UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACTOF 1934
For the fiscal year ended December 31, 2002
Commission files number 000-31973
Beacon Power Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-3372365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Ballardvale Street
Wilmington, Massachusetts 01887-1032
(Address of principal executive offices) (Zip code)
(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 $.01 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 21, 2003, the market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was $8,562,579.
Indicate by check mark whether the registrant is an accelerated filer (as
defined by rule 12b-2 of the Act). ___ Yes _X_ No
As of June 28, 2002 the market value of the voting stock of the registrant
held by non-affiliates of the registrant was $9,418,459.
The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of March 21, 2003 was 42,812,897.
DOCUMENTS INCORPORATED BY REFERENCE
Pertinent extracts from the Registrant's Proxy Statement for the 2003 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.
Table of Contents Page
PART I
Item 1. Business 1
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 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Consolidated Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
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
Item 14. Controls and Procedures 48
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 49
Signatures 52
Note Regarding Forward Looking Statements:
This Annual Report on Form 10-K may include statements that are not historical
facts and are considered "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These "forward-looking"
statements reflect Beacon Power Corporation's view about future events and
financial performance, including among other things, our expected future
revenues, costs of operations and capital expenditures and estimates of the
potential markets for our products. 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
"Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Certain Factors Affecting Future Operating Results" of
this Form 10-K.
PART I
Item 1. Business
Overview
Beacon Power Corporation is a development stage company that was incorporated on
May 8, 1997. The Corporation, and its subsidiary (collectively "Beacon" or "the
Company") designs, develops, configures and offers for sale, power systems that
provide highly reliable, high-quality, environmentally friendly, uninterruptible
electric power employing both proprietary and third-party solutions for a number
of potential applications. The Company has segmented the potential markets for
its products into three broad categories: high-energy, high-power
uninterruptible power systems (UPS), and high power distributed generation and
utility power grid energy storage systems. We have available for sale several
high-energy products that deliver a low level of power over a long period of
time (typically measured in hours). These products are tailored to the
telecommunications, cable systems, computer networks, and Internet markets. We
are developing a new high-energy product for potential applications in the
renewable energy market for both photovoltaic and wind turbine uses. As part of
exploring these markets we have committed to invest $1.1 million in Evergreen
Solar, Inc. and we have purchased the inverter electronics technology of
Advanced Energy Systems, Inc., as described in more detail below. We do not have
high-energy units in inventory or purchase orders placed with vendors for these
products. In the event that we are able to sell these products we will need to
place orders for components with vendors and hire and train manufacturing
personnel to assemble, inspect and assist in the installation of deliverable
units. We also have UPS products available for sale to provide short-term
(typically measured in seconds) power until a generator or other long-term power
source can be activated for commercial and industrial facilities that are
high-power applications. We do not have units in inventory or purchase orders
placed with the suppliers of the flywheel system or the electronics unit. For
both components we do have agreements with the suppliers, but these units will
need to be produced and the electronics unit will also require modification to
meet U.S. electrical standards. We are now developing products for distributed
generation and utility power grid applications that provide megawatts for
minutes. Our existing products already offer more stored energy than any other
commercial flywheel product. The flywheel module being designed for distributed
generation and utility applications will be significantly higher in stored
energy capacity than any other available products in the industry. Completion of
development of this product will depend on tangible interest expressed by the
marketplace.
We have taken significant actions over the last eighteen months to reduce our
expenditures for product development, infrastructure and production readiness.
Our headcount, development spending and capital expenditures have been
significantly reduced. We have continued the preliminary design and development
of potential products for markets under consideration and with specific approval
by the Company's Board of Directors limited component development by our vendors
may be authorized. For example we have placed purchase orders for key components
for our next generation high-energy 25kWh product. However, we will not make the
additional expenditures that would be required for prototype development or
production capabilities until we have defined the specific markets to be served
and the marketplace has expressed tangible interest.
We are presently analyzing markets for our current and contemplated flywheel
systems and electronic products in terms of their size and growth potential,
competitive advantages that our products could provide and probable penetration
we could achieve. Our initial products were focused on the telecom industry. As
a result of the overall economic downturn and, in particular, the significant
decline in capital and maintenance spending in telecom, as well as the low price
of lead-acid batteries, we have not yet been successful in selling products into
this market. As a result of the cost-cutting measures referred to above, we have
recognized restructuring and asset impairment charges in 2002. A substantial
portion of our long-term assets has been idled, including machinery and
equipment, tooling, office furniture and fixtures and leasehold improvements. We
have evaluated all of our property and equipment as required by Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." We have taken a non-cash accounting charge of
$6.5 million of which $4.3 million represents impaired capital equipment and
leasehold improvements, $1.9 million relates to a reserve against future lease
payments and related facility costs and $0.3 million relates to severance costs.
The assets held for sale have been grouped together and classified as "Assets
held for sale" in the current assets section of the balance sheet. Assets held
for sale have been written down to their fair value based on quotes from vendors
and other market factors. The reserve against future lease payments is
classified as "Restructuring reserve" in the current liabilities section of the
balance sheet.
If we identify markets in which we believe our products will be successful, and
those markets express a tangible interest in our products, we may not have
sufficient cash available to complete prototype development and production of
our products unless we raise additional equity, or obtain debt financing.
Lead-acid batteries are the most commonly used devices for providing
long-duration backup power and replacement electric power and for ensuring power
quality, either alone or as a temporary measure until generators or other power
sources can be activated. Our flywheel-based systems offer an alternative to
battery systems, providing the same function but with much longer life and
without the need for regular maintenance. Flywheel systems draw electrical
energy from a primary power source while that source is operational, store that
energy, and then convert that energy to provide immediate, peak-power, voltage
support and uninterruptible electric power when the primary power source fails
or is disrupted.
We believe that our current and anticipated flywheel-based products offer
life-cycle cost advantages and significant performance advantages over
conventional, battery-based back-up power and UPS systems. These performance
advantages include improved certainty of operations, more reliable monitoring,
higher reliability, significantly longer life, improved recharging capability,
significantly reduced scheduled maintenance, and greater environmental
friendliness. Life-cycle cost comparisons consider the costs over the life of
the product and include initial costs, expense of maintaining, monitoring,
replacement and disposing of competing products.
In the area of distributed generation and utility grid applications, users of
electricity can experience significant losses in their operations if their
electricity supply is partially or wholly interrupted, such as by sags, surges
and other temporary interruptions or variations in utility-supplied power. When
grid-supplied electricity is interrupted, these users must employ some means to
replace it. Even if the utility industry were to undertake substantial upgrades
and other investments to improve overall utility grid reliability, the grid's
exposure to severe weather, accidents and other external events means that the
absolute level of power quality required for today's sophisticated electronic
and industrial applications remains difficult to achieve without local
uninterrupted power protection close to the place of use. In addition to
supplying the necessary power levels and time duration for these applications,
these flywheel systems would have the added advantages of minimal scheduled
maintenance, long life, reliable monitoring and environmental friendliness.
From our inception through December 31, 2002 we have incurred losses of
approximately $114.9 million. We do not expect to become profitable or obtain
positive cash flow before 2006. Also, our losses and uses of cash may fluctuate
significantly from quarter to quarter as our costs of development, production
and marketing fluctuate and we make investments that we consider strategic.
Markets for our Products
High-Energy Market. The needs and dynamics of the back-up high-energy market are
for products that supply low-power for a longer time (as contrasted to
high-power UPS products, which supply higher power for a shorter period). Our
high-energy products have been designed to address specifically the back-up
power needs of the telecommunications industry (for example, telephony,
broadband, cable and wireless networks) in decentralized locations in suburban
and rural areas.
The telecommunications industry, however, experienced a significant overall
slowdown that began in 2000 and is continuing, and there can be no assurance of
when it will recover. Significant reductions in both maintenance budgets and
capital build-out budgets at telecommunications companies made these potential
customers more conservative with spending and expenditure analysis and less
willing to implement new technology solutions, such as our products. These
conditions have also discouraged potential customers from comparing our
products' life-cycle cost to that of batteries, because the savings produced by
our products accrue in the future, whereas the higher initial cost is realized
immediately.
Customers that might be receptive to our products are those for which the
advantages outweigh the greater initial cost. Some potential customers might
have particular needs for 100% reliability, such as critical-use facilities,
hospitals, data centers and call centers; or a power source might be very
expensive to replace or maintain due to its location or for any other reason
(making life-cycle analysis more attractive); or a power source or site might be
located where there are dramatic swings in temperature or where temperatures are
very high (making batteries impractical due to severe degradation of
performance).
In addition, we believe that our next generation high-energy 25kWh product
currently being developed as an extension of our existing high-energy products
will be well suited for renewable energy uses in both photovoltaic and wind
turbine applications. We have purchased the intellectual property assets of
Advanced Energy Systems, Inc. (AES), a supplier of inverter electronics. We
believe this will strengthen our potential entry into these markets for both our
flywheel systems and for improved 5kW inverter control electronics. Inverters in
these applications convert DC power generated by renewable sources to the AC
power required by residential and commercial users. In addition, we have
committed to investments in Evergreen Solar, Inc. to explore strategic
opportunities in the photovoltaic market. We believe that we will be able to
provide increased reliability and performance in both the photovoltaic and wind
turbine markets. We believe that these markets will make purchase decisions with
a greater emphasis on life-cycle costs, which will allow us to be competitive
with battery-based systems. In addition, we believe that our environmentally
friendly products are ideal to introduce to these markets.
High-Power UPS Market. In the high-power UPS market, power quality systems
usually consist of three interconnected devices; (a) solid-state switches and
control electronics, (b) batteries or flywheels to supply short-term power and
(c) engine generators to supply longer-term power which together are commonly
referred to as a continuous power system or CPS. We have products for commercial
and industrial facilities to provide either stand-alone UPS functions or to
provide short-term (typically measured in seconds) power until a generator or
other long-term power source can be activated.
A UPS protects sensitive systems from sags, surges and other temporary
interruptions or variations in utility-supplied power. If the UPS electronics
determine that the power being supplied from the grid is unacceptable or
insufficient, it will draw from the back-up power source to ensure
uninterrupted, quality power.
A CPS provides back-up power for a lengthy period, thus if the power disturbance
lasts for more than a few seconds, the CPS generator is activated and begins to
operate. Internet service providers, data processing centers, semiconductor
plants and cellular phone sites all use CPS to keep critical business equipment
operating when electric utility grid power falters.
We believe that our flywheel systems provide significant advantages to potential
customers due to the numerous problems associated with lead-acid batteries,
including:
o Reliability. Batteries are not only prone to multiple problems leading to
battery failure, but when they are repeatedly used at close to their maximum
power capacity; their power output capacity can rapidly decrease, reducing the
batteries' effectiveness over time. Also, the amount of power available in
battery systems may not readily be monitored and, therefore, the amount of
remaining energy cannot be assured.
o Life-Cycle Cost. The use of batteries has both direct and indirect costs.
In addition to bearing the initial purchase costs of the batteries, a user must
allocate significant space to large battery arrays (space that could otherwise
be allocated to revenue-generating equipment), must inspect and test them on
site every few months (as their power output degrades over time), must cool them
with costly air conditioning (if the user wishes to avoid the rapid degradation
in performance and life that results with temperature variations), and must
replace them every two to six years (depending on type of use, environment and
other factors).
o Life. In applications where discharges consume all or most of the
battery's available reserve, or where the batteries are used in facilities that
are not air-conditioned, the life of batteries is significantly reduced.
o Environmental. Batteries contain toxic materials such as lead and
sulfuric acid. They are considered hazardous waste and their disposal entails
rigorous environmental regulations. Facilities with spent batteries must make
arrangements with hazardous waste handlers for disposal. Both the costs
associated with disposal and the complexity of compliance for proper handling,
permitting and regulatory requirements continue to increase and may accelerate
sharply as pressure increases to curb such hazardous wastes.
The high-power market needs range from 200 watts to two megawatts. The
percentage of this market that is expected to be flywheel-based is not known due
to the short history of such products. However, we expect the percentage to
increase as more market participants sell flywheel-based products and their
advantages become better known.
High-Power Distributed Generation and Utility Power Grid Energy Storage Systems
Market. We are also addressing a market consisting of users of electricity who
experience significant losses in their operations when their electricity supply
is partially or wholly interrupted, such as by sags, surges and other temporary
interruptions or variations in utility-supplied power. When grid-supplied
electricity is interrupted, these users must employ some means to replace it.
Even if the utility industry were to undertake substantial upgrades and other
investments to improve overall utility grid reliability, the grid's exposure to
severe weather, accidents and other external events means that the absolute
level of power quality required for today's sophisticated electronic and
industrial applications remains difficult to achieve without local uninterrupted
power protection close to the place of use. In addition to supplying the
necessary power levels and time duration for these applications, these flywheel
systems would have the added advantages of minimal scheduled maintenance, long
life, reliable monitoring and environmental friendliness.
We believe that our flywheel systems provide significant advantages to potential
customers in these markets.
Our Products
We have available for delivery a high-power UPS product: the Smart Power(TM) 250
kWh flywheel UPS (which consists of a flywheel system coupled with control
electronics). This product bridges the supply of power for a short period of
time (measured in seconds) from interruption of electricity until the customer's
longer-term source (such as a generator or fuel cell) begins to operate. Our UPS
product uses a composite flywheel and it can supply power for approximately
twice as long as devices using steel flywheels. Our UPS product can be
configured to achieve higher power (depending on customer needs) by connecting
units in parallel. It is designed to be compatible with industry standards for
standby generators, enabling its use in a CPS. We have designs that could expand
the power output of our UPS product up to 500kWh if we determine that the size
and growth of markets, competitive aspects and advantages that our products
could provide and probable market penetration we could achieve are sufficient to
develop prototypes and begin production.
We believe that our UPS products will be superior to battery-based UPS systems
in life-cycle cost to the customer, in function, and in environmental benefits
described earlier. We also expect these products to be superior to other
flywheel-based products with which it will compete. We anticipate that it will
require significantly less maintenance and provide superior quality performance
to other flywheel-based products.
Previously, the flywheel and control electronics components of our current UPS
product have been marketed outside the United States by their respective
manufacturers. We have a distribution agreement with our flywheel supplier, and
we will purchase the associated control electronics. The only adaptation of
these components needed for the U.S. market is the conversion of the control
electronics component to US standards, which is being undertaken by the supplier
in conjunction with us.
Our existing high-energy products, the 2kWh and 6kWh flywheel Smart Energy(TM)
systems, have approximately 250,000 hours of operation in customer sites without
failure of our mechanical system, which we believe verifies the reliability of
our technologies. We installed additional units during 2002 to expand the
demonstration of the performance of our products in the telecom industry. At
Verizon Communications, Century Communications, now part of Adelphia
Communications, Cox Communications, AT&T Broadband, Rogers Cable, and WinDBreak
Cable, we have successfully maintained power with no degradation of service in
planned and unplanned losses of utility power. Also, our systems can be adapted
to deliver the amount of power and back-up time required to meet specific needs
of customers by integrating multiple flywheel systems. This has been
successfully demonstrated at Verizon Communications sites.
We believe our next-generation high-energy 25kWh product, currently being
developed as an extension of our existing high-energy products, will be well
suited for renewable energy applications in both photovoltaic and wind turbine
markets. Our product will provide a number of energy storage and power benefits
including extended ride through to generator start, load leveling and load
following. In addition, potential products based on further development of AES
intellectual property would include grid-connect, off-grid and UPS-based
inverter systems. We have preliminary designs for these products but we will not
make the significant additional expenditures that would be required for
prototype development or production capabilities until we have fully defined the
market potential and the marketplace has expressed tangible interest. We have
obtained Underwriters Laboratory approval for our existing high-energy products
and we are pursuing the same for our UPS and utility grid power products. We
designed and certified our high-energy product in accordance with Telcordia
standards, which represent the safety standards established by the
telecommunications industry. Our high-power products are designed and will be
tested for concurrence with the Institute of Electrical and Electronics
Engineers (IEEE) 587 standard, which is the standard for all UPS systems.
Our Technology
Since our formation, we have been developing flywheel energy storage products to
offer superior reliability and performance at competitive costs. Our composite
flywheel is a rotating wheel on 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 an external power source. The flywheel is able
to spin for extended periods with great efficiency, because 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 external power source is
eliminated, the spinning flywheel drives a generator and its bi-directional
inverter converts the kinetic energy into electrical energy, providing it to an
end-user as back up or UPS power.
Steel flywheels have been used since the industrial revolution in applications
such as piston engines to store energy during the power stroke for release
during the compression stroke, and punch presses, such as sheet metal
fabrications, to store energy to achieve stamping pressure. These applications
are limited on the revolutions per minute (RPM) that steel flywheels are able to
operate at and steel's limited density of storage of energy by volume. There is
interest in attempting to commercialize flywheel systems that are capable of
higher power or energy based on technology first developed for aerospace and
nuclear processing applications and have resulted in compact high-energy
flywheels that can be commercially cost competitive. The products we offer
employ 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 composite flywheels are fabricated from
high-strength, lightweight fiber composites, such as graphite and fiberglass
combined with resins, which allow our 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 (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, our flywheel technology is much more efficient than steel
flywheels.
Our proprietary technology enables the design of maintenance-free flywheel
products, in that our products can employ a proprietary internal rather than
external vacuum system and our bearing systems have been designed and developed
to have a long life with no scheduled replacement or maintenance required.
Competing flywheel products rely on bearings and separate vacuum systems that
require periodic maintenance and replacement. Our proprietary technologies are
used in our high-energy products, but have not yet been employed in our
anticipated high-power UPS products. Our Smart Energy(TM) products have
dramatically longer discharge times than any other flywheel energy storage
system; this is possible because our technologies result in very low operating
losses that would otherwise deplete the energy without making it available to
support the customer's load.
In addition, we have purchased the intellectual property assets of Advanced
Energy Systems, Inc. (AES). These assets include anti-islanding software, which
ensures safe grid utility interconnection, as well as drawings, source code,
production know-how, and all associated documentation. We believe these
technologies will enhance our product mix to provide increased market
opportunities in renewable energy solutions such as wind turbines and
photovoltaic systems.
Research and Development
We believe that our research and development efforts are essential to our
ability to successfully design and deliver our products to our targeted
customers, as well as to modify and improve them to reflect the evolution of
markets and customer needs. Our research and development team has worked closely
with potential customers to define product features and performance to address
specific needs. Our research and development expenses, including engineering
expenses, were approximately $7,130,000 in 2002, $17,628,000 in 2001, and
$12,715,000 in 2000. We expect research and development expenses in 2003 to be
lower than in 2002. As we determine market opportunities, we may need to make
significant levels of research and development expenditures in the future. At
December 31, 2002, we employed 23 engineers and technicians who were engaged in
research and development. At December 31, 2001, we had 53 engineers and
technicians.
Manufacturing
Historically, our manufacturing has consisted of the welding and assembly of our
products. We have previously contracted out the manufacture of our high-energy
flywheel components, using our design drawings and processes to facilitate more
rapid growth by taking advantage of third-party installed manufacturing
capacity. For a limited number of non-proprietary components, we generate
performance specifications and obtain either standard or custom components. We
then perform the final assembly and testing.
Our facility is underutilized as a result of reductions in development work and
customer orders for production. We are maintaining a limited manufacturing
staff, many of whom are skilled in Six-Sigma quality control techniques. We
expect to continue to utilize contract manufacturing and outside suppliers in
the future based on our estimate of product demand from potential customers. The
suppliers of the mechanical flywheel and the control electronics for our
high-power UPS product are both single-source suppliers, and the loss or
interruption of supply from either of these suppliers would adversely affect our
ability to market and deliver our high-power UPS product, and thus, our
financial results. To manage cost and supplier risk, we may elect to manufacture
composite rims (the most expensive portion of flywheel units) in our facility if
we determine that it is in our best interest to do so. We have personnel skilled
in management, design, and the manufacturing of composites that will manage our
manufacturing processes.
Sales and Marketing
We are marketing our products directly to customers, and are attempting to build
market interest through power quality manufacturer's representatives and through
lead generation via advertising, trade press articles, participation in industry
conferences, technical presentations to potential customers and limited direct
mail to specific power quality customers. We believe that this strategy could
evolve into alliances and channel partnerships, involving relationships with
power quality manufacturer's representatives, OEMs, architects, engineers,
system integrators, electrical contractors and power quality personnel in
electric utilities.
With respect to our existing high-energy back-up power products, our marketing
strategy has been to identify key prospects and to work with those companies to
formulate our product plan, pricing, initial installation and service
strategies. We have installed on-site, working demonstration units at Verizon
Communications, Century Communications (now part of Adelphia Communications),
Cox Communications, AT&T Broadband, Rogers Cable, and WinDBreak Cable. We will
continue to perform market analysis to identify opportunities for installations
that fit the unique characteristics of those products and to emphasize the value
proposition of our high-energy products. Potential customers for these products
include businesses with heightened needs for 100% reliability, such as
hospitals, data centers, call centers and other critical-use facilities. We
believe that our high-energy products will also be attractive to customers with
power sources that are very expensive to replace or maintain due to their
location or other factors, or power sources located where there are high or low
prevailing temperatures or dramatic changes in temperature.
Backlog
At December 31, 2002, we did not have any backlog.
Customer Service
We intend to provide maintenance and support for our products, although we
expect to contract out such functions at an appropriate time. All our products
are designed to have maintenance-free lives of 20 years.
Competition
Substantially all of the high-energy and UPS market today consists of sales of
battery-based products, rather than battery-free technologies. 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. Various energy technology companies compete in the UPS
market. We will compete with:
o Manufacturers and developers of battery technologies;
o Other companies developing flywheel technology; and
o Other companies developing additional alternative energy products.
Examples of other technologies that are potentially competitive include ultra
capacitors, fuel cells and super-conducting magnetic energy storage products.
While we have not yet sold any units, our market research indicates that we may
be able to demonstrate a competitive value proposition in certain markets. There
are other companies selling diesel generators and micro turbines that are
competitors in the broadest sense, although we believe that in most cases, our
flywheels will be complementary to their equipment.
As for our high-energy back-up power products, competition is on the basis of
cost and value to the customer. We plan to continue to emphasize the value
proposition of our high-energy products based upon dependability, environmental
benefits, and the long maintenance-free life of our products.
Intellectual Property
Our success depends upon our ability to develop and maintain the proprietary
aspects of our technologies and to operate without infringing on the proprietary
rights of others. To some extent, our success also depends upon the same
abilities on the part of our suppliers. The intellectual property rights of our
high-energy products are based on a combination of SatCon Technology
Corporation's flywheel technologies and patents for stationary terrestrial
flywheel applications that we are licensed to use and patents that Beacon holds
or are pending. Our current UPS product is based on intellectual property owned
or controlled by the suppliers of the two main elements of that product. We
expect to develop additional intellectual properties and trade secrets as we
continue developing high-energy UPS and high-power distributed generation and
utility power grid products. 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 protections, however, may
afford only limited protection for our technology.
We hold a perpetual, exclusive, royalty-free, worldwide right and license to use
SatCon Technology Corporation's flywheel technologies and patents for stationary
terrestrial flywheel applications. Those rights include eleven issued U.S.
patents and eleven U.S. and foreign patent applications that expire on various
dates between 2012 and 2021. 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. We own all technology improvements we develop
that are based on the technology licensed from SatCon. We have a patent on our
vacuum system. We also have 22 pending U.S. and foreign patent applications, and
seven 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.
We have purchased the intellectual property assets of Advanced Energy Systems,
Inc. (AES). These assets include anti-islanding software, which ensures safe
grid utility interconnection, as well as drawings, source code, production
know-how, and all associated documentation.
Government Regulation
We do not believe that we will be subject to existing federal and state
regulatory commissions governing 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. We have obtained FCC approval of our high-energy
products, and plan to pursue the same for our UPS product.
Employees
At December 31, 2002, we had a total staff of 30 full-time employees and two
independent contractors, of which approximately 23 were engineers and
technicians involved in research and development and four were in sales,
marketing and customer service. The remaining five people were involved in
administrative tasks. As a first step in the implementation of our strategy
discussed in Item 1 of this document, we reduced staffing at all levels in an
effort to preserve our cash. None of our employees is represented by a union. We
consider our relations with employees to be satisfactory.
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.
Item 3. Legal Proceedings
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
None.
Item 4A. Executive Officers of the Company
Our executive officers, their positions and their ages as of March 21, 2003, are
as follows:
Name Age Position
F. William Capp 54 President and Chief Executive
Officer, Director
William J. Driscoll 43 Vice President of Engineering
Matthew L. Lazarewicz 52 Vice President and Chief Technical
Officer
James M. Spiezio 55 Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary
F. William Capp. Mr. Capp has served as our President and Chief Executive
Officer since December 1, 2001 when he joined Beacon Power. Prior to joining
Beacon Power, Mr. Capp was the President of the Telecommunications group of
Bracknell Corporation, a company that provided infrastructure for the
telecommunications industry with annual sales of $350 million and 30 regional
offices in the US and Canada. From 1997-2000, Mr. Capp served as the President
of a division of York International where he increased aftermarket sales by over
50% from 1997 to 1999, which were the two most profitable years in that
division's history. From 1978-1997, Mr. Capp held numerous positions at
Ingersoll Rand. From 1992-1997, he served as Vice President and General Manager
of the Compressor Division where he was responsible for an operation with over
700 employees. He managed a complex supply chain including over $100 million in
purchases from a variety of companies. From 1989-1992, Mr. Capp was the Vice
President of Technology for the Torrington Company, which is a $900 million
manufacturer of bearings and precision components to the automotive and other
industries worldwide. Mr. Capp assisted in the development of new products, new
manufacturing technologies and project management. He also held numerous other
engineering positions within Ingersoll Rand. Prior to joining Ingersoll Rand in
1978, he worked for Ford's Truck Division in such positions as project
engineering, supervisor, and product planning. Mr. Capp received his Bachelor of
Science in Aeronautical Engineering from Purdue University, a Master of Business
Administration and a Master Degree in Mechanical Engineering from the University
of Michigan. He also has his Black Belt Training Program from the American
Society for Quality.
William J. Driscoll. Mr. Driscoll joined us in September of 2001 as our Vice
President of Engineering. Prior to his arrival at Beacon Power Corporation he
had worked in the power electronics industry for 22 years, most recently as Vice
President of Engineering for the Omnirel division of International Rectifier. In
this capacity, Mr. Driscoll was responsible for all technical aspects of the
business, including Research and Development, New Product Development and Test
Engineering. Prior to Omnirel, Mr. Driscoll was employed at Raytheon Electronics
Systems Division for approximately ten years. At Raytheon, Mr. Driscoll held
positions such as Manager of Missile Guidance Power Systems, Program Manager of
the Airborne Surveillance System for the SIVAM program in Brazil, and Missile
Lead Engineer for one of Raytheon's Special Access Programs. Prior to Raytheon,
Mr. Driscoll was employed at AVCO Systems Division for four years. At AVCO, Mr.
Driscoll was the lead Power System Design Engineer for programs such as the MX
MK 21 Reentry Vehicle, the Sensor Fused Weapon System and the Boosted Kinetic
Energy Penetrator. Mr. Driscoll holds a Bachelor's Degree in Electronic
Engineering from the University of Massachusetts (Lowell).
Matthew L. Lazarewicz. Mr. Lazarewicz has served as our Vice President of
Engineering since February 1999, and was named Chief Technical Officer in
September of 2001. 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 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.
James M. Spiezio. Mr. Spiezio joined us in May 2000. He has served as our Vice
President of Finance, Chief Financial Officer and Treasurer since July 2000,
Secretary since March 2001, 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.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock is quoted on the NASDAQ SmallCap 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 2002 $ 0.44 $ 0.14
Third quarter 2002 $ 0.31 $ 0.15
Second quarter 2002 $ 0.58 $ 0.21
First quarter 2002 $ 1.50 $ 0.50
Fourth quarter 2001 $ 1.85 $ 0.75
On March 21, 2003, the last reported sale price of the common stock on the
NASDAQ SmallCap Market was $0.20 per share, and there were 296 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
During 2002, we issued no unregistered securities.
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, 2002, 2001, 2000, 1999, 1998, and for the period from May 8,
1997, the date of our inception, through December 31, 2002.
Period from
Date
of Inception
(May 8, 1997)
Year ended December 31, to
---------------------------------------------------------- December 31,
2002 2001 2000 1999 1998 2002
---------------------------------------------------------------------------
(In Thousands, except Per Share Data)
Statement of Operations Data:
Revenues $ - $ - $ 50 $ 269 $ - $ 551
Operating expenses:
Selling, general and administrative 5,637 8,940 4,631 1,559 1,188 23,123
Research and development 7,130 17,628 12,715 3,506 3,524 46,794
Loss on sales commitments - - 51 325 - 376
Depreciation and amortization 1,644 1,324 401 219 78 3,666
Restructuring charges 2,159 - - - - 2,159
Loss on impairment of assets 4,297 - - - - 4,297
---------------------------------------------------------------------------
Total operating expenses 20,867 27,892 17,798 5,609 4,790 80,415
---------------------------------------------------------------------------
Loss from operations (20,867) (27,892) (17,748) (5,340) 4,790 (79,864)
Interest and other income (expense), net 28 1,746 330 (331) (3) 1,885
---------------------------------------------------------------------------
Net loss (20,839) (26,146) (17,418) (5,671) 4,739 (77,979)
Preferred stock dividends - - (35,797) (917) (112) (36,826)
Accretion of redeemable convertible
preferred stock - - (64) (42) (7) (113)
---------------------------------------------------------------------------
Loss to common shareholders (20,839) (26,146) (53,279) (6,630) (4,912) (114,918)
===========================================================================
Net loss per share, basic and diluted ($0.49) ($0.61) ($10.77) ($393.52) ($291.58)
============================================================
Shares used in computing net loss per
share, basic and diluted 42,797 42,551 4,946 17 17
============================================================
As of December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $18,222 $34,602 $62,497 $234 $2,491
Working capital 17,220 32,788 59,224 (878) 1,481
Total assets 20,906 42,131 67,738 974 2,992
Redeemable convertible preferred stock - - - 4,535 4,493
Total stockholders' equity (deficiency) 18,075 38,981 63,308 (8,591) (2,720)
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
Beacon Power Corporation is a development stage company that was incorporated on
May 8, 1997. The Corporation, and its subsidiary (collectively "Beacon" or "the
Company") designs, develops, configures and offers for sale power systems that
provide highly reliable, high-quality, environmentally friendly, uninterruptible
electric power employing both proprietary and third-party solutions for a number
of potential applications. The Company has segmented the potential markets for
its products into three broad categories: high-energy and high-power
uninterruptible power systems (UPS), high-power distributed generation and
utility power grid applications. We have available for sale several high-energy
products that deliver a low level of power over a long period of time (typically
measured in hours). These products are tailored to the communications, cable
systems, computer networks, and Internet markets. We are currently developing a
new high-energy product that is an extension of our existing high-energy
products. We believe this product is well suited for renewable energy uses in
both photovoltaic and wind turbine applications. We have preliminary designs for
this product but we will not make the significant additional expenditures that
would be required for prototype development or production capabilities until we
have fully defined the market potential and the marketplace has expressed
tangible interest. As part of exploring these markets we have committed to
invest $1.1 million in Evergreen Solar, Inc. and we have purchased the inverter
electronics technology of Advanced Energy Systems, Inc. We also have products
available for sale to provide short-term (typically measured in seconds) power
until a generator or other long-term power source can be activated for
commercial and industrial facilities that are high power applications. We are
now developing products for distributed generation and utility power grid
applications that provide megawatts for minutes. Our existing products already
offer more stored energy than any other commercial flywheel product. The
flywheel module being designed for distributed generation and utility
applications will be significantly higher in energy level than any other
available products in the industry. Completion of development of these products
will depend on tangible interest expressed by the marketplace.
From our inception through December 31, 2002, we have incurred losses of
approximately $114.9 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.
Revenues. We are evaluating markets for our current products and other future
products but we did not recognize revenues in 2002 or 2001. Prior to the fourth
quarter of 2000, we recorded revenues as a 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.
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. During 2002, we expanded
our sales and marketing effort into UPS and utility grid applications by
initiating several market research efforts to help us evaluate markets for our
current and future products and technical presentations at potential customer
locations. During 2002 we focused our marketing efforts on the high-energy
market. Prior to 2001, our historical sales and marketing expenses have not been
material. We continue to rely on engineering personnel to provide technical
specifications and product overviews to our potential customer base. We expect
sales and marketing expenses to continue to increase as we expand our efforts to
seek new markets for our products. Our general and administrative expenses
consist primarily of compensation and benefits related to our corporate staff,
professional fees, insurance and travel. In October 2001, March 2002 and again
in July 2002, we reduced our headcount in sales and marketing and in
administration functions. As a result of these reductions, we expect our
selling, general and administrative expenses to be reduced during 2003 as
compared to 2002.
Research and Development. Our cost of research and development consists
primarily of the cost of compensation and benefits for research and development,
and support staff, as well as materials and supplies used in the engineering
design and development process. These costs decreased significantly during 2002
as we focused on reducing our expenditure rate by reducing product design and
development activities. While we do not expect to incur any significant
additional costs for our existing products, we do expect to incur significant
costs for the design and development of our high-powered products once we have
defined the specific markets to be served and the marketplace has expressed
tangible interest.
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
did not accrue such losses during 2002. In the second half of 2001 we reversed
projected losses contemplated and recognized during 2000 and early 2001. We are
most likely to recognize probable losses on sales commitments early in a
product's introduction prior to being able to realize expected decreases in cost
per unit through engineering design changes, operating efficiencies, and volume
purchasing discounts.
Restructuring and asset impairment charges. We recognized restructuring and
asset impairment charges during 2002. Our initial products were focused on the
telecom industry. As a result of the overall economic downturn and in particular
the significant decline in capital and maintenance spending in telecom as well
as the low price of lead-acid batteries, the Company has not been successful in
selling products into this market and therefore has taken non-cash asset
impairment charges aggregating $4.3 million pursuant to Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets."
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. We do have intellectual property
in the form of a patent on our vacuum system and expect to obtain other patents
during 2003 and beyond.
Interest and Other Income/Expense, net. Our non-operating income and expenses
are primarily attributable to interest income relating to cash on hand from our
private financings and initial public offering and interest expense associated
with our capital.
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 was 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. All
outstanding dividends were paid in full during 2001.
Results of operations:
Comparison of Year ended December 31, 2002 and 2001
Revenue. During 2002 and 2001 we did not record any revenue. To date, proceeds
from the sale of demonstration and test units have been applied as a reduction
against research and development expense. Proceeds from these sales totaling
$69,000 were applied as a reduction against research and development expense in
2001. In 2002 we had proceeds of $79,000 from work performed on electronics
development for others. These proceeds have been recorded as offsets to Research
and Development expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 2002 totaled approximately $5,637,000 compared to
approximately $8,940,000 during the year ended December 31, 2001. This decrease
of $3,303,000 is primarily the result of decreased compensation and benefit
costs due to the reduction in staffing. During October 2001, March 2002 and
again in July 2002, we reduced our headcount in sales and marketing and in
administration functions by 8, 11 and 7 respectively. As a result of these
reductions, we expect our selling, general and administrative expenses to be
further reduced during 2003 as compared to 2002.
Research and Development Expenses. Research and development expenses for 2002
were approximately $7,130,000, compared to approximately $17,628,000 during
2001. This decrease of $10,498, 000 is primarily the result of decreased
compensation and benefit costs related to reductions in the number of
engineering and manufacturing personnel and materials used for product
development. During October 2001, March 2002 and again in July 2002, we reduced
our headcount in research and development functions by 29, 24 and 18
respectively. These costs decreased significantly during 2002 as a result of our
focus on reducing our cash expenditures. While we do not expect to incur any
significant additional costs for our existing products, we do expect to incur
significant costs for the development of prototypes for new products and
staffing the manufacturing function and establishing required processes for
commercial production of our products. We will begin prototype development and
establishing production capabilities after we have defined the specific markets
to be served and the marketplace has expressed tangible interest. While we will
continue to design new high-powered products, we expect our cost of research and
development in 2003 to be reduced compared to 2002.
Depreciation and Amortization. Depreciation and amortization for 2002 was
approximately $1,644,000 compared to approximately $1,324,000 during 2001. This
increase of $320,000 is attributable to amortization of leasehold improvements
at the new facility in Wilmington Massachusetts as well as amortization on
additional machinery and equipment and other capital assets acquired in 2001. We
expect our charge for depreciation in 2003 to be reduced compared to 2002 as a
result of restructuring and asset impairment charges.
Restructuring and asset impairment charges. We have recognized restructuring and
asset impairment charges in 2002. The Company's initial products were focused on
the telecom industry. As a result of the overall economic downturn and in
particular the significant decline in capital and maintenance spending in
telecom as well as the low price of lead-acid batteries, the Company has not as
of yet been successful in selling products into this market. Therefore, in July
2002, in an effort to reduce our monthly cash spending rate, the Company
implemented a number of cost-cutting measures to ensure the availability of
resources necessary to pursue its business strategy for a reasonable period but
at a significantly lower cash expenditure rate and on a less ambitious
timetable. As a result, a substantial portion of our long-term assets has been
idled, including machinery and equipment, tooling, office furniture and fixtures
and leasehold improvements. We have evaluated all of our property and equipment
as required by Statement of Financial Accounting Standards No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets". We have taken
restructuring and impairment charges of $6.5 million of which $4.3 million
represents impaired capital equipment and leasehold improvements, $1.9 million
relates to a reserve against future lease payments and related facility costs
and $.3 million relates to severance costs. The assets held for sale have been
grouped together and classified as "Assets held for sale" in the current assets
section of the balance sheet. Assets held for sale have been written down to
their fair value based on quotes from vendors and other market factors. The
reserve against future lease payments is classified as "Restructuring reserve"
in the current liabilities section of the balance sheet.
Interest and Other Income/ (Expense), net. Our net non-operating income for 2002
was approximately $28,000 compared to approximately $1,746,000 in 2001. The
decrease is attributable to lower interest income associated with the lower cash
balances, lower interest rate yields on investments and a reserve of
approximately $426,000 for the loan to the former CEO.
Comparison of Year ended December 31, 2001 and 2000
Revenue. During 2001 we shipped 20 flywheel units. These units were primarily
demonstration and test units. As such, any proceeds from the sale of these units
were applied as a reduction against research and development expense. 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 of 2000. Proceeds from these sales totaling $69,000 were applied as a
reduction against research and development expense in 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 2001 totaled approximately $8,940,000 compared to
approximately $4,631,000 during the year ended December 31, 2000. This increase
of $4,309,000 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. During October 2001 and again in
March 2002, we reduced our headcount in sales and marketing and in
administration functions.
Research and Development Expenses. Research and development expenses for 2001
were approximately $17,628,000, compared to approximately $12,715,000 during
2000. This increase of $4,913,000 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. These costs increased significantly during 2001 as we completed the
designs of our 2kWh unit and our 6kWh units as well as the related electronics.
While we do not expect to incur any significant additional costs for the 2kWh or
6kWh units, we do expect to incur significant costs for the design and
development of our high-powered products. These costs began in the first quarter
of 2002 and are expected to continue throughout the remainder of 2002 and into
2003. As a part of the new strategy for moving into the high-powered market, we
have reduced the number of our development teams from two to one. The one team
will focus solely on the high-powered design. As a result of this, we reduced
our headcount with respect to development engineers significantly in March 2002.
Loss on Sales Commitments. Loss on sales commitments for 2000 was approximately
$51,000. No loss on sales commitments was recorded during 2001. We accrued these
losses during 2000 based on our estimated costs to complete delivery commitments
during 2000 and 2001. We have adjusted our delivery schedule and reversed
projected losses contemplated earlier in 2000. As a result, at both December 31,
2001 and 2000 there was no cumulative accrual.
Depreciation and Amortization. Depreciation and amortization for 2001 were
approximately $1,324,000 compared to approximately $401,000 during 2000. This
increase of $923,000 is attributable to amortization of leasehold improvements
at the new facility in Wilmington MA as well as amortization on additional
machinery and equipment and other capital assets acquired in 2001.
Interest and Other Income/ (Expense), net. Our net non-operating income for 2001
was approximately $1,746,000 compared to approximately $330,000 in 2000. The
increase is attributable to interest income associated with the higher cash
balances resulting from 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
of warrants to purchase common stock in conjunction with the issuance of our
Class D redeemable convertible preferred stock. As a result of our initial
public stock offering during the fourth quarter of 2000, we no longer have any
preferred stock outstanding. All outstanding dividends were paid in full during
2001.
Liquidity and Capital Resources
Our cash requirements depend on many factors, including our research and
development activities, continued efforts to commercialize our products and
additional market development. We expect to make significant expenditures to
fund our working capital, develop our technologies and explore opportunities to
find and develop other markets to sell our products. However, we have taken
significant actions over the last eighteen months to reduce our cash
expenditures for product development, infrastructure and production readiness.
We have significantly reduced headcount, development spending and capital
expenditures. We have focused our activity on market analysis in terms of size
of markets, competitive aspects and advantages that our products could provide.
We have continued to do preliminary design and development of potential products
for markets under consideration. We are not making expenditures for prototype
development or production capabilities until we have defined the specific
markets to be served.
From our inception to date, our primary cash requirements have been to fund
research and development, establish production capabilities including capital
expenditures and for working capital including various infrastructure costs. Net
cash used in operating activities was approximately ($15,586,000),
($24,220,000), and ($12,458,000) for 2002, 2001, and 2000, respectively. The
primary component of the negative cash flow from operations is the net losses.
For the year 2002 we had a net loss of approximately ($20,839,000). This was
offset by approximately $1,644,000 for depreciation and amortization; $4,297,000
for an impairment of fixed assets; $1,750,000 for restructuring charges
resulting from our reduction in force; $428,000 for a reserve on officer's note;
other non-cash consulting expenses of $19,000; and losses from the sale or
disposal of capital equipment of $14,000. Changes in operating assets and
liabilities used approximately $2,901,000 of cash during 2002. For the year
2001, we had a net loss of approximately ($26,146,000). This was offset by
approximately $1,324,000 for depreciation and amortization; $347,000 for a
non-cash expense from the change in stock option terms for certain terminated
employees; other non-cash consulting expenses of $340,000; $303,000 for a
non-cash charge in connection with the settlement of a lawsuit and approximately
$109,000 from the sale or disposal of certain fixed assets and tooling. Changes
in operating assets and liabilities used approximately $497,000 of cash during
2001. The primary components were decreased accounts payable and accrued
expenses of approximately $857,000 and decreased inventory of approximately
$208,000. These were offset by decreased prepaid expenses and other current
assets of approximately $274,000 and an increase in our accrual for compensation
and benefits of $444,000. For the year 2000 we had a net loss of approximately
($17,418,000) offset by non-cash expenses of approximately $3,799,000. Changes
in operating assets and liabilities generated cash of approximately $1,161,000
during 2000.
Net cash used in investing activities was approximately ($466,000),
($3,655,000), and ($3,702,000) for 2002, 2001 and 2000, 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 used in financing activities was approximately ($327,000) during 2002.
This compares to net cash used in 2001 of approximately ($21,000) and net cash
generated in 2000 of $78,423,000. During 2002, the principal sources of cash
were approximately $13,000 from the exercise of shares of common stock issued
under our Employee Stock Purchase Plan. The repayment of capital leases of
($340,000) offset these proceeds. During 2001, the principal sources of cash
were approximately $829,000 from the exercise of employee stock options and
shares of common stock issued under our Employee Stock Purchase Plan. In
addition we refinanced certain fixed assets under capital leases that generated
approximately $496,000. These proceeds were offset by the payment of dividends
accrued in 2000 related to various classes of preferred stock of approximately
$1,159,000 and the repayment of capital leases of $186,000. 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.
Based on our operating baseline which includes the cash flow benefits of our
significantly reduced headcount, development spending and capital expenditures,
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 24
months. However, this belief assumes no expenditures for prototype development
or production capabilities, which would require significant amounts of cash. In
the event that we are not able to obtain development contracts from customers to
fund prototype development, these expenditures will significantly reduce the
number of months our cash and cash equivalents and future cash flow from
operations will satisfy our working capital needs. Inasmuch as we do not expect
to become profitable or cash flow positive until 2006, our ability to continue
as a going concern will depend on our being able to raise additional capital. We
may not be able to raise this capital at all, or if we are able to do so, it may
be on terms that are extremely dilutive to our shareholders.
Our significant long-term contractual obligations as of December 31, 2002 are as
follows:
Cash Payments Due During the Year Ended December 31,
-----------------------------------------------------------------------------
Description of Commitment 2003 2004 2005 2006 2007 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------
Operating Leases $490,675 $490,675 $500,359 $529,413 $397,059 $ - $2,408,181
The amounts listed for operating leases represent payments for the occupancy our
principal executive offices, laboratory and manufacturing facilities located in
Wilmington, Massachusetts. Our commitment on this lease is secured by an
irrevocable letter of credit in the amount of $355,232. A cash deposit secures
this letter of credit.
We may make investments in companies for strategic business reasons. Because our
primary motivation in making these investments is not to realize a profit on the
investment itself, but rather to expand our business prospects, these
investments may lack any financial returns to us, may result in a loss of
principal and may lack liquidity.
On March 24, 2003 we announced that we had committed to invest $1,000,000 in
Series A Preferred Stock of Evergreen Solar, Inc., a public company which
specializes in renewable energy sources, in order to develop a strategic
relationship with that company. We also believe that this investment has a
potential to provide us with significant financial returns on our investment.
Our investment was part of a larger financing provided by several investors. We
made our investment on the same terms as the other investors in this financing,
except that we also were permitted to purchase a three-year warrant for $100,000
that is exercisable for 2,400,000 shares of Evergreen's common stock. This
warrant makes our investment terms more favorable than those received by the
other investors. Evergreen's financing was a private placement of $29.475
million of its Series A Preferred Stock and the above warrant. Perseus 2000,
L.L.C., an affiliate of one of the Company's stockholders, Perseus Capital,
L.L.C., invested $3 million in Evergreen's Series A Preferred Stock in this
financing. Mr. Philip J. Deutch and Mr. Kenneth M. Socha, members of the Board
of Directors of the Company, are Managing Director and Senior Managing Director,
respectively, of Perseus, L.L.C., and Mr. Deutch is one of four individuals from
the Evergreen investor group to be added to the Board of Directors of Evergreen
when the investment closes.
We believe that the Evergreen investment will give us access to the renewable
energy market, which we believe has significant potential for our next
high-energy product, which is now in development. In addition, on March 24, 2003
we purchased, for approximately $141,000, the inverter electronics technologies
of Advanced Energy Systems, Inc to strengthen our potential entry into these
markets
Investments such as those made in Evergreen Solar and the acquisition of the
intellectual properties of Advanced Energy Systems may accelerate our need to
raise capital. We may not be able to raise this capital at all, or if we are
able to do so, it may be on terms that are extremely dilutive to our
shareholders.
Inflation
We do not believe our operations have been materially affected by inflation.
Certain Factors Affecting Future Operating Results
The Value Proposition of our High-Energy Products May Not Be Recognized.
There can be no assurance that we will be able to compete successfully
against batteries. To compete successfully we must establish the value
proposition of our products based upon their dependability, environmental
benefits, and long maintenance-free life, or we must develop other strategic
alternatives.
We May Not Be Able to Reduce Our Product Cost Enough to Make Our Prices
Competitive
There can be no assurance that we will be successful in lowering our
production costs through lower cost designs or volume discounts, which may
prevent market acceptance of our products.
We Have Very Limited Experience Manufacturing Flywheel Energy Storage Systems on
a Commercial Basis. In the Event of Significant Sales We Will Need to Develop or
Obtain Manufacturing Capacity for Our Products. There Can be No Assurance That
We Will be Able to Accomplish These Tasks, and if We do not We Will Not Become
Profitable.
Should we experience customer demand for our products, we will need to
develop or obtain manufacturing capacity to meet quality, profitability and
delivery schedules. We may need to establish manufacturing facilities, expand
our current facilities or expand third-party manufacturing. We have no
experience in the volume manufacture of flywheel systems and there can be no
assurance that we will be able to accomplish these tasks, if necessary, on a
timely basis to meet customer demand or at all. In fact, we have idled our
manufacturing capabilities through headcount reduction and delaying the
development of our manufacturing process documentation and the capital build-out
to conserve cash. We may not achieve profitability if we cannot develop or
obtain 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 meet our product
commercialization schedule, if any, or to satisfy the requirements of our
customers or the market generally.
We Will Need Additional Financing, Which May not Be Available to Us on
Acceptable Terms or At All.
We will need to secure additional financing in the future to carry out our
business plan. We believe our cash balances will fund our operations for the
foreseeable future. We may also need additional financing for a variety of
reasons including:
o expanding research and development;
o achieving manufacturing capability;
o funding additional working capital; or
o acquiring complementary products, businesses or technologies.
We cannot be certain 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."
Our Stockholders may Suffer Substantial Dilution if we Issue Additional Equity
to Obtain Financing.
If we raise additional funds by issuing additional equity securities, our
existing stockholders will likely experience substantial dilution. Furthermore,
the newly issued securities could have rights superior to the rights of the
common stock outstanding.
Our Stock May be Disqualified from the SmallCap Market System of NASDAQ
NASDAQ has advised us that unless our stock maintains a minimum closing bid
price of one dollar for ten consecutive trading days before June 6, 2003, it
will no longer be eligible for quotation on the NASDAQ SmallCap Market after
that date. We do not expect our stock to satisfy this requirement. Should our
stock lose its eligibility to be quoted on the SmallCap Market, we will seek to
have it quoted on the OTCBB. While we know of no reason that our stock will not
be accepted for quotation on OTCBB, we cannot guarantee that acceptance. If our
stock is not accepted for acceptance on the OTCBB, it will be listed on the pink
sheets.
We Face Intensified Competition from Batteries Due to Their Declining Prices and
Improved Life. As a Consequence Our Customers are Less Likely to Accept the
Value Proposition of Our Products.
The performance of batteries has improved while battery prices have
declined due to lower volume demand from the communications markets and others
and increased competition resulting from an increase in the number of battery
manufacturers. These changes in battery pricing and performance make it more
difficult for us to establish the value proposition of our high-energy products.
The Telecommunications Industry Has Experienced a Sