 50 were engineers and technicians
involved in research and development, four were in sales, marketing and customer
service. The remaining 27 people were involved in administrative tasks. As of
March 19, 2001, we had a total staff of 104 full-time employees and 18
independent contractors, of which approximately 39 were involved in
manufacturing and assembly of our products, 52 were engineers and technicians
involved in research and development, four were in sales and marketing and four
in customer service. The remaining 23 people were involved in administrative
tasks. None of our employees are represented by a union. We consider our
relations with our employees to be excellent.
ITEM 2. PROPERTIES
Our principal executive offices, laboratory and manufacturing facilities are
located at a single location in Wilmington, Massachusetts. This 51,650 square
foot facility operates under a lease that expires on September 30, 2007. If our
production growth meets our expectations, we will require additional space in
2003. At that time, we could require an additional 50,000 to 70,000 square feet
of production facility for assembly and testing of units.
ITEM 3. LEGAL PROCEEDINGS
In November 2000, one of our former employees commenced litigation against
us based on a disagreement regarding his rights to exercise stock options as of
November 2, 2000. We settled this claim in January 2001, by agreeing to allow
him to exercise 53,000 shares of such stock. This settlement will not have a
material impact on the financial statements of the Company.
Other than the action described above, we are not involved in any legal
proceedings. However, we may from time to time be involved in legal proceedings
in the ordinary course of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a Written Consent in Lieu of a Meeting of Stockholders dated
October 18, 2000, holders of the requisite majority of our then outstanding
shares of voting securities approved various resolutions in connection with our
initial public offering. These matters included the approval of certain
amendments to our certificate of incorporation, the filing of our Fifth Amended
and Restated Certificate of Incorporation upon the effective date of our initial
public offering and the filing of our Sixth Amended and Restated Certificate of
Incorporation upon the closing date of our initial public offering. Also
approved were certain amendments to our By-laws and the adoption of our Amended
and Restated By-laws. Our stockholders also adopted our Employee Stock Purchase
Plan and authorized our management to take action necessary to prepare, execute
and file with the Securities and Exchange Commission a Registration Statement on
Form S-8 for the purpose of registering shares of our common stock to be
distributed to such plan and our Second Amended and Restated 1998 Stock
Incentive Plan.
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ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers, their positions and their ages as of December 31,
2000, are as follows:
NAME AGE POSITION
- ---- -------- --------
William E. Stanton............. 57 President and Chief Executive Officer, Director
John J. Doherty................ 57 Vice President of Sales and Marketing
Robert D. French............... 61 Vice President of Manufacturing
Matthew L. Lazarewicz.......... 50 Vice President of Engineering
Maureen A. Lister.............. 38 Vice President of Operations Management and Chief
Administrative Officer
Stephen A. Spanos.............. 37 Corporate Controller
James M. Spiezio............... 52 Vice President of Finance and Chief Financial Officer
WILLIAM E. STANTON. Mr. Stanton has served as our President and Chief
Executive Officer since January 1998 and a director since 1997. Prior to January
1998, he served as our general manager. Prior to joining Beacon, Mr. Stanton was
the Chief Operating Officer of SatCon from September 1995 to May 1997, where he
managed operations and the strategy development to convert SatCon from a
contract research and development company to a commercial product organization.
This strategy included the formation of Beacon Power. Prior to joining SatCon,
Mr. Stanton was one of two Vice Presidents of Operations at the Charles Stark
Draper Laboratory where he managed between $50 million and $75 million of
contract research and development annually. At Draper, he had also served as the
Vice President of Corporate Development, where he led strategic planning,
developed and managed a $25 million annual corporate research and development
program, and helped create new business units that were generating over
$30 million in software and avionics products annually. Mr. Stanton received a
Bachelor's Degree in Electrical Engineering from the University of Maine, a
Master's Degree in Instrumentation and Control from the Massachusetts Institute
of Technology, and a Master's in Business Administration from the Harvard
Business School. Mr. Stanton's term of office as director expires in 2001.
JOHN J. DOHERTY. Mr. Doherty joined us as Vice President of Sales and
Marketing during January 2001. He has over 30 years of sales and marketing
management including senior management experience in 4 start up companies. Mr.
Doherty has over eight years experience selling high speed composite flywheel
systems. Prior to joining Beacon he was president of New Frontier
Enterprises, Inc. a consulting firm that specializes in developing sales and
marketing solutions for new and emerging technologies. His clients in the
flywheel industry have included British Nuclear Fuel Limited and International
Energy Systems Ltd. in the United Kingdom, and Satcon and Beacon Power in the
United States. Prior to New Frontier Enterprises, Inc. Mr. Doherty was Senior
Vice President of Marketing for Best Power Technology the world's largest
manufacturer of mid-range UPS systems. He is a member of the Institute of
Electrical and Electronics Engineers (IEEE) and attended St. Joseph's University
and the University of North Florida.
ROBERT D. FRENCH. Mr. French joined us in April 2000 as Vice President of
Manufacturing at Beacon and is responsible for the definition and growth of all
phases of production. Prior to joining us, Mr. French worked for the General
Electric Company in various capacities. His most recent position was with the
Aircraft Engine Group, where from 1995 to 2000, he worked on transitioning the
U.S. Navy's newest fighter engine, the F414, from development to full
production. Prior to this, Mr. French was involved in the building and operating
of an automated factory for jet engine components and held
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positions as Manager of Engine Assembly and Flight Support and as Manufacturing
Program Manager for several engine product lines. His professional career began
with the U.S. Army Materials and Mechanics Research Center, progressing from
Metallurgist to Director of the Metals and Ceramics Laboratory and transitioning
technology from research and development through manufacturing process
development. Dr. French received his Bachelor's and Master's Degrees in
Mechanical Engineering from Northeastern University and his Ph.D. in
Engineering, with a major in Materials Science, from Brown University.
MATTHEW L. LAZAREWICZ. Mr. Lazarewicz has served as our Vice President of
Engineering since February 1999. Prior to joining us, Mr. Lazarewicz worked for
General Electric Company in various capacities. He started his 25-year career
with the General Electric Company in the gas turbine division as a design
engineer. After a transfer to GE Aircraft Engines, he progressed through a
variety of positions in design, manufacturing, quality, marketing, and product
support in both military and commercial applications. Most recently he served as
a manager of program independent analysis from 1996 to 1999, and he was the
mechanical design manager for the F414 engine used in the Navy front line F/A18
fighter using concurrent engineering practices from 1991 to 1996. This included
the development through production phases. He was recognized as the GE Aircraft
Engines "Engineer of the Year" and received the Department of Defense
"Excellence in Acquisition" Award for his leadership of this project. Mr.
Lazarewicz is a Registered Professional Engineer in the Commonwealth of
Massachusetts and received both Bachelor's and Master's Degrees in Mechanical
Engineering from the Massachusetts Institute of Technology. Mr. Lazarewicz also
completed his Master's Degree in Management at the Massachusetts Institute of
Technology Sloan School of Management.
MAUREEN A. LISTER. Ms. Lister serves as our Vice President of Operations
Management and Chief Administrative Officer. She joined us as Vice President,
Chief Financial Officer, Treasurer and Secretary, in March 1998 responsible for
all aspects of finance including fund raising and investor relations. Prior to
joining us, Ms. Lister was Vice President and Chief Financial Officer at
Priscilla of Boston, Inc., a manufacturing and retail operation with
$10 million in annual revenues, from November 1996 to February 1998, where she
was responsible for all aspects of financial and treasury management. Prior to
joining Priscilla of Boston, Inc., Ms. Lister served as Chief Financial Officer
at Cahners Direct Marketing Systems, a $35 million direct mail business, from
August 1995 to November 1996, where she was responsible for all aspects of the
business including financial reporting and mergers and acquisitions. Prior to
Cahners, she held the position of Vice President of Finance and Operations with
Rigby, a $32 million publisher and distributor, from August 1991 to August 1995,
where Ms. Lister was responsible for joint venture activity, warehouse and
distribution as well as the establishment of an employee run retail store. Ms.
Lister holds a Bachelor of Science in Finance (with Honors) from Northeastern
University and a Master's of Business Administration from DePaul University.
STEPHEN A. SPANOS. Mr. Spanos joined us in January 2001 as our Corporate
Controller. He has over fifteen years of financial accounting experience,
including eight years of public accounting and seven years in financial
management. Prior to joining Beacon Power, Mr. Spanos was with Waste Systems
International (WSI), a publicly traded solid-waste management company, from
October 1998 to January 2001 where he most recently served as Corporate
Controller. From 1996 until October 1998, Mr. Spanos held financial management
positions with Picturetel, a manufacturer of videoconferencing products and Zoom
Telephonics, a manufacturer of modems and other telephony products. Mr. Spanos
holds both a Bachelor of Science in Business Administration and a Master's of
Business Administration from Boston University. Mr. Spanos is also a Certified
Public Accountant.
10
JAMES M. SPIEZIO. Mr. Spiezio joined us in May 2000. He has served as our
Vice President of Finance and Chief Financial Officer since July 2000 and our
Corporate Controller from May 2000 to July 2000. He worked as a financial
consultant from November 1999 to May 2000. He has over twenty-five years of
diversified manufacturing and financial management experience. Prior to acting
as an independent financial consultant, Mr. Spiezio was the Chief Financial
Officer at Starmet Corporation, a diversified metallurgical manufacturing
company, from January 1993 to November 1999. While at Starmet he also served as
President of a wholly owned manufacturing facility for five years and held
additional financial management positions including Corporate Controller and
Manager Planning and Analysis. Prior to joining Starmet, Mr. Spiezio held
financial management positions with United Technologies Corporation, Pratt &
Whitney Aircraft Group in accounting, cost and business analysis. Prior to
Pratt & Whitney, Mr. Spiezio held financial management positions with General
Electric Company in both the Power Systems and Apparatus Services business
groups. Mr. Spiezio is a graduate of the Indiana University School of Business.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently quoted on the NASDAQ National Market
under the symbol "BCON". The following table sets forth the high and low sales
price of the common stock for the period indicated.
HIGH LOW
-------- --------
Fourth quarter (November 17, 2000* through December 31,
2000)..................................................... $10.125 $6.125
- ------------------------
* November 17, 2000 was the first day of trading for our common stock.
On March 19, 2001, the last reported sale price of the common stock on the
NASDAQ National Market was $6.88 per share, and there were approximately 42
holders of record of common stock.
We have never declared or paid cash dividends on shares of our common stock.
We expect to retain any future earnings to finance the expansion of our
business, and therefore we do not expect to pay cash dividends in the
foreseeable future. Payment of future cash 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
Since December 31, 1999, we have issued the following securities:
1. In January 2000, we sold senior secured convertible promissory notes to four
of our existing shareholders in an aggregate principal amount of $600,000.
The aggregate purchase price of the securities was $600,000. These notes
were convertible, and were subsequently repaid or converted in April 2000,
into class E preferred stock at the same price at which the class E
preferred stock was to be issued. Our class E preferred stock was converted
into common stock upon our initial public offering.
2. In April 2000, we sold an aggregate of 1,226,141 shares of our class E
preferred stock to four of our existing shareholders at a purchase price of
$3.12 per share and warrants to purchase 306,535 shares of our class E
preferred stock at an exercise price of $2.50 per share. The aggregate
consideration for the securities was the cancellation of $3,550,000
principal amount of bridge notes and $275,559 accrued interest on those
bridge notes and cancellation of the warrants issued in connection with the
bridge notes. The shares of class E preferred stock were convertible at any
time into shares of our common stock. Our class E preferred stock was
converted into common stock upon our initial public offering.
3. In February 2000, we issued demand promissory notes to two of our existing
shareholders for an aggregate principal amount of $600,000. The aggregate
purchase price of these securities was $600,000. These notes were
convertible, and were subsequently repaid or converted in May 2000, into
shares of our class F preferred stock at the same price at which the
class F preferred stock was to be issued. Our class F preferred stock was
converted into common stock upon our initial public offering.
4. In March 2000, we issued demand promissory notes to three of our existing
shareholders for an aggregate principal amount of $800,000. These notes were
convertible, and were subsequently converted in May 2000, into shares of our
class F preferred stock at the same price at which the class F preferred
stock was to be issued. Our class F preferred stock was converted into
common stock upon our initial public offering.
12
5. In April 2000, we issued demand promissory notes to two of our existing
shareholders and three new investors for an aggregate principal amount of
$4,100,000 and warrants to purchase 82,000 shares of our common stock. These
notes were convertible, and were subsequently converted in May 2000, into
shares of our class F preferred stock at the same price at which the
class F preferred stock was to be issued. Our class F preferred stock was
converted into common stock upon our initial public offering.
6. In May 2000, we sold to three of our existing shareholders and four new
investors 6,785,711 shares of our class F preferred stock at a purchase
price of $4.20 per share and warrants to purchase 6,333,333 shares of our
common stock at an exercise price of $2.25 per share. The aggregate purchase
price of the securities was $23,300,000 in cash and the cancellation of
$5,200,000 principal amount of convertible notes. The shares of class F
preferred stock were convertible at any time into shares of our common
stock. Our class F preferred stock was converted into common stock upon our
initial public offering.
7. In June-September 2000, we issued 157,334 shares of our common stock upon
the exercise of stock options by four employees in exchange for a per share
consideration of $0.89 or an aggregate consideration of $140,028.
8. In August 2000 we issued warrants to purchase 70,000 shares of our common
stock to two consultants currently providing consulting services to our
company in the areas of sales, marketing, strategic planning and research
and development. These services were valued at $490,000.
9. In September 2000 we issued 24,000 shares of our common stock upon the
exercise of a warrant by one of our investors in exchange for a per share
consideration of $2.10 or an aggregate consideration of $50,400.
10. In September 2000 one of our investors transferred 476,190 shares of our
class F preferred stock, warrants to purchase 8,000 shares of common stock
and warrants issued in connection with the class F preferred stock financing
to purchase 444,444 shares of our common stock.
11. In September 2000 one of our investors transferred 1,124 shares of our
common stock.
12. In October 2000, in accordance with a prior agreement, we issued a warrant
to purchase 240,000 shares of our common stock to one of our existing
investors in connection with an agreement by an affiliate of that investor
to provide us with technical expertise in controls and materials. The
aggregate exercise price of this warrant was $504,000.
13. In October 2000, we issued 60,000 shares of our class A preferred stock to
one of our existing shareholders in exchange for consulting services
rendered valued at $471,500. The shares of class A preferred stock were
convertible at any time into shares of our common stock. Our class A
preferred stock was converted into common stock upon our initial public
offering.
14. In October and November 2000, we issued 250,000 shares of our common stock
upon the exercise of stock options by two employees in exchange for a per
share consideration of $0.89 or an aggregate consideration of $55,625.
13
15. Between January 1, 2000 and the date of our initial public offering, we
granted options to purchase common stock to our executive officers,
employees and consultants. The following table sets forth information
regarding these grants:
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
January 1, 2000 to April 1, 2000..................... 259,000 $0.89
April 5, 2000 to May 10, 2000........................ 872,188 2.10
June 5, 2000......................................... 799,000 2.50
June 5, 2000......................................... 300,000 3.10
June 5, 2000......................................... 300,000 6.00
June 26, 2000........................................ 90,000 3.10
July 24, 2000........................................ 250,000 4.10
August 21, 2000...................................... 198,000 5.10
September 7, 2000.................................... 58,000 6.10
September 27, 2000................................... 84,000 6.10
16. Effective immediately prior to our initial public offering in November 2000,
we effected a 2-for-1 stock split of our common stock.
17. As a result of our public offering in November 2000, we converted each
outstanding share of our class A, C, D, E and F preferred stock into two
shares of our common stock.
18. Upon the closing of our public offering in November 2000, we issued 859,330
shares of our common stock in payment of accrued dividends on our class D
and E preferred stock.
19. Upon the closing of our public offering in November 2000, we issued 14,464
shares of our common stock in payment of consulting fees to one of our
existing shareholders in exchange for consulting services rendered valued at
$86,784.
20. In December 2000 we issued an aggregate of 1,982,876 shares of our common
stock to two of our investors in connection with the cashless exercise of
previously issued warrants to purchase our common stock.
There were no underwriters employed in connection with any of the
transactions set forth in this Item 15.
The issuances of securities described in Paragraphs 1-6, 8-13, and 18-21
were exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act as transactions by an issuer not involving a public
offering. We reasonably believe that each of the investors who received
securities in these issuances was an accredited investor as such term is defined
in Rule 501(a) promulgated under the Securities Act. The issuances of the
securities described in Paragraphs 16 and 17 were exempt from registration in
reliance on Section 3(a)(9) of the Securities Act. The issuances of the
securities described in Paragraphs 7, 14 and 15 were exempt from registration
under the Securities Act in reliance on Section 4(2) or Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other instruments
issued in such transactions. All recipients either received adequate information
about our company or had access, through employment or other relationships, to
such information.
14
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
On November 16, 2000, the Securities and Exchange Commission declared our
Registration Statement on Form S-1 (File No. 333-43386) effective. In our
initial public offering during the fourth quarter of 2000, we sold 9,200,000
shares of our common stock, inclusive of the underwriters' over allotment, at an
initial public offering price of $6.00 per share. We received net proceeds from
our initial public offering of approximately $49.3 million, reflecting gross
proceeds of $55.2 million net of underwriter commissions of approximately
$3.9 million and other offering costs payable to persons, other than directors
or officers, of approximately $2.0 million.
From November 16, 2000 to December 31, 2000, we spent approximately
$1.7 million to complete the build-out of our new facility at 234 Ballardvale
Street in Wilmington, MA and for certain working capital needs. The remainder of
the net offering proceeds have been invested in short-term, income producing
bank deposits pending their use for the purchase of property and equipment and
working capital needs. None of these amounts were direct or indirect payments to
directors or officers of the issuer or their associates or to persons owning 10%
or more of our common stock or to any of our affiliates.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the related notes, found
elsewhere in this Form 10-K.
The following tables present selected historical financial data for the
years ended December 31, 2000, 1999 and 1998 and for the period from May 8,
1997, the date of our inception, through December 31, 2000.
PERIOD FROM DATE PERIOD FROM DATE
OF INCEPTION OF INCEPTION
YEAR ENDED DECEMBER 31, (MAY 8, 1997) TO (MAY 8, 1997) TO
------------------------------ DECEMBER 31, DECEMBER 31,
2000 1999 1998 1997 2000
-------- -------- -------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ 50 $ 269 $ -- $ 232 $ 551
Operating expenses:
Selling, general and
administrative................ 4,631 1,559 1,188 1,168 8,547
Research and development........ 12,715 3,506 3,524 2,292 22,036
Loss on sales commitments....... 51 325 -- -- 376
Depreciation and amortization... 401 219 78 -- 698
-------- -------- -------- -------- --------
Total operating expenses.......... 17,798 5,609 4,790 3,460 31,657
-------- -------- -------- -------- --------
Loss from operations.............. (17,748) (5,340) (4,790) (3,228) (31,106)
Interest and other income
(expense), net.................. 330 (331) (3) 117 111
-------- -------- -------- -------- --------
Net loss.......................... (17,418) (5,671) (4,793) (3,111) (30,995)
Preferred stock dividends......... (35,797) (917) (112) -- (36,826)
Accretion of redeemable
convertible preferred stock..... (64) (42) (7) (113)
-------- -------- -------- -------- --------
Loss to common shareholders....... (53,279) (6,630) (4,912) (3,111) (67,934)
Net loss per share, basic and
diluted......................... $ (10.77) $(393.52) $(291.58) $(184.67)
Shares used in computing net loss
per share, basic and diluted.... 4,946 17 17 17
AS OF DECEMBER 31,
-----------------------------------------
2000 1999 1998 1997
-------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $62,497 $ 234 $ 2,491 $ 30
Working capital............................................ 59,224 (878) 1,481 (29)
Total assets............................................... 67,738 974 2,992 112
Redeemable convertible preferred stock..................... -- 4,535 4,493 --
Total stockholders' equity (deficit)....................... $63,308 $(8,591) $(2,720) $ (1)
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements, the
notes to those financial statements and other financial information appearing
elsewhere in this document. In addition to historical information, the following
discussion and other parts of this document contain forward-looking statements
that reflect our plans, estimates, intentions, expectations and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. See "Note Regarding Forward-Looking Statements."
Factors that could cause or contribute to such differences include, but are not
limited to, those set forth in the "Certain Factors Affecting Future Operating
Results" section and contained elsewhere in this Form 10-K.
OVERVIEW
We design and develop flywheel energy storage systems that we believe will
provide highly reliable, high-quality, uninterruptible electric power for
communications networks, computers, the Internet, industrial manufacturing,
commercial facilities and distributed generation products.
A former division of SatCon Technology Corporation, we were founded in May
1997. Since our inception, we have raised $41.8 million in private equity and
approximately $49.3 million in our initial public offering. These funds have
allowed us to develop and test field-trial flywheel units and to continue
development of our first commercial product. These funds will allow us to
complete our product design, increase manufacturing capacity and begin
commercial production.
From our inception through December 31, 2000 we have incurred losses of
approximately $67.9 million. We expect to continue to incur losses as we expand
our product development and commercialization program and prepare for the
commencement of full manufacturing operations. We expect that losses will
fluctuate from quarter to quarter and that such fluctuations may be substantial
as a result of, among other factors, the number of systems we produce and sell
to our customers.
REVENUES. During the fourth quarter of 2000, we shipped our first units and
have orders to ship additional commercial units during 2001 and 2002. Prior to
the fourth quarter of 2000, our revenues have been the result of development
contracts with government entities focused on the design of flywheel
technologies. We have placed several development prototypes with potential
customers and shipped pre-production units. These products were provided to
potential customers without charge or on a demonstration basis to allow us
access to field test information and to demonstrate the application of our
technologies. We believe that through the performance of these field units we
will obtain additional commercial orders.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our sales and marketing
expenses consist primarily of compensation and benefits for our sales and
marketing personnel and related business development expenses. We are emerging
from research and development to introduction of commercial products through
manufacturing. Our historical sales and marketing expenses have not been
material. We have relied on engineering personnel to provide technical
specifications and product overviews to our potential customer base. We expect
sales and marketing expenses to increase significantly as we continue to grow.
Our general and administrative expenses consist primarily of compensation and
benefits related to our corporate staff, professional fees, and related travel.
We expect our general and administrative expenses to increase significantly as
we continue to grow.
RESEARCH AND DEVELOPMENT. Our cost of research and development consists
primarily of the cost of compensation and benefits for research and development,
manufacturing and support staff, as well as materials and supplies used in the
engineering design process. We expect our cost of research and development to
continue to increase as we develop additional product designs, refine existing
products
17
and expand our analytic capabilities. We have significantly expanded our
research and manufacturing capacity as a result of our relocation to our new
facility in January 2001.
LOSS ON SALES COMMITMENTS. We will establish reserves for anticipated
losses on sales commitments when our cost estimates indicate a loss will be
incurred. We accrued such losses during the year based on our estimated costs to
complete delivery commitments during 2000 and 2001. We have adjusted our
delivery schedule and do not expect to incur the losses contemplated earlier in
the year. We expect to decrease our cost per unit through engineering design
changes, operating efficiencies, and volume purchasing discounts.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization is
primarily related to depreciation on capital expenditures and the amortization
of lease and leasehold costs related to our facilities.
INTEREST AND OTHER INCOME/EXPENSE, NET. Our non-operating income and
expenses are primarily attributable to interest income attributable to cash on
hand from our private financings and initial public offering and interest
expense associated with our notes payable to investors.
PREFERRED STOCK DIVIDENDS. Prior to our initial public offering of our
common stock, we had various classes of preferred stock outstanding each of
which was entitled to receive dividends. We accrued dividend expense monthly
according to the requirements of each class of preferred stock. In addition, we
issued warrants to purchase common stock in conjunction with the issuance of
certain classes of the preferred stock. Any value assigned to these warrants is
charged to dividend expense. As a result of our initial public stock offering
during the fourth quarter of 2000, we no longer have any preferred stock
outstanding.
RESULTS OF OPERATIONS:
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 AND 1999
REVENUE. We recorded $50,000 of revenue during the year ended December 31,
2000. This revenue was derived from a milestone related shipment of our first
two units. No revenue was recognized for five other units that we shipped in the
fourth quarter. We expect to recognize this revenue when we are better able to
estimate future warranty costs associated with these installed units. During
1999 our revenue was approximately $269,000 which resulted from work performed
on contracts to demonstrate applications of our technologies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled approximately $4,631,000 during the year ended
December 31, 2000, compared to approximately $1,559,000 during 1999. This
increase of $3,072,000 is primarily the result of increased compensation and
benefit costs due to the increased staffing required for infrastructure
development and expansion of our sales and marketing effort. We expect to
continue to increase and strengthen our sales and marketing effort throughout
2001.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
2000 were approximately $12,715,000, compared to approximately $3,506,000 during
1999. This increase of $9,209,000 is primarily the result of increased
compensation and benefit costs related to an increase in the number of
engineering and manufacturing personnel and materials used for product
development. During the fourth quarter of 2000, we completed the development
process of our first commercial product and are actively developing our family
of products. During 2001, we expect this research and development effort to
continue at about the same level as during 2000.
LOSS ON SALES COMMITMENTS. Loss on sales commitments for 2000 was
approximately $51,000 compared to $325,000 during 1999. We accrued these losses
during the year based on our estimated
18
costs to complete delivery commitments during 2000 and 2001. We have adjusted
our delivery schedule and do not expect to incur the losses contemplated earlier
in the year. As a result, at December 31, 2000 the cumulative accrual was $0.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for 2000 were
approximately $401,000 compared to approximately $219,000 during 1999. This
increase of $182,000 is attributable to increases in capital lease costs and
capital equipment expenditures.
INTEREST AND OTHER INCOME/(EXPENSE), NET. Our net non-operating income for
2000 was approximately $330,000, compared to net non-operating expense of
approximately ($331,000) for 1999. The increase is attributable to interest
income associated with the higher cash balances resulting from our various
financings early in 2000 and the proceeds of our stock offering during the
fourth quarter of 2000.
PREFERRED STOCK DIVIDENDS. During 2000, we accrued preferred stock
dividends on redeemable convertible preferred stock of approximately
$35,797,000. Of this amount $33,000,000 was a non-cash charge from the issuance
of warrants in connection with the issuance of our Class F redeemable
convertible preferred stock. In addition, we recorded a $1,300,000 non-cash
charge from the issuance in warrants to purchase common stock in conjunction
with the issuance of our Class D redeemable convertible preferred stock.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUE. Revenues were approximately $269,000 in 1999 while we did not
record revenues in 1998. These revenues resulted from work performed on research
contracts to demonstrate applications of our technologies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were approximately $1,559,000 in 1999 compared to
approximately $1,188,000 for 1998. This increase of approximately $371,000
reflects the expansion of our infrastructure to support sales growth and the
commercialization of our products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
1999 were approximately $3,506,000, compared to approximately $3,524,000 in
1998. Research and development expenses, while essentially flat over the
two-year period, is indicative of our ongoing efforts to develop and improve our
technologies and product potentials.
LOSS ON SALES COMMITMENTS. Losses on sales commitments of approximately
$325,000 were recorded in 1999 compared to no sales commitment losses in 1998.
We accrued these losses in 1999 based on estimates of costs to complete these
delivery commitments.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were
approximately $219,000 in 1999 compared to approximately $78,000 in 1998. This
increase of approximately $141,000 reflects increased capital expenditures for
development and production equipment as well as increased facilities related
lease costs.
INTEREST AND OTHER INCOME/(EXPENSE), NET. Other expenses were approximately
($331,000) for 1999 compared to approximately ($3,000) in 1998. This increase is
related to a higher level of indebtedness in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements depend on many factors, including our research and
development activities, expansion of our manufacturing facilities, planned
growth of operations and related infrastructure, continued efforts to
commercialize our products, including market development. We expect to make
19
significant expenditures to fund our working capital, develop our technologies
and expand our manufacturing capabilities.
Through our initial public offering in the fourth quarter of 2000, we sold
9,200,000 shares of our common stock, inclusive of the underwriters' over
allotment, at an initial public offering price of $6 per share. We received net
proceeds from our initial public offering of approximately $49.3 million
reflecting gross proceeds of $55.2 million net of underwriter commissions and
other offering costs of approximately $5.9 million. Prior to our initial stock
offering, we financed our operations primarily through cash from private
offerings. We raised approximately $41.8 million through sale of preferred
capital stock. Our primary cash requirements have been to fund research and
development, establish production capabilities, make capital expenditures and
for working capital and fund infrastructure costs.
Net cash used in operating activities was approximately ($12,458,000),
($4,840,000) and ($3,722,000) for 2000, 1999, and 1998, respectively. The
primary component to the negative cash flow from operations is from the net
losses. For the year 2000, we had a net loss of approximately ($17,418,000).
This was offset by approximately $201,000 for non-cash interest from the
issuance of warrants; $1,569,000 for a non-cash expense from consulting services
for which we issued warrants in lieu of compensation; other non-cash consulting
expenses of $1,529,000; an increase in our loss on sales commitments of $51,000
and other non-cash expenses including depreciation and amortization of
approximately $448,000. Changes in operating assets and liabilities generated
approximately $1,160,000 of cash during 2000. The primary components were
increased accounts payable and accrued expenses of approximately $2,585,000
offset by increased inventory, prepaid expenses and other current assets of
approximately $1,049,000. In addition, we used cash of approximately $376,000 to
build and ship units to customers that were in excess of the purchase price.
These costs were charged against the loss on sales commitments reserve. For the
year 1999 we had a net loss of approximately ($5,671,000) offset by non-cash
expenses of approximately $1,014,000. Changes in operating assets and
liabilities used approximately ($183,000) of cash during 1999. For the year 1998
we had a net loss of approximately ($4,793,000) offset by non-cash expenses of
approximately $265,000. Changes in operating assets and liabilities generated
cash of approximately $807,000 during 1998.
Net cash used in investing activities was approximately ($3,702,000),
($461,000) and ($237,000) for 2000, 1999 and 1998, respectively. The principal
uses of cash were related to the purchase of equipment including the leasehold
improvements to the new operating facility and the payment of security deposits
pursuant to obtaining the new facility lease.
Net cash from financing activities was approximately $78,423,000, $3,045,000
and $6,421,000 for 2000, 1999 and 1998, respectively. During 2000, the principal
source of cash was our initial public stock offering which raised approximately
$49,341,000 net of $5,858,000 of expenses associated with the offering.
Additionally, we raised approximately $28,352,000 during 2000 through our sale
of Class F Preferred stock. During 1999, we received cash proceeds of $3,150,000
from notes payable to investors. In 1998, we received proceeds of approximately
$4,486,000 through the sale of our Class D Preferred stock and an additional
$2,008,000 through the collection of our subscription receivable from our
Class A Preferred Stock. Proceeds from our initial public stock offering are
currently held in short-term, interest-bearing investment grade securities to
provide liquidity for operations.
Based upon our operating plan, we believe that our cash and cash equivalents
and future cash flow from operations will satisfy the Company's working capital
needs for the next 18-24 months.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET IMPLEMENTED
For United States generally accepted accounting principles reporting
purposes we will be required to adopt Statement of Financial Accounting
Standards ("SFAS") 133 "Accounting for Derivative Instruments and Hedging
Activities" for the 2001 fiscal year. The adoption of SFAS 133 will not have a
material impact on our financial condition or results of operations.
20
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
established guidelines for revenue recognition and was implemented by the
Company in the fourth quarter of 2000. The adoption of SAB 101 did not have a
material impact on our financial condition or results of operations.
INFLATION
We do not believe our operations have been materially affected by inflation.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
BECAUSE OUR SHORT OPERATING HISTORY MAKES THE BASIS FOR EVALUATING US LIMITED,
OUR FUTURE FINANCIAL PERFORMANCE MAY DISAPPOINT INVESTORS AND RESULT IN A
DECLINE IN OUR STOCK PRICE.
We have a limited operating history and investors should not rely on our
recent results as an indication of our future results. We were formed in May
1997 to commercialize electrical power systems based on flywheel energy storage.
We are a development stage company making the transition to the manufacturing of
new products in a new and developing sector. We have only recently begun to
market our products. Unless we can achieve significant increases in market
acceptance of our product, we may never advance beyond our start-up phase. In
light of the foregoing, it is difficult or impossible for us to predict future
results and investors should not expect future revenue growth based on our
recent results. Our future results may disappoint investors and cause our stock
price to decline. See "Business," "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE HAVE INCURRED LOSSES SINCE OUR INCEPTION AND ANTICIPATE CONTINUED LOSSES
THROUGH AT LEAST 2002.
We have incurred net losses to common shareholders and negative cash flows
since our inception in May 1997. We had net losses to common shareholders of
approximately ($53,279,000) in 2000, ($6,630,000) in 1999 and ($4,912,000) in
1998. Since our inception in May 1997, we have had net losses to common
shareholders totaling ($67,933,000). We expect to continue to incur net losses
through at least 2002. We also anticipate that our expenses will continue to
increase substantially in the foreseeable future as we expand our sales and
marketing, research and development and general and administrative operations.
Our efforts may prove even more expensive than we currently anticipate. Our
revenue must grow substantially if we are to offset these higher expenses and
become profitable. Even if we do achieve profitability, we may be unable to
sustain or increase our profitability in the future. See "Selected Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
WE HAVE LIMITED EXPERIENCE MANUFACTURING FLYWHEEL ENERGY STORAGE SYSTEMS ON A
COMMERCIAL BASIS, AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY.
We may not achieve profitability if we cannot develop efficient, low-cost
manufacturing capability, processes and suppliers that will enable us to meet
the quality, price, engineering, design and production standards or production
volumes required to timely meet our product commercialization schedule or to
satisfy the requirements of our distributors or customers. To date, we have
focused primarily on research and development and have limited experience
manufacturing flywheel energy storage systems on a commercial basis. See
"Business."
21
IF WE ARE UNABLE TO MEET OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION
MILESTONES, WE COULD LOSE SALES.
Failure to meet product development and commercialization milestones could
impair our relationships with our existing or potential customers, cause us to
lose business and/or cause the capital markets to devalue our common stock. We
have established internal product development and commercialization milestones
and dates for achieving our goals. If we experience delays in meeting our goals
or if our systems exhibit technical defects or are unable to meet cost or
performance goals, including energy output, useful life and reliability, our
commercialization schedule could be delayed. In that event, existing or
potential purchasers of our commercial systems may choose competing products or
alternative technologies. We cannot guarantee that we will successfully achieve
our future milestones. See "Business."
WE CANNOT ASSURE COMMERCIAL VIABILITY OF OUR PRODUCTS, AND IF THEY ARE NOT
ACCEPTED COMMERCIALLY, OUR COMPETITIVE POSITION AND PROFITABILITY WOULD DECLINE.
Our future success is dependent upon our ability to develop and market a
commercially acceptable product. The market for highly reliable, uninterruptible
electric power is rapidly evolving and it is difficult to predict its potential
size or future growth rate. We cannot assure investors that our flywheel energy
storage based products will achieve market acceptance, that they will meet the
technical demands of our potential customers or that they will offer
cost-effective advantages over competing technologies. Most of the organizations
that may purchase our products have invested substantial resources in their
existing power systems and, as a result, may be reluctant or slow to adopt a new
approach. Moreover, our products are alternatives to existing power back-up
systems and may not be accepted by our potential customers. To date we have
shipped only seven units. We have firm commitments for an additional 114
commercial units, which are to be delivered during 2001 and 2002. See
"Business."
OUR FAILURE TO MEET THE SIGNIFICANT TECHNOLOGICAL CHALLENGES TO DEVELOP A
COMMERCIALLY VIABLE PRODUCT COULD CAUSE US TO LOSE REVENUES.
The successful development of a commercially viable flywheel energy storage
system for an uninterruptible power supply involves significant technological
challenges including:
- reducing manufacturing costs for the wheel shaft, hub and rim, and
bearings to achieve commercial viability for our current products; and
- developing new products with increased energy storage capacity to expand
our market share.
We cannot assure you that our technologies will be suitable for specific
commercial applications, including communications applications. Design
modifications may be required or demanded by our existing or potential
customers, and we may be unable to make those adjustments at all or to make them
as well or as cost-effectively as our competitors. See "Business."
BECAUSE WE DEPEND ON THIRD-PARTY SUPPLIERS FOR THE DEVELOPMENT AND SUPPLY OF KEY
COMPONENTS FOR OUR PRODUCTS, AND BECAUSE WE DO NOT HAVE CONTRACTS WITH THESE
SUPPLIERS, WE COULD EXPERIENCE DISRUPTIONS IN SUPPLY THAT COULD DELAY OR
DECREASE OUR REVENUES.
Our business, prospects, results of operations, or financial condition could
be harmed if we are unable to maintain satisfactory relationships with
suppliers. To accelerate development time and reduce capital investment, we rely
on third-party suppliers for several of our key components. We do not have any
contracts with these suppliers. If these suppliers should fail to timely deliver
components that meet our quality, quantity, or cost standards, then we could
experience production delays or cost increases and our financial performance
could be adversely affected. Because the components with limited
22
sources are key components that are complex, difficult to manufacture and
require long lead times, we may have difficulty finding alternative suppliers on
a timely basis. As a result, we could experience shortages in supply. See
"Business."
WE FACE INTENSE COMPETITION AND OUR REVENUE COULD DECLINE IF WE ARE UNABLE TO
COMPETE SUCCESSFULLY.
The markets for highly reliable, uninterruptible electric power are
intensely competitive. There are a number of companies located in the United
States, Canada, and abroad that are developing flywheel energy storage
technology. We also compete with companies that are developing applications
using other types of alternative energy storage. In addition, if large,
established companies decide to focus on the development of flywheel energy
storage systems for sale to communications service providers, they may have the
manufacturing, marketing, and sales capabilities to complete research,
development and commercialization of commercially viable alternative energy
storage systems that could be more competitive than our systems and could be
brought to market more quickly than ours. To the extent they already have name
recognition, their products may enjoy greater initial market acceptance among
our potential customers. These competitors may also be better able than
ourselves to adapt quickly to customers' changing demands and to changes in
technology. See "Business."
Technological advances in alternative energy products or other alternative
energy technologies may render our systems obsolete and could therefore cause
our stock price to fall. We do not presently have any products or technologies
other than flywheel systems under development, nor do we have any plans to
pursue other products or technologies either through internal development or
through acquisitions. Our system is, however, only one of a number of
alternative energy products being developed by potential competitors as
supplements to the electric grid that have potential commercial applications,
including microturbines, solar power and wind power, advanced batteries, fuel
cells and other types of alternative energy technologies. See "Business."
GOVERNMENT REGULATION MAY IMPAIR OUR ABILITY TO MARKET OUR PRODUCT.
Government regulation of our product, whether at the federal, state or local
level, including any regulations relating to installation and servicing of our
products, may increase our costs and the price of our systems, and may have a
negative impact on our revenue and profitability. We cannot assure you that our
products will not be subject to existing or future federal and state regulations
governing traditional electric utilities and other regulated entities. We expect
that our products and their installation will be subject to oversight and
regulation at the local level in accordance with state and local ordinances
relating to building codes, safety, pipeline connections and related matters. We
do not know the extent to which any existing or new regulations may impact our
ability to distribute, install and service our products. Once our products reach
the commercialization stage and we begin distributing our systems to our early
target markets, federal, state or local government entities or competitors may
seek to impose regulations.
PRODUCT LIABILITY CLAIMS AGAINST US COULD RESULT IN SUBSTANTIAL EXPENSES AND
NEGATIVE PUBLICITY WHICH COULD IMPAIR SUCCESSFUL MARKETING OF OUR PRODUCTS.
Our business exposes us to potential product liability claims that are
inherent in the manufacturing, marketing and sale of electro-mechanical
products, and as such, we may face substantial liability for damages resulting
from the faulty design or manufacture of products or improper use of products by
end users. We cannot assure you that our product liability insurance will
provide sufficient coverage in the event of a claim. Also, we cannot predict
whether we will be able to maintain such coverage on acceptable terms, if at
all, or that a product liability claim would not materially adversely affect our
business, financial condition or the price of our common stock. In addition,
negative publicity in connection with the faulty design or manufacture of our
products would adversely affect our ability to market and sell our products.
23
SAFETY FAILURES BY OUR PRODUCTS OR THOSE OF OUR COMPETITORS COULD REDUCE MARKET
DEMAND OR ACCEPTANCE FOR FLYWHEELS IN GENERAL.
A serious accident involving either our flywheels or our competitors'
flywheels could be a significant deterrent to customer acceptance and adversely
affect our financial performance. With any form of energy storage, including
machinery, chemicals, fuel or other means of energy storage, there is the
possibility of accident. If a flywheel fails and the energy stored is released,
the flywheel could break apart and the pieces could be ejected at a high rate of
speed. A consortium of government, academic, and industry representatives has
been formed to address containment in the event of this kind of flywheel
failure. At this early stage of commercialization, there are differing
approaches to containment with disagreement in the community on the most
effective means.
WE EXPECT TO NEED ADDITIONAL FINANCING THAT MAY NOT BE AVAILABLE TO US ON
ACCEPTABLE TERMS OR AT ALL, WHICH COULD CAUSE US TO FAIL TO REACH OUR FUTURE
GOALS.
We expect to require additional financing in the future in order to carry
out our business plan. We believe that the proceeds of the initial public
offering, together with our cash balances, will fund our operations for
approximately 18-24 months. We may also need additional financing for a variety
of reasons including:
- expanding research and development;
- expanding manufacturing equipment and facilities faster than currently
planned;
- funding additional working capital; or
- acquiring complementary products, businesses or technologies.
We cannot assure you that we will be able to raise additional funds on terms
acceptable to us, or at all. If future financing is not available or is not
available on acceptable terms, our business, results of operations and financial
condition would be materially adversely affected. See "Selected Historical
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE IN THE EVENT THAT WE OBTAIN
ADDITIONAL FINANCING.
If we raise additional funds by issuing additional equity securities, our
existing stockholders will experience dilution, which may dilute the value of
the common stock outstanding if the equity is sold at a price less than that
paid by investors. Furthermore, the newly issued securities could have rights
superior to the rights of the common stock outstanding.
WE MAY HAVE DIFFICULTY MANAGING THE EXPANSION OF OUR OPERATIONS AND OUR BUSINESS
OPERATIONS COULD BE INTERRUPTED.
Our business, prospects, results of operations or financial condition could
be harmed if we encounter difficulties in effectively managing our rapid
expansion. We are undergoing rapid growth in the number of our employees, the
size of our physical plant and the scope of our operations. Rapid expansion is
difficult to maintain and is likely to place a significant strain on our senior
management team and other resources. In addition, if we are successful in
obtaining rapid market penetration of our products, we will be required to
continue to expand and improve our operational, management and financial systems
and controls to meet anticipated growth. See "Business."
24
OUR FINANCIAL PERFORMANCE COULD BE ADVERSELY AFFECTED BY OUR NEED TO HIRE AND
RETAIN KEY EXECUTIVE OFFICERS AND SKILLED TECHNICAL PERSONNEL.
Because our future success depends largely on the success of our technology,
our competitiveness will depend significantly on whether we can attract and
retain skilled technical personnel, especially engineers, and can retain members
of our executive team. We currently have employment agreements only with Messrs.
Stanton, Spiezio, Lazarewicz and French and Ms. Lister. Based on our planned
expansion, we will require a significant increase in the number of employees,
including skilled personnel. Competition for skilled personnel is intense, and
we may not be successful in attracting and retaining the personnel or executive
managers necessary to develop our product and operate profitably. Because a
large portion of our expenses relates to skilled technical personnel that cannot
be easily reduced without adversely affecting our business prospects and
strategic plan, we may not be able to effectively adjust spending to compensate
for revenue shortfalls. Accordingly, any significant shortfall in revenues in
relation to our planned expenditures would reduce, and possibly eliminate,
operating income and could materially adversely affect our business, operating
results and financial condition.
WE WILL RELY ON A LIMITED NUMBER OF LARGE CUSTOMERS AND OUR BUSINESS MAY BE
ADVERSELY AFFECTED BY THE LOSS OF, OR REDUCED PURCHASES BY, ANY ONE OF THOSE
CUSTOMERS.
Our initial intent is to focus on selling directly to a small number of
large communications companies and to original equipment manufacturers that
serve the communications markets. If we are successful in this strategy, the
loss of, or reduced purchases by, one customer could have a material adverse
effect on our operating results. In addition, if we do not perform
satisfactorily for a customer, that customer could further harm our future
business if the customer communicates its dissatisfaction or does not recommend
our services to other communications customers.
IF WE ARE UNABLE TO SUCCESSFULLY MARKET, DISTRIBUTE AND SERVICE OUR PRODUCTS
INTERNATIONALLY WE MAY EXPERIENCE A SHORTFALL IN EXPECTED REVENUES AND
PROFITABILITY WHICH COULD LEAD TO A REDUCTION IN OUR STOCK PRICE.
An important part of our business strategy is to expand our customer base by
marketing, distributing and servicing our products internationally through
distributors. We have limited experience developing, and no experience
manufacturing, our products to comply with the commercial and legal requirements
of international markets. Our ability to properly service our products
internationally will depend on third party service providers. There is no
assurance that we will be able to locate service providers in every region or
that these providers will effectively service our products. Our success in those
markets also will depend, in part, on our ability to secure foreign customers
and our ability to manufacture products that meet foreign regulatory and
commercial requirements. In addition, our planned international operations are
subject to other inherent risks, including potential difficulties in
establishing distributorship relationships and enforcing contractual obligations
and intellectual property rights in foreign countries, fluctuations in currency
exchange rates and entering into satisfactory foreign distributorship
arrangements. If we are unable to successfully market, distribute or service our
products internationally, we may never experience profitability and our stock
price may decline.
ANY FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD SERIOUSLY IMPAIR OUR
COMPETITIVE POSITION.
We cannot assure you that we have or will be able to maintain a significant
proprietary position on the basic technologies used in our flywheel systems. Our
ability to compete effectively against alternative technologies will depend on
our ability to protect our proprietary technology, systems designs and
manufacturing processes. We do not know whether any of our pending or future
patent applications under which we have rights will issue or, in the case of
patents issued or to be issued, that the claims allowed are or will be
sufficiently broad to protect our technology or processes, or will protect us
from competitors. Even if all our patent applications are issued and are
sufficiently broad,
25
they may be challenged or invalidated. We could incur substantial costs in
prosecuting or defending patent infringement suits, and such suits would divert
funds and resources that could be used in our business. We do not know whether
we have been or will be completely successful in safeguarding and maintaining
our proprietary rights.
Further, our competitors may independently develop or patent technologies or
processes that are substantially equivalent or superior to ours. If we are found
to be infringing on third party patents, we do not know whether we will be able
to obtain licenses to use such patents on acceptable terms, if at all. Failure
to obtain needed licenses could delay or prevent the development, manufacture or
sale of our systems.
We rely, in part, on contractual provisions to protect our trade secrets and
proprietary knowledge. These agreements may be breached, and we may not have
adequate remedies for any breach. Our trade secrets may also be known without
breach of such agreements or may be independently developed by competitors. Our
inability to maintain the proprietary nature of our technology and processes
could allow our competitors to limit or eliminate any competitive advantages we
may have and prevent us from being the first company to commercialize highly
reliable electrical power products, thereby harming our business prospects. See
"Business."
OUR MAJORITY STOCKHOLDERS WILL CONTROL ALL MATTERS REQUIRING A STOCKHOLDER VOTE,
WHICH WILL LIMIT OTHER INVESTORS' ABILITY TO INFLUENCE THE OUTCOME OF MATTERS
REQUIRING STOCKHOLDER APPROVAL.
Stockholders who owned our company prior to our initial public offering own
approximately 79.4% of our outstanding stock as of December 31, 2000. If a
sufficient number of these stockholders were to vote together as a group, they
would have the ability to control our board of directors and its policies. For
instance, these stockholders would be able to control the outcome of all
stockholder votes, including votes concerning director elections, charter and
by-law amendments and possible mergers, corporate control contests and other
significant corporate transactions. These stockholders may use their influence
to approve actions that are adverse to the interest of other investors, which
could depress our stock price.
THE SHARE PRICES OF COMPANIES IN OUR SECTOR HAVE BEEN HIGHLY VOLATILE AND OUR
SHARE PRICE COULD BE SUBJECT TO EXTREME PRICE FLUCTUATIONS.
The markets for equity securities of high technology companies, including
companies in the power reliability and power quality markets, have been highly
volatile recently and the market price of our common stock may be subject to
significant fluctuations. This could be in response to operating results,
announcements of technological innovations or new products by us or our
competitors, patent or proprietary rights developments and market conditions for
high technology stocks in general. In addition, stock markets, in particular the
Nasdaq National Market, in recent years have experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of individual companies. These market fluctuations, as
well as general economic conditions, may adversely affect the market price of
our common stock which could affect our ability to attract additional capital to
fund our operations.
OUR INITIAL TARGET MARKET, THE COMMUNICATIONS INDUSTRY, MAY NOT BE ABLE TO
SUSTAIN ITS CURRENT GROWTH RATE, WHICH MAY AFFECT INVESTORS' EXPECTATIONS
REGARDING OUR FINANCIAL PERFORMANCE AND ADVERSELY AFFECT OUR STOCK PRICE.
We are initially targeting the communications markets for the sale of our
products. The communications industry which had sustained high rates of
infrastructure build-out that expanded the need for new power technologies such
as our flywheel product has recently experienced declining rates of build-out.
We cannot assure you in these market conditions, that the demand for our
products will
26
be adequate to avoid a material adverse effect on our business, operating
results and financial condition.
PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY INHIBIT A TAKEOVER
THAT STOCKHOLDERS CONSIDER FAVORABLE.
Provisions in our certificate of incorporation and by-laws and in the
Delaware corporate law may make it difficult and expensive for a third party to
pursue a tender offer, change in control or takeover attempt that is opposed by
our management and board of directors. Public stockholders who might desire to
participate in such a transaction may not have an opportunity to do so.
Beginning with our annual stockholder meeting in 2001, we will have a staggered
board of directors that will make it difficult for stockholders to change the
composition of the board of directors in any one year. Additionally, our board
of directors may authorize issuances of "blank check" preferred stock that could
be used to increase the number of outstanding shares and discourage a takeover
attempt. These anti-takeover provisions could substantially impede the ability
of public stockholders to benefit from a change in control or change our
management and board of directors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our cash equivalents and investments, all of which have maturities of less
than one year, may expose us to interest rate risk. At December 31, 2000, we had
approximately $1,069,000 of cash equivalents which were held in a non-interest
bearing checking account. Also at December 31, 2000, we had approximately
$12,471,000 invested in interest-bearing money market accounts and approximately
$48,957,000 in high-grade commercial paper. The fair value of these investments
approximates their cost. A 10% change in interest rates would change the
investment income realized on an annual basis by approximately $300,000, which
we do not believe is material.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Report................................ 29
Consolidated Balance Sheets at December 31, 2000 and 1999... 30
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 and for the Period May 8,
1997 (date of inception) to December 31, 2000............. 31
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 2000, 1999 and 1998 and
for the Period May 8, 1997 (date of inception) to December
31, 2000.................................................. 32
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 and for the Period May 8,
1997 (date of inception) to December 31, 2000............. 35
Notes to Consolidated Financial Statements.................. 36
28
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Beacon Power Corporation:
We have audited the accompanying consolidated balance sheets of Beacon Power
Corporation and subsidiary (the "Company") (a development stage company) as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficiency) and cash flows for the three years
ended December 31, 2000 and for the period from May 8, 1997 (date of inception)
through December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Beacon Power
Corporation and subsidiary as of December 31, 2000 and 1999, and the results of
its operations and its cash flows for the three years ended December 31, 2000
and the period from May 8, 1997 (date of inception) through December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 9, 2001
29
BEACON POWER CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
2000 1999
------------ ------------
Assets
Current assets:
Cash and cash equivalents................................. $ 62,497,102 $ 234,350
Inventory................................................. 207,613 --
Prepaid expenses and other current assets................. 857,137 15,987
------------ ------------
Total current assets.................................... 63,561,852 250,337
Property and equipment, Net (Note 3)........................ 3,417,884 566,013
Prepaid financing costs..................................... -- 81,934
Deposits.................................................... 673,278 57,150
Other assets................................................ 84,992 18,066
------------ ------------
Total assets................................................ $ 67,738,006 $ 973,500
============ ============
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable.......................................... $ 1,728,330 $ 413,146
Accrued compensation and benefits......................... 277,086 109,206
Accrued interest.......................................... -- 164,140
Accrued loss on sales commitments......................... -- 325,000
Due to related party (Note 15).............................. 52,725 --
Dividends payable (Note 10)............................... 1,159,373 --
Other accrued expenses.................................... 981,671 43,222
Current portion of capital lease obligations (Note 5)..... 138,648 73,291
------------ ------------
Total current liabilities............................... 4,337,833 1,128,005
Dividends payable (Notes 7, 8, 16).......................... -- 749,005
Notes payable to investors (Note 4)......................... -- 3,150,000
Capital lease obligations, net of current portion (Note
5)........................................................ 92,245 2,875
Commitments (Note 6)
Class D redeemable convertible preferred stock (liquidation
preference of $4,750,000)................................. -- 4,534,816
Stockholders' equity (deficiency):
Preferred stock:
Class A Convertible, $.01 par value; 6,000,000 shares
authorized, 4,767,907 shares issued and outstanding in
1999 (liquidation preference $21,217,186)............. -- 5,741,451
Class B Convertible, $.01 par value; 1 share authorized;
no shares issued and outstanding...................... -- --
Class C Convertible, $.01 par value; 6 shares
authorized, issued and outstanding in 1999............ -- 29,866
Preferred stock, par value $.01; 10,000,000 authorized;
no shares issued or outstanding....................... -- --
Common stock, $.01 par value; 110,000,000 shares
authorized; 42,033,314 and 16,848 shares issued and
outstanding in 2000 and 1999, respectively.............. 420,333 168
Deferred consulting expense, net.......................... -- (100,000)
Deferred stock compensation............................... (2,070,659) (56,648)
Additional paid-in capital................................ 132,958,758 515,318
Deficit accumulated during the development stage.......... (68,000,504) (14,721,356)
------------ ------------
Total stockholders' equity (deficiency)................. 63,307,928 (8,591,201)
------------ ------------
Total liabilities and stockholders' equity (deficiency)..... $ 67,738,006 $ 973,500
============ ============
See notes to consolidated financial statements.
30
BEACON POWER CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE
FROM
MAY 8, 1997
(DATE OF
INCEPTION)
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2000 1999 1998 2000
------------ ----------- ----------- ------------
Revenue.................................. $ 50,000 $ 268,868 $ -- $ 551,184
Operating expenses:
Selling, general and administrative.... 4,630,915 1,558,985 1,188,165 8,546,536
Research and development............... 12,714,823 3,506,031 3,523,572 22,036,300
Loss on sales commitments.............. 50,974 325,000 -- 375,974
Depreciation and amortization.......... 401,013 218,594 78,208 697,815
------------ ----------- ----------- ------------
Total operating expenses............. 17,797,725 5,608,610 4,789,945 31,656,625
------------ ----------- ----------- ------------
Loss from operations..................... (17,747,725) (5,339,742) (4,789,945) (31,105,441)
Other income (expense):
Interest income........................ 747,202 25,118 11,277 900,245
Interest expense....................... (370,299) (356,869) (14,730) (741,898)
Other income (expense)................. (47,216) -- -- (47,216)
------------ ----------- ----------- ------------
Total other income (expense), net.... 329,687 (331,751) (3,453) 111,131
------------ ----------- ----------- ------------
Net loss................................. (17,418,038) (5,671,493) (4,793,398) (30,994,310)
Preferred stock dividends (Note 10)...... (35,796,675) (916,852) (112,153) (36,825,680)
Accretion of redeemable convertible
preferred stock........................ (64,435) (41,671) (6,908) (113,014)
------------ ----------- ----------- ------------
Loss to common shareholders.............. $(53,279,148) $(6,630,016) $(4,912,459) $(67,933,004)
============ =========== =========== ============
Loss per share--basic and diluted........ $ (10.77) $ (393.52) $ (291.58)
============ =========== ===========
Weighted-average common shares
outstanding............................ 4,946,411 16,848 16,848
============ =========== ===========
See notes to consolidated financial statements.
31
BEACON POWER CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
CLASS A CLASS C
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------ ------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- -------- -------- ---------- --------
Balance at May 8, 1997 (Date of Inception)............... -- $ -- -- $ -- -- $ --
Issuance of founder's shares............................. 6,750,000 67,500
Issuance of Class A preferred stock...................... 1,125,000 5,000,000
Recapitalization......................................... 3,373,313 67,466 (6,746,626) (67,466)
Rounding for fractional shares........................... (2)
Issuance of Class C preferred and common stock........... 6 29,866 13,476 134
Accrual of consulting expense............................
Repayment of subscription receivable.....................
Net loss.................................................
---------- ----------- -------- -------- ---------- --------
Balance, December 31, 1997............................... 4,498,313 5,067,466 6 29,866 16,848 168
Issuance of Class A preferred stock for services......... 120,000 300,000
Issuance of Class A preferred stock for services and
interest on loans...................................... 4,594 11,485
Dividend on Class D redeemable convertible preferred
stock..................................................
Repayment of subscription receivable.....................
Amortization of deferred consulting expense, net.........
Accretion of redeemable preferred stock to redemption
value..................................................
Net loss.................................................
---------- ----------- -------- -------- ---------- --------
Balance, December 31, 1998............................... 4,622,907 5,378,951 6 29,866 16,848 168
Issuance of Class A preferred stock for services......... 145,000 362,500
Dividend on Class D redeemable convertible preferred
stock..................................................
Deferred stock compensation..............................
Amortization of deferred stock compensation..............
Amortization of deferred consulting expense, net.........
Issuance of warrants to holders of Class D redeemable
convertible preferred stock............................
Issuance of warrants for bridge loans....................
Accretion of redeemable preferred stock to redemption
value..................................................
Net loss.................................................
---------- ----------- -------- -------- ---------- --------
Balance, December 31, 1999............................... 4,767,907 5,741,451 6 29,866 16,848 168
========== =========== ======== ======== ========== ========
Dividends on redeemable convertible preferred stock......
Issuance of warrants.....................................
Deferred stock compensation..............................
Amortization of deferred stock compensation..............
Accretion of redeemable preferred stock to redemption
value..................................................
Proceeds from stock offering............................. 9,200,000 92,000
Conversion of Class A preferred stock.................... (4,767,907) (5,741,451) 9,535,814 95,358
Conversion of Class C preferred stock.................... (6) (29,866) 12
Conversion of redeemable convertible preferred stock..... 19,823,704 198,237
Deferred consulting......................................
Common stock issuance for consulting..................... 134,464 1,345
Payment of accrued dividend.............................. 859,330 8,593
Cashless warrant exercise................................ 1,982,876 19,829
Exercise of stock options................................ 480,266 4,803
Net loss.................................................
---------- ----------- -------- -------- ---------- --------
Balance, December 31, 2000............................... -- $ -- -- $ -- 42,033,314 $420,333
========== =========== ======== ======== ========== ========
See notes to consolidated financial statements.
32
BEACON POWER CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (CONTINUED)
DEFERRED DEFERRED ADDITIONAL STOCK
CONSULTING STOCK PAID-IN SUBSCRIPTION ACCUMULATED
EXPENSE COMPENSATION CAPITAL RECEIVABLE DEFICIT
---------- ------------ ------------ ------------ ------------
Balance at May 8, 1997 (Date of
Inception)................................ $ -- $ -- $ -- $ -- $ --
Issuance of founder's shares................ (67,500)
Issuance of Class A preferred stock for
services.................................. (5,000,000)
Recapitalization............................
Rounding for fractional shares..............
Issuance of Class C preferred and common
stock.....................................
Accrual of consulting expense............... 87,500
Repayment of subscription receivable........ 2,992,492
Net loss.................................... (3,111,381)
--------- ----------- ------------ ----------- ------------
Balance, December 31, 1997.................. 87,500 -- -- (2,007,508) (3,178,881)
Issuance of Class A preferred stock for
services.................................. (150,000)
Issuance of Class A preferred stock for
services and interest on loans............
Dividend on Class D redeemable convertible
preferred stock........................... (112,153)
Repayment of subscription receivable........ 2,007,508
Amortization of deferred consulting expense,
net....................................... 25,000
Accretion of redeemable preferred stock to
redemption value.......................... (6,908)
Net loss.................................... (4,793,398)
--------- ----------- ------------ ----------- ------------
Balance, December 31, 1998.................. (37,500) -- -- -- (8,091,340)
Issuance of Class A preferred stock......... (125,000)
Dividend on Class D redeemable convertible
preferred stock........................... (636,852)
Deferred stock compensation................. (65,318) 65,318
Amortization of deferred stock
compensation.............................. 8,670
Amortization of deferred consulting expense,
net....................................... 62,500
Issuance of warrants to holders of Class D
redeemable convertible preferred stock.... 280,000 (280,000)
Issuance of warrants for bridge loans....... 170,000
Accretion of redeemable preferred stock to
redemption value.......................... (41,671)
Net loss.................................... (5,671,493)
--------- ----------- ------------ ----------- ------------
Balance, December 31, 1999.................. (100,000) (56,648) 515,318 -- (14,721,356)
========= =========== ============ =========== ============
Dividends on redeemable convertible
preferred stock........................... (1,496,675)
Issuance of warrants........................ 36,070,366 (34,300,000)
Deferred stock compensation................. (2,944,649) 2,944,649
Amortization of deferred stock
compensation.............................. 930,638
Accretion of redeemable preferred stock to
redemption value.......................... (64,435)
Proceeds from stock offering, net of
expenses.................................. 49,249,537
Conversion of Class A preferred stock....... 5,646,093
Conversion of Class C preferred stock....... 29,866
Conversion of redeemable convertible
preferred stock........................... 36,496,431
Deferred consulting......................... 598,284
Common stock issuance for consulting........ (498,284) 496,939
Payment of accrued dividend................. 1,077,714
Cashless warrant exercise................... (19,829)
Exercise of stock options................... 451,674
Net loss.................................... (17,418,038)
--------- ----------- ------------ ----------- ------------
Balance, December 31, 2000.................. $ -- $(2,070,659) $132,958,758 $ 0 $(68,000,504)
========= =========== ============ =========== ============
See notes to consolidated financial statements.
33
BEACON POWER CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (CONTINUED)
TOTAL
STOCKHOLDERS'
(DEFICIENCY)
EQUITY
-------------
Balance at May 8, 1997 (Date of Inception).................. --
Issuance of founder's shares................................ --
Issuance of Class A preferred stock for services............ --
Recapitalization............................................ --
Rounding for fractional shares.............................. --
Issuance of Class C preferred and common stock.............. 30,000
Accrual of consulting expense............................... 87,500
Repayment of subscription receivable........................ 2,992,492
Net loss.................................................... (3,111,381)
------------
Balance, December 31, 1997.................................. (1,389)
Issuance of Class A preferred stock for services............ 150,000
Issuance of Class A preferred stock for services and
interest on loans......................................... 11,485
Dividend on Class D redeemable convertible preferred
stock..................................................... (112,153)
Repayment of subscription receivable........................ 2,007,508
Amortization of deferred consulting expense, net............ 25,000
Accretion of redeemable preferred stock to redemption
value..................................................... (6,908)
Net loss.................................................... (4,793,398)
------------
Balance, December 31, 1998.................................. (2,719,855)
Issuance of Class A preferred stock......................... 237,500
Dividend on Class D redeemable convertible preferred
stock..................................................... (636,852)
Deferred stock compensation................................. --
Amortization of deferred stock compensation................. 8,670
Amortization of deferred consulting expense, net............ 62,500
Issuance of warrants to holders of Class D redeemable
convertible preferred stock............................... --
Issuance of warrants for bridge loans....................... 170,000
Accretion of redeemable preferred stock to redemption
value..................................................... (41,671)
Net loss.................................................... (5,671,493)
------------
Balance, December 31, 1999.................................. (8,591,201)
============
Dividends on redeemable convertible preferred stock......... (1,496,675)
Issuance of warrants........................................ 1,770,366
Deferred stock compensation................................. --
Amortization of deferred stock compensation................. 930,638
Accretion of redeemable preferred stock to redemption
value..................................................... (64,435)
Proceeds from stock offering................................ 49,341,537
Conversion of Class A preferred stock....................... --
Conversion of Class C preferred stock....................... --
Conversion of redeemable convertible preferred stock........ 36,694,668
Deferred consulting......................................... 598,284
Common stock issuance for consulting........................ --
Payment of accrued dividend................................. 1,086,307
Cashless warrant exercise................................... --
Exercise of stock options................................... 456,477
Net loss.................................................... (17,418,038)
------------
Balance, December 31, 2000.................................. $ 63,307,928
============
See notes to consolidated financial statements.
34
BEACON POWER CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE
FROM
MAY 8, 1997
(DATE OF
INCEPTION)
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2000 1999 1998 2000
------------ ----------- ----------- ------------
Cash flows from operating activities:
Net loss........................................ $(17,418,038) $(5,671,493) $(4,793,398) $(30,994,310)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 401,013 218,594 78,208 697,815
Loss on sale of fixed assets.................. 47,416 -- -- 47,416
Interest expense relating to issuance of
warrants.................................... 201,000 170,000 -- 371,000
Amortization of deferred consulting expense,
net......................................... 598,284 300,000 175,000 1,160,784
Amortization of deferred stock compensation... 930,638 -- -- 930,638
Warrants issued for consulting services....... 1,569,366 -- -- 1,569,366
Accrued loss on sales commitments............. 50,974 325,000 -- 375,974
Services and interest expense paid in
preferred stock............................. -- -- 11,485 11,485
Changes in operating assets and liabilities:
Inventory..................................... (207,613) -- -- (207,613)
Prepaid expenses and other current assets..... (841,150) 4,320 4,320 (857,137)
Accounts payable.............................. 1,315,184 (409,577) 772,723 1,728,330
Accrued compensation and benefits............. 167,880 41,023 37,141 277,086
Accrued interest.............................. 111,420 164,140 -- 275,560
Due to related party.......................... 52,725 (18,611) 18,611 52,725
Accrued loss on sales commitments............. (375,974) -- -- (375,974)
Other accrued expenses and current
liabilities................................. 938,449 36,270 (16,359) 990,341
------------ ----------- ----------- ------------
Net cash used in operating activities......... (12,458,426) (4,840,334) (3,722,409) (23,946,514)
Cash flows from investing activities:
Increase in other assets........................ (683,054) (110,180) (19,823) (840,204)
Repayment of note receivable from officer....... -- -- 40,000 --
Purchases of property and equipment............. (3,019,266) (350,881) (257,423) (3,627,570)
------------ ----------- ----------- ------------
Net cash used in investing activities......... (3,702,320) (461,061) (237,246) (4,467,774)
Cash flows from financing activities:
Initial public stock offering, net of
expenses...................................... 49,341,537 -- -- 49,341,537
Exercise of employee stock options.............. 456,477 -- -- 456,477
Issuance of preferred stock..................... 28,351,792 -- 4,486,237 32,868,028
Repayment of subscription receivable............ -- -- 2,007,508 5,000,000
Repayment of capital leases..................... (126,307) (105,406) (72,939) (304,652)
Proceeds from notes payable issued to
investors..................................... 400,000 3,150,000 -- 3,550,000
------------ ----------- ----------- ------------
Net cash provided by financing activities..... 78,423,498 3,044,594 6,420,806 90,911,390
Increase (decrease) in cash and cash
equivalents..................................... 62,262,752 (2,256,801) 2,461,151 62,497,102
Cash and cash equivalents, beginning of period.... 234,350 2,491,151 30,000 --
------------ ----------- ----------- ------------
Cash and cash equivalents, end of period.......... $ 62,497,102 $ 234,350 $2,491,151 $ 62,497,102
============ =========== =========== ============
See notes to consolidated financial statements.
35
BEACON POWER CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND OPERATIONS
NATURE OF BUSINESS. Beacon Power Corporation (the "Company" or "Beacon") (a
development stage company) was incorporated on May 8, 1997 as a wholly owned
subsidiary of SatCon Technology Corporation ("SatCon"). Since its inception,
Beacon has been engaged in the development of flywheel devices for storing and
transmitting kinetic energy. During the fourth quarter of 2000, the Company
shipped its first seven units. Because the Company has not yet generated a
significant amount of revenue from its principal operations, it is continuing to
be accounted for as a development stage company under Statement of Financial
Accounting Standards No. 7. The Company has a single operating segment,
manufacturing alternative power sources. The Company has no organizational
structure dictated by product lines, geography or customer type.
OPERATIONS. The Company has experienced net losses since its inception and,
as of December 31, 2000, had an accumulated deficit of approximately
$68.0 million. The Company is currently facing the challenge of ongoing
development and refinement of its commercial product. This ongoing research and
development is expected to require significant outlays of capital. As discussed
in Note 10, during the fourth quarter of 2000, the Company completed an initial
public offering of its common stock and raised approximately $49.3 million net
of offering expenses. Management believes that this funding is sufficient to
continue its operations as a going concern through at least December 31, 2001.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
ACCOUNTING PRINCIPLES. The accompanying consolidated financial statements
have been prepared using accounting principles generally accepted in the United
States of America.
CONSOLIDATION. The accompanying consolidated financial statements include
the accounts of the Company and its subsidiary Beacon Power Securities
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
RECAPITALIZATION. The accompanying financial statements reflect a
recapitalization of the Company in 1997 when one shareholder exchanged shares of
common stock for Class A preferred stock.
STOCK SPLIT. The accompanying financial statements reflect a 2-for-1 split
of the Company's common stock, which occurred immediately prior to the
effectiveness of the Company's initial public stock offering. All share and per
share information herein has been retroactively restated to reflect this split.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of consolidated financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include demand
deposits and highly liquid investments with maturity of three months or less
when acquired. Cash equivalents are stated at cost, which approximates market
value.
36
INVENTORY. Inventory consists of raw materials at December 31, 2000 and is
carried at the lower of cost or market utilizing the first-in first-out ("FIFO")
method.
PROPERTY AND EQUIPMENT. Property and equipment, including leasehold
improvements, are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets.
PREPAID FINANCING COSTS. Prepaid financing costs consist of legal,
financing and other related expenses incurred in connection with the Class E
financing and the initial public offering of the Company's common stock
completed during the year ending December 31, 2000. Prepaid financing costs are
netted against the proceeds of the offering.
OTHER ASSETS. Other assets consist of unamortized legal expenses related to
patents.
LOSS ON SALES COMMITMENTS. Substantially all of the Company's sales
commitments are firm and have fixed-prices. Revenue and cost of revenue on such
sales commitments are recorded as deliveries are made. The direct costs to
manufacture products covered by the Company's firm sales commitments are in
excess of the fixed selling prices. Direct costs consist of materials and direct
labor costs. These excess costs have been estimated and accrued as losses on
sales commitments in the period in which the sales commitment is made. Estimates
of costs to manufacture products are reviewed and revised periodically and
changes in estimated losses from such revisions are recorded in the accounting
period in which the revisions are made. At December 31, 2000, no estimated
losses on sales commitments are anticipated.
LONG-LIVED ASSETS. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121 long-lived assets to be held and used by the Company
are reviewed to determine whether any events or changes in circumstances
indicate that the carrying value of the asset may not be recoverable. The
conditions considered include whether or not the asset is in service, has become
obsolete, or whether external market circumstances indicate that the carrying
amount may not be recoverable. The Company recognizes a loss for the difference
between the estimated fair value of the asset and the carrying amount. The fair
value of the asset is measured using either available market prices or estimated
discounted cash flows. The Company's analyses indicate that there has been no
impairment of long-lived assets.
REVENUE RECOGNITION. Revenue relates to work performed under research and
development contracts and delivery of units. Revenue is recognized as services
are performed or when products are shipped and all related costs are estimable.
STOCK-BASED COMPENSATION. Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic-value method.
Deferred compensation expense associated with awards to non-employees is
measured using the fair-value method and is amortized over the vesting period of
three years using an accelerated calculation under FASB Interpretation No. 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans."
INCOME TAXES. Deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and tax loss and credit carryforwards using the currently
enacted tax rates and laws. A valuation allowance is provided to the extent
realization of deferred tax assets is not considered more likely than not.
RESEARCH AND DEVELOPMENT. Research and development costs are expensed as
incurred.
FINANCIAL INSTRUMENTS. The carrying amount of cash and cash equivalents,
accounts payable, accrued expenses, notes payable to investors and capital lease
obligations approximate their fair values.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject the Company to significant concentration of credit risk consist
primarily of cash and cash equivalents. Substantially all of
37
the Company's cash and cash equivalents are managed by one financial
institution. At December 31, 2000 and 1999, the Company had cash balances at a
financial institution in excess of federally insured limits. However, the
Company does not believe that it is subject to unusual credit risk beyond the
normal credit risk associated with commercial banking relationships.
COMPREHENSIVE LOSS. Comprehensive loss is the same as net loss for all
periods presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Statement, as
amended, is effective for fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 on January 1, 2000, did not have a material impact on
the Company's financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
established guidelines for revenue recognition and was implemented by the
Company in the fourth quarter of 2000. The adoption of SAB 101 did not have a
material impact on the Company's financial condition or results of operations.
LOSS PER SHARE--BASIC AND DILUTED. Basic loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
each period. Diluted loss per share was computed in the same manner. At
December 31, 2000 the impact of the Company's outstanding potential common
shares, including options and warrants (computed using the treasury stock
method) totaling 9,084,625 shares, were excluded from the calculation because
such items were antidilutive.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
ESTIMATED
USEFUL
LIVES 2000 1999
---------- ---------- ---------
Machinery and equipment.................. 5 years $ 694,486 $ 298,180
Furniture and fixtures................... 7 years 54,433 41,521
Office equipment......................... 3 years 1,217,263 159,894
Leasehold improvements................... Lease term 1,489,569 108,809
Equipment under capital lease
obligations............................ Lease term 535,450 254,411
---------- ---------
Total................................ 3,991,201 862,815
Less accumulated depreciation and
amortization........................... (573,317) (296,802)
---------- ---------
Property and equipment, net.............. $3,417,884 $ 566,013
========== =========
4. NOTES PAYABLE TO INVESTORS
At December 31, 1999, notes payable to investors consisted of Senior Secured
Convertible Promissory Notes (the "Senior Notes") held by the Company's primary
investors. The Senior Notes called for interest to be payable at an annual rate
of 12.5%, increasing to 15% after six months if the Class E redeemable
convertible preferred stock ("Class E Stock") funding had not occurred at that
time. In connection with the issuance of the Senior Notes, the investors
received warrants to purchase shares of the Company's common stock (see Note
10). On April 7, 2000, the Senior Notes and accrued interest were converted into
Class E Stock. The Class E Stock was later converted into common stock as a
result of the Company's initial public stock offering during the fourth quarter
of 2000.
38
5. CAPITAL LEASE OBLIGATIONS
The Company leases equipment under capital lease agreements expiring through
January 2003. Future obligations under such capital leases as of December 31,
2000 are as follows:
2001........................................................ $ 159,043
2002........................................................ 94,392
2003........................................................ 2,580
---------
256,014
Less amount representing interest........................... (25,121)
---------
230,893
Less current portion of capital lease obligations........... (138,648)
---------
Capital lease obligations, excluding current portion........ $ 92,245
=========
6. COMMITMENTS
The Company leases office and light manufacturing space under an operating
lease through September 30, 2007 and has an operating lease for certain office
equipment expiring October 2001. At December 31, 2000, the Company has provided
the lessor with an irrevocable letter of credit in the amount of $450,000. This
letter of credit is secured by a cash deposit. The Company is also obligated
under leases for its former office and light manufacturing space which expired
January 30, 2001
Future minimum annual lease payments under non-cancelable operating leases
as of December 31, 2000 are as follows:
2001........................................................ $477,387
2002........................................................ 461,622
2003........................................................ 490,675
2004........................................................ 490,675
2005........................................................ 500,359
Thereafter.................................................. $926,472
Total rent expense was $473,576, $199,405 and $146,255, during 2000, 1999
and 1998, respectively.
7. PREFERRED STOCK
CLASS A CONVERTIBLE PREFERRED STOCK. Each share of Class A convertible
preferred stock ("Class A Stock") was convertible into two shares of common
stock at the option of the holder. The Class A Stock was nonvoting. The Class A
Stock plus accrued dividends automatically converted into shares of common stock
as a result of the public offering of common stock of the Company during the
fourth quarter of 2000.
CLASS B AND C CONVERTIBLE PREFERRED STOCK. The Company authorized both
Class B and C convertible preferred stock of which only Class C shares were
outstanding at December 31, 1999. Class B shares were never issued. Class C
convertible preferred stock ("Class C Stock") was convertible into two shares of
common stock at the option of the holder. The holders of the Class C Stock had
voting rights equivalent to the number of shares of common stock into which
their shares of Class C Stock converted. The Class C Stock plus accrued
dividends automatically converted into shares of common stock as a result of the
public offering of common stock of the Company during the fourth quarter of
2000.
39
8. REDEEMABLE PREFERRED STOCK
CLASS D REDEEMABLE CONVERTIBLE PREFERRED STOCK. The Company authorized
6,000,000 shares of Class D redeemable convertible preferred stock ("Class D
Stock") with a par value of $.01 per share. On October 23, 1998, the Company
issued 1,900,000 shares of Class D Stock and received net proceeds of
approximately $4,486,000. Issuance costs totaled approximately $264,000 and were
being accreted to the carrying value of the Class D Stock over the period to the
stock's earliest redemption date. Each share of Class D Stock was convertible
into two shares of common stock at the option of the holder. The Class D Stock
earned cumulative dividends at an annual rate of 12.5% through May 23, 2000 and
6% on and after this date, payable quarterly. Dividends could be paid in shares
of Class D Stock through May 23, 2000 after which they could be paid only in
cash. The Class D Stock plus dividends totaling $1,025,204 were automatically
converted into 4,620,164 shares of common stock as a result of the public
offering of common stock of the Company during the fourth quarter of 2000.
Cumulative dividends from May 23, 2000 to November 22, 2000 not paid on Class D
Stock total $174,216 as of December 31, 2000. These dividends were paid in full
in February 2001.
CLASS E REDEEMABLE CONVERTIBLE PREFERRED STOCK. During April 2000, the
Company authorized 2,000,000 shares of $.01 par value per share Class E
redeemable convertible preferred Stock (Class E Stock). On April 7, 2000, the
Company converted $3,550,000 of bridge loans plus interest of $275,559 into
1,226,141 shares of Class E Stock (the "Class E conversion"). Each share of
Class E Stock was convertible into two shares of common stock at the option of
the holder. The Class E Stock earned cumulative dividends at an annual rate of
12.5% through May 23, 2000 and 6% on and after this date, payable quarterly.
Dividends could be paid in shares of Class E Stock through May 23, 2000 and
after which they could be paid only in cash. The Class E Stock plus dividends
totaling $61,103 were automatically converted into 2,491,448 shares of common
stock as a result of the public offering of common stock of the Company during
the fourth quarter of 2000. Cumulative dividends from May 23, 2000 to
November 22, 2000 not paid on Class E Stock total $117,304 as of December 31,
2000. These dividends were paid in full in February 2001.
CLASS F REDEEMABLE CONVERTIBLE PREFERRED STOCK. During May 2000 the Company
authorized 7,500,000 shares of $.01 par value Class F redeemable convertible
preferred Stock (Class F Stock). On May 23, 2000, the Company sold 6,785,711
shares of Class F Stock for a total of $28,500,000, and simultaneously,
outstanding Class F Bridge Loans of $5,200,000 were converted to Class F Stock
at the rate of $4.20 per share. Each share of Class F Stock was convertible into
two shares of common stock at the option of the holder. The Class F Stock earns
cumulative dividends at an annual rate of 6%, payable quarterly. Dividends are
payable in cash. The Class F Stock was automatically converted into 13,571,422
shares of common stock as a result of the public offering of common stock of the
Company during the fourth quarter of 2000. Cumulative dividends from May 23,
2000 to November 22, 2000 total $867,853 as of December 31, 2000. These
dividends were paid in full in February 2001.
As a result of the initial public offering of the Company's common stock and
the conversion of all outstanding shares of all classes of the preferred stock,
the Company amended its charter and cancelled all its classes of preferred
stock. The Company then added a new class of preferred stock that can be issued
in the future by filing a Certificate of Designations with the specific terms as
set by its Board of Directors. At December 31, 2000, there are 10 million shares
of preferred stock authorized with none outstanding.
9. COMMON STOCK
INITIAL PUBLIC OFFERING. During the fourth quarter of 2000, the Company
sold 9,200,000 shares of its common stock, inclusive of the underwriters' over
allotment, at an initial public offering price of $6 per share. Net proceeds to
the Company as a result of the stock offering totaled approximately
$49.3 million reflecting gross proceeds of $55.2 million net of underwriter
commissions of approximately $3.9 million and other estimated offering costs of
approximately $2.0 million.
40
RESERVED SHARES. At December 31, 2000, 13,722,268 shares of common stock
were reserved for issuance under the Company's stock option plan and outstanding
warrants.
10. STOCK WARRANTS
At its inception in 1997, the Company issued a warrant to purchase 1,125,000
shares of common stock to an investor at the price of $2.67 per share (the "1997
warrant"). The warrant expired unexercised on May 28, 1999. Value ascribed to
this warrant was not material.
CLASS D STOCK WARRANTS. Under the conditions of the Class D Stock offering,
the Company issued warrants in October 1999 to three investors to purchase
772,500 shares of common stock at $1.67, 772,500 shares of common stock at
$2.25, and 772,500 shares of common stock at $3.00 (the "October 1999
warrants"). The estimated fair value of the warrants at the date of their
issuance was $280,000. This amount has been recorded as a dividend to the
holders of the Class D Stock and credited to additional paid-in-capital. These
warrants expire December 31, 2004.
Additional warrants were issued under the Class D Stock agreement during
April 2000 to three investors to purchase 712,500 shares of common stock at
$1.67 per share, 712,500 shares of common stock at $2.25 per share, and 712,500
shares of common stock at $3.00 per share. Upon issuance of these warrants, the
Company recorded a dividend of approximately $1,300,000 for the fair market
value of these warrants based on the Black-Scholes option pricing model. These
warrants expire December 31, 2004.
In December 2000, an investor exercised a portion of its warrants, in a
cashless transaction, to purchase 300,000 shares of the Company's common stock
at $1.67, 300,000 shares of the Company's common stock at $2.25 and 300,000
shares of the Company's common stock at $3.00 per share. Net shares issued
totaled 608,843.
CLASS E STOCK WARRANTS. In conjunction with the issuance of the Senior
Notes in August 1999, the Company issued warrants to four investors to purchase
315,000 shares of Class E Stock at an exercise price of $2.50 per share (the
"August 1999 warrants"). The estimated fair value of these warrants at the date
of grant was $170,000. This amount was recorded as a discount on the Senior
Notes and was charged to interest expense in 1999, as the Senior Notes were
demand notes. These warrants were to expire on August 2, 2004.
In conjunction with the Class E Stock conversion (See Note 8), warrants
totaling 315,000, issued in conjunction with the issuance of the Senior Notes in
August 1999, were cancelled. In exchange, warrants to purchase 306,535 shares of
Class E Stock at $2.50 per share were issued. These warrants expire April 7,
2005. The estimated fair market value of these warrants is approximately
$344,000. Since these warrants replace the August 2, 1999 warrants, the amount
allocated to the August 2, 1999 warrants have been reallocated to Class E
Redeemable Preferred Warrants and the remaining $174,000 has been charged to
interest expense in the year ended December 31, 2000. As a result of the initial
public stock offering by the Company in the fourth quarter of 2000, the holders
of the warrants are now entitled to purchase 613,070 shares of the Company's
common stock instead of the Class E Stock.
In December 2000, an investor exercised its warrants, in a cashless
transaction, to purchase 84,433 shares of the Company's common stock.
CLASS F STOCK WARRANTS. In conjunction with the issuance of the Class F
Stock, the Company issued warrants to seven investors to purchase 6,333,333
shares of its common stock at an exercise price of $2.25. The estimated fair
value of the warrants at the date of their issuance was $33,000,000. This amount
has been recorded as a dividend to the holders of the Class F Stock and credited
to additional paid-in-capital. These warrants expire on May 23, 2005. During
December 2000, two investors exercised their warrants, in a cashless
transaction, to purchase 1,289,600 shares of the Company's common stock.
41
CONSULTANT WARRANTS. The Company issued warrants to two consultants that
are exercisable for an aggregate of 70,000 shares of its common stock at an
exercise price of $6.00 per share. The holder of one of these warrants
exercisable for 50,000 shares of common stock may exercise its warrant at any
time prior to January 31, 2002. The holder of the other warrant exercisable for
20,000 shares of common stock may exercise its warrant at any time prior to
August 2, 2005. Upon the issuance of these warrants, the Company recorded a
charge to consulting expense of $213,861.
On October 24, 2000, the Company issued 240,000 warrants to an investor at
an exercise price of $2.10 per share in conjunction with an agreement by an
affiliate of that investor to provide the Company with technical expertise. One
half of the warrants vest immediately, the remainder vest as services are
utilized. During the fourth quarter of 2000, the company recorded a charge to
consulting expense for $1,355,505 to recognize the fair market value of the
vested warrants. The Company has deferred the remaining warrants and will
revalue the amount and record additional expense as necessary in future quarters
as the remaining services are provided. Deferred compensation relating to these
warrants at December 31, 2000, is approximately $1,100,000. The agreement
terminates and any unvested options are forfeited on November 1, 2003.
All warrants were valued on the date of grant using the Black-Scholes
(common stock) or the Binary Option Pricing Model (preferred stock). The
assumptions used to value these warrants were as follows:
APRIL AUGUST OCTOBER
2000 2000 1999 1999 1997
WARRANTS WARRANTS WARRANTS WARRANTS WARRANTS
---------- -------- ---------- ---------- ----------
Risk-free interest rate.............. 6.15% 6.5% 5.62% 5.86% 6.25%
Expected life of warrant............. 12 months Various 30 months 27 months 24 months
Expected dividend payment rate, as a
percentage of the stock price on
the date of grant.................. 0% 0% 0% 0% 0%
Assumed volatility................... 73% 100% 60% 60% 48%
11. STOCK OPTIONS
The Company's option plans provide for the granting of stock options to
purchase up to 9,000,000 shares of the Company's common stock. Options may be
granted to employees, officers, directors and consultants of the Company with
terms of up to 10 years. Under the terms of the option plans, incentive stock
options ("ISOs") are to be granted at fair market value of the Company's stock
at the date of grant, and nonqualified stock options ("NSOs") are to be granted
at a price determined by the Board of Directors. ISOs and NSOs generally vest
ratably over 36 months from the grant date and have contractual lives of up to
10 years.
42
Stock option activity since inception is as follows:
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE FAIR
SHARES PRICE VALUE
--------- --------- ---------
Outstanding at inception....................... --
Granted...................................... 647,874 $0.89 $0.35
--------- ----- -----
Outstanding, December 31, 1997................. 647,874 0.89
Granted...................................... 199,126 0.89 0.38
Canceled, forfeited or expired............... (10,000) 0.89
--------- ----- -----
Outstanding, December 31, 1998................. 837,000 0.89
Granted...................................... 1,467,000 0.89 0.40
Canceled, forfeited or expired............... (295,688) 0.89
--------- ----- -----
Outstanding, December 31, 1999................. 2,008,312 0.89
Granted...................................... 3,343,688 3.15 1.78
Exercised.................................... (480,266) 0.89
Canceled, forfeited or expired............... (238,694) 2.37
--------- ----- -----
Outstanding, December 31, 2000................. 4,733,040 $2.50
========= ===== =====
The following table summarizes information about stock options outstanding
at December 31, 2000:
VESTED
WEIGHTED- ----------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE AVERAGE
OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OF OPTIONS PRICE
- -------------- ----------- ----------- --------- ---------- ---------
$0.89................... 1,771,352 8.74 $ 0.89 612,960 $0.89
$1.78-$2.50............. 1,548,188 9.20 $ 2.23 66,667 $1.78
$3.10-$4.10............. 640,000 9.49 $ 3.49 80,000 $4.10
$5.10-$6.00............. 498,000 9.52 $ 5.64 -- $ --
$6.10-$7.12............. 275,500 9.84 $ 6.34 60,000 $6.00
Included in the above schedules are grants of 160,000 and 162,000 options
made to non-employee consultants in 2000 and 1999, respectively.
As described in Note 2, the Company uses the intrinsic-value method to
measure compensation expense associated with grants of stock options to
employees. If the Company had used the fair value method to measure
compensation, reported net loss would have been as follows:
CUMULATIVE FROM
MAY 8, 1997
(DATE OF
YEAR ENDED YEAR ENDED YEAR ENDED INCEPTION) TO
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2000 1999 1998 2000
------------ ----------- ----------- ---------------
Net loss to common shareholders as
reported.............................. $(53,279,148) $(6,630,016) $(4,912,459) $(67,933,004)
Net loss--pro forma..................... (54,175,173) (7,154,362) (4,987,251) (69,653,514)
Loss per share--as reported............. $ (10.77) $ (393.52) $ (291.58)
Loss per share--pro forma............... $ (10.95) $ (424.64) $ (296.01)
43
The fair value of the options on their grant date was measured using the
Black-Scholes option-pricing model. Key assumptions used to apply this
option-pricing model are as follows:
2000 1999 1998
----------------------------- -------- --------
Risk-free interest rate................. 6.5% and 6.25% 6.0% 5.75%
Expected life of option................. 3 years 3 years 3 years
Expected dividend payment rate, as a
percentage of the stock price on the
date of grant......................... 0% 0% 0%
Assumed volatility...................... 100% 60% 58%
The option-pricing model used was designed to value readily tradable stock
options with relatively short lives. However, management believes that the
assumptions used to value the options and the model applied yield a reasonable
estimate of the fair value of the grants made under the circumstances (see also
Note 15).
12. EMPLOYEE STOCK PURCHASE PLAN
On October 15, 2000 the Company adopted an Employee Stock Purchase Plan (the
"Plan") under which eligible employees are able to purchase shares of the
Company's Common Stock at 85% of the market value at the date of the start of
each six month option period or the end of such period, whichever is lower.
Under the provisions of the Plan up to 1,000,000 shares are authorized. No
shares have been issued under this Plan at December 31, 2000.
13. INCOME TAXES
The components of the provision (benefit) for income taxes consisted of the
following:
CUMULATIVE FROM
MAY 8, 1997
(DATE OF
YEAR ENDED YEAR ENDED YEAR ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998 2000
------------ ------------ ------------ ---------------
Federal--deferred........................ $(5,115,236) $(1,995,158) $(1,594,955) $(9,743,219)
State--deferred.......................... (993,055) (352,087) (282,933) (1,809,758)
Increase in valuation allowance.......... 6,108,291 2,347,245 1,877,888 11,552,977
----------- ----------- ----------- -----------
Provision (benefit) for income taxes..... $ -- $ -- $ -- $ --
=========== =========== =========== ===========
A reconciliation of the statutory federal rate to the effective rate for all
periods is as follows:
Statutory federal rate benefit.............................. (34)%
State, net of federal effect................................ (6)
Valuation allowance provided................................ 40
---
Effective rate.............................................. --%
===
44
The components of the Company's deferred tax assets and liabilities
consisted of the following at December 31:
2000 1999
----------- ----------
Long-term assets:
Net operating loss carryforwards.................. $10,403,206 $4,728,408
Research and development credits.................. 1,017,264 524,958
Loss on sales commitments......................... -- 130,000
Other............................................. 132,506 61,320
----------- ----------
Net deferred tax assets before valuation
allowance......................................... 11,552,977 5,444,686
Less valuation allowance............................ (11,552,977) (5,444,686)
----------- ----------
Net deferred tax assets............................. $ -- $ --
=========== ==========
The valuation allowance increased by $6,108,291 in 2000 and $2,347,245 in
1999, primarily due to the generation of net operating loss carryforwards and
credits for which realization is not reasonably assured.
The Company has available for future periods federal and state tax net
operating loss carryforwards for federal and state purposes of approximately
$23,564,000 and $23,330,000, respectively, as of December 31, 2000. In addition,
the Company has business credits of approximately $539,000 and 47,000 for
federal and state purposes, respectively as of December 31, 2000. The net
operating loss carryforwards expire beginning in 2012 and 2002 for federal and
state tax purposes, respectively. The federal research and development credits
begin to expire in 2012. The Company did not pay any income taxes from inception
to December 31, 2000.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may have limited, or may limit in the future,
the amount of net operating loss carryforwards which could be utilized annually
to offset future taxable income and income tax liabilities. The amount of any
annual limitation is determined based upon the Company's value prior to an
ownership change.
14. BENEFIT PLAN
In 1998, the Company created a 401(k) Profit Sharing Plan (the "Plan") for
its full-time employees. Each participant in the Plan may elect to contribute a
percentage of his or her annual compensation to the Plan on a pre-tax basis up
to the annual limit established by the Internal Revenue Service. The Company
matches employee contributions at a rate of 50% up to the first 6% of the
employee's contributions. The Company may also elect to make a profit-sharing
contribution based on the discretion of the Board of Directors. Employee
contributions are fully vested. Company matching and profit sharing
contributions vest 20% after two years of service consisting of at least 1,000
hours per calendar year and 20% annually thereafter. Company contributions were
$102,085, $41,963, and $19,376 during 2000, 1999 and 1998, respectively.
15. RELATED PARTY TRANSACTIONS
CONSULTING AGREEMENTS. The Company entered into consulting agreements with
three investors. The contracts were seven-year agreements, renewable annually
thereafter, for consulting services to be provided by the investors in exchange
for annual issuances of shares of the Company's Class A Stock. During 2000, 1999
and 1998, $586,000, $300,000 and $175,000, respectively, was recorded as
consulting expense relating to these agreements, and 67,232 (ultimately 134,464
shares of common stock), 145,000 and 120,000 shares of Class A Stock in 2000,
1999 and 1998, respectively, were issued as compensation under these contracts.
Prepaid and accrued consulting expenses have been recorded annually, based on
the terms and dates of the consulting agreements. The services provided by the
investors were recorded
45
based upon the value of the securities issued. These contracts all expired upon
the completion of the initial public offering of the Company's common stock in
November 2000.
PATENTS. The Company has entered into an agreement with SatCon whereby
SatCon granted the Company a perpetual license to use the technology patented by
SatCon relating to the field of flywheel energy storage products, systems and
processes for stationary terrestrial applications.
SERVICES AGREEMENTS. Prior to 2000, SatCon performed certain research and
development, administrative and other services for the Company. Amounts paid to
SatCon for such services rendered amounted to approximately $551,000, $59,000,
$443,000 and $2,404,000 during 2000, 1999, 1998 and the period from inception to
December 31, 2000, respectively. No amounts were payable to SatCon relating to
such services at either December 31, 2000 or 1999.
INVENTORY. The Company uses Satcon to perform certain engineering and other
processing tasks on certain of the electrical components of its product. At
December 31, 2000, the Company had $153,500 of its inventory at Satcon for
processing.
DISTRIBUTION AGREEMENT. In 1997, the Company signed a 20-year agreement
which granted an investor exclusive rights to distribute certain of the
Company's products in a territory comprised of seven Mid-Atlantic states and the
District of Columbia. However, the Company retained the right to distribute
products directly to cable television and telephone companies.
16. SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2000, the Company converted its bridge notes of $3,550,000 and
accrued interest on those notes totaling $275,560 into Class E redeemable
convertible preferred stock.
As indicated in Note 11 above, in April 2000, the Company cancelled certain
warrants that were issued in conjunction with the Class E Preferred stock. This
resulted in a charge to Additional Paid in Capital of $170,000.
As a result of its initial public stock offering during the fourth quarter
of 2000, the Company converted 4,767,907 shares of its Class A Preferred Stock
into 9,535,814 shares of its common stock.
As a result of its initial public stock offering during the fourth quarter
of 2000, the Company converted 6 shares of its Class C preferred stock into 12
shares of its common stock.
As a result of its initial public stock offering during the fourth quarter
of 2000, the Company converted all of its outstanding shares of its Class D, E
and F redeemable convertible preferred stock into 19,823,704 shares of its
common stock.
During 2000, the company paid dividends on its redeemable convertible
preferred stock totaling $1,086,307 through the issuance of 859,330 shares of
its common stock.
As a result of its initial public stock offering during the fourth quarter
of 2000, the Company paid accrued consulting dividends totaling $498,284 with
134,464 shares of its common stock.
During 2000, the Company recorded an increase in deferred compensation from
the issuance of non-qualified stock options to third parties of $1,844,649. This
is offset by a credit to additional paid in capital.
In December 2000, the Company issued 1,982,876 shares of its common stock as
a result of two holders of the Company's warrants exercising a portion of their
warrants in a cashless exercise transaction.
During 2000, 1999 and 1998, the Company acquired assets totaling $281,034,
$0 and $254,411 of assets with capital leases.
46
During 1999 the Company issued warrants valued at $450,000 in conjunction
with certain financing arrangements.
During 1999 the Company issued non-qualified stock options valued at $65,318
for certain consulting agreements.
17. QUARTERLY RESULTS (UNAUDITED)
In management's opinion, this unaudited information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any future
quarters.
2000
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ------------
Revenue................................... $ -- $ -- $ -- $ 50,000
Loss from operations...................... (2,893,697) (2,295,054) (4,582,851) (7,976,123)
Net loss.................................. $(3,018,735) $(2,526,898) $(4,247,082) $ (7,625,323)
Loss per share--basic and diluted......... $ (179.17) $ (73.39) $ (34.74) $ (0.39)
Weighted-average common shares
outstanding............................. 16,848 34,430 122,269 19,504,373
1999
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
Revenue.................................... $ 32,931 $ 32,931 $ -- $ 203,006
Loss from operations....................... (1,191,017) (1,379,035) (989,270) (1,780,420)
Net loss................................... $(1,183,719) $(1,382,435) $(1,221,338) $(1,884,001)
Loss per share--basic and diluted.......... $ (70.26) $ (82.05) $ (72.49) $ (111.82)
Weighted-average common shares
outstanding.............................. 16,848 16,848 16,848 16,848
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers of the Company that responds to
this Item is incorporated by reference from Item 4A contained in Part 1 of this
Form 10-K. The information that responds to this Item with respect to Directors
is incorporated by reference from the section entitled "Election of Directors"
in the Company's definitive proxy statement for its 2001 Annual Meeting of
Stockholders, which is required to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 ("Exchange Act") and which will be filed with
the SEC not later than 120 days after the end of the Company's fiscal year (the
"Proxy Statement"). Information with respect to compliance by the Company's
directors and executive officers with Section 16(a) of the Exchange Act is
incorporated by reference from the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information required in response to this Item is incorporated by reference
from the section entitled "Compensation of Executive Officers" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required in response to this Item is incorporated by reference
from the sections entitled "Election of Directors" and "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required in response to this Item is incorporated by reference
from the section entitled "Other Information Relating to Directors, Nominees and
Executive Officers" in the Proxy Statement.
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. Financial Statements
The financial statements are listed under Part II, Item 8 of this Report.
2. Financial Statement Schedules
Schedules for which provision is made in the applicable regulations of
the Securities and Exchange Commission have been omitted because the
information is disclosed in the Consolidated Financial Statements or
because such schedules are not required or not applicable.
3. Exhibits
The exhibits are listed below under Part IV, Item 14(c) of this report.
Reports on Form 8-K
None
Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- ------------------------------------------------------------
3.1 Sixth Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit No. 3.1 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
3.2 Amended and Restated Bylaws (Incorporated by reference to
Exhibit No. 3.2 to the Registration Statement on Form S-1 of
Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.1 Securities Purchase Agreement by and among SatCon Technology
Corporation, Duquesne Enterprises (n/k/a DQE Enterprises,
Inc.) and Beacon Power Corporation dated May 28, 1997
(Incorporated by reference to Exhibit No. 10.1.1 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.2 Securities Purchase Agreement by and among Beacon Power
Corporation, Perseus Capital, L.L.C., Duquesne Enterprises
(n/k/a DQE Enterprises, Inc.), Micro-Generation Technology
Fund, L.L.C. and SatCon Technology Corporation dated
October 23, 1998 (Incorporated by reference to Exhibit
No. 10.1.2 to the Registration Statement on Form S-1 of
Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.3 Securities Purchase Agreement by and among Beacon Power
Corporation, Perseus Capital, L.L.C., Duquesne Enterprises
(n/k/a DQE Enterprises, Inc.), Micro-Generation Technology
Fund, L.L.C. and SatCon Technology dated April 7, 2000
(Incorporated by reference to Exhibit No. 10.1.3 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.4 Securities Purchase Agreement by and among Beacon Power
Corporation, Perseus Capital, L.L.C., Micro-Generation
Technology Fund, L.L.C., Mechanical Technology Incorporated,
The Beacon Group Energy Investment Fund II, L.P. and Penske
Corporation dated April 21, 2000 (Incorporated by reference
to Exhibit No. 10.1.4 to the Registration Statement on
Form S-1 of Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
49
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- ------------------------------------------------------------
10.1.5 Securities Purchase Agreement by and among Beacon Power
Corporation, Perseus Capital, L.L.C., DQE
Enterprises, Inc., Micro-Generation Technology
Fund, L.L.C., Mechanical Technology Incorporated, GE
Capital Equity Investments, Inc., The Beacon Group Energy
Investment Fund II, L.P. and Penske Corporation dated
May 23, 2000 (Incorporated by reference to Exhibit No.
10.1.5 to the Registration Statement on Form S-1 of Beacon
Power Corporation No. 333-43386 filed on November 16, 2000).
10.1.6 Investor Rights Agreement by and among Beacon Power
Corporation, Perseus Capital, L.L.C., DQE Enterprises, Inc.,
Micro-Generation Technology Fund, L.L.C., Mechanical
Technology Incorporated, GE Capital Equity Investments,
Inc., The Beacon Group Energy Investment Fund II, L.P.,
Penske Corporation, SatCon Technology Corporation, James S.
Bezreh, Russel S. Jackson, Russell A. Kelley, Stephen J.
O'Connor, Jane E. O'Sullivan and Robert G. Wilkinson dated
May 23, 2000 (Incorporated by reference to Exhibit
No. 10.1.6 to the Registration Statement on Form S-1 of
Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.7 Form of Warrant of Beacon Power Corporation issued pursuant
to class D financing and list of holders thereof
(Incorporated by reference to Exhibit No. 10.1.7 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.8 Form of Warrant of Beacon Power Corporation issued pursuant
to class E financing and list of holders thereof
(Incorporated by reference to Exhibit No. 10.1.8 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.9 Form of Warrant of Beacon Power Corporation issued pursuant
to class F bridge financing and list of holders thereof
(Incorporated by reference to Exhibit No. 10.1.9 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 33-43386 filed on November 16, 2000).
10.1.10 Form of Warrant of Beacon Power Corporation issued pursuant
to class F financing and list of holders thereof
(Incorporated by reference to Exhibit No. 10.1.10 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.11 Warrant of Beacon Power Corporation issued to Cox
Communications, Inc. dated August 2, 2000 (Incorporated by
reference to Exhibit No. 10.1.11 to the Registration
Statement on Form S-1 of Beacon Power Corporation
No. 333-43386 filed on November 16, 2000).
10.1.12 Warrant of Beacon Power Corporation issued to Kaufman-Peters
dated August 2, 2000 (Incorporated by reference to Exhibit
No. 10.1.12 to the Registration Statement on Form S-1 of
Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.13 Warrant of Beacon Power Corporation issued to GE Capital
Equity Investments, Inc. dated October 24, 2000
(Incorporated by reference to Exhibit No. 10.1.13 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.14 Second Amended and Restated 1998 Stock Incentive Plan of
Beacon Power Corporation (Incorporated by reference to
Exhibit No. 10.1.14 to the Registration Statement on
Form S-1 of Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
50
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- ------------------------------------------------------------
10.1.15 Form of Incentive Stock Option Agreement of Beacon Power
Corporation (Incorporated by reference to Exhibit
No. 10.1.15 to the Registration Statement on Form S-1 of
Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.16 Form of Non-Qualified Stock Option Agreement of Beacon Power
Corporation (Incorporated by reference to Exhibit
No. 10.1.16 to the Registration Statement on Form S-1 of
Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.17 Form of Non-Qualified Stock Option Agreement of Beacon Power
Corporation issued to certain consultants on July 24, 2000
and list of holders thereof (Incorporated by reference to
Exhibit No. 10.1.17 to the Registration Statement on
Form S-1 of Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.18 Amended and Restated License Agreement by and between Beacon
Power Corporation and SatCon Technology Corporation dated
October 23, 1998 (Incorporated by reference to Exhibit
No. 10.1.18 to the Registration Statement on Form S-1 of
Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.19 Letter Agreement between Beacon Power Corporation and
Duquesne Enterprises (n/k/a/ DQE Enterprises, Inc.) dated
May 28, 1997 (Incorporated by reference to Exhibit
No. 10.1.19 to the Registration Statement on Form S-1 of
Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.20 Lease between Beacon Power Corporation and BCIA New England
Holdings LLC dated July 14, 2000 (Incorporated by reference
to Exhibit No. 10.1.20 to the Registration Statement on
Form S-1 of Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.21 Commercial Lease by and between Beacon Power Corporation and
Cummings Properties Management, Inc. dated November 19, 1997
(Incorporated by reference to Exhibit No. 10.1.21 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.22 Distribution Agreement between Beacon Power Corporation and
TLER dated January 6, 2000 (Incorporated by reference to
Exhibit No. 10.1.22 to the Registration Statement on
Form S-1 of Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.23 Purchase Order and Agreement for the Sale of Goods between
TLER and Beacon Power Corporation dated January 10, 2000
(Incorporated by reference to Exhibit No. 10.1.23 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.24 Letter Agreement among Beacon Power Corporation, GE Capital
Equity Investments, Inc. and GE Corporate Research and
Development dated October 24, 2000 (Incorporated by
reference to Exhibit No. 10.1.24 to the Registration
Statement on Form S-1 of Beacon Power Corporation
No. 333-43386 filed on November 16, 2000).
10.1.25 Form of Director and Officer Indemnification Agreement
(Incorporated by reference to Exhibit No. 10.1.25 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.26 Form of Employment Agreement and list of parties thereto
(Incorporated by reference to Exhibit No. 10.1.26 to the
Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
51
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- ------------------------------------------------------------
10.1.27 Letter from Petroleos Mexicanos to Beacon Power Corporation
dated October 25, 2000 (Incorporated by reference to Exhibit
No. 10.1.27 to the Registration Statement on Form S-1 of
Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
11.1 Statement of Computation of Earnings per Share. (This
exhibit has been omitted because the information is shown in
the financial statements or notes thereto.)
23.1 Consent of Deloitte & Touche LLP
52
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
BEACON POWER CORPORATION
By: /s/ WILLIAM E. STANTON
-----------------------------------------
William E. Stanton
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
President and Chief Executive
/s/ WILLIAM E. STANTON Officer, and Director
------------------------------------------- (Principal Executive March 30, 2001
William E. Stanton Officer)
Vice President of Finance and
/s/ JAMES M. SPIEZIO Chief Financial Officer
------------------------------------------- (Principal Financial March 30, 2001
James M. Spiezio Officer)
/s/ STEPHEN A. SPANOS Corporate Controller
------------------------------------------- (Principal Accounting March 30, 2001
Stephen A. Spanos Officer)
/s/ KENNETH M. SOCHA
------------------------------------------- Director March 30, 2001
Kenneth M. Socha
/s/ PHILIP J. DEUTCH
------------------------------------------- Director March 30, 2001
Philip J. Deutch
/s/ DAVID B. EISENHAURE
------------------------------------------- Director March 30, 2001
David B. Eisenhaure
/s/ ERIC R. STOLTZ
------------------------------------------- Director March 30, 2001
Eric R. Stoltz
/s/ NANCY HAWTHORNE
------------------------------------------- Director March 30, 2001
Nancy Hawthorne
/s/ ALAN P. GOLDBERG
------------------------------------------- Director March 30, 2001
Alan P. Goldberg
53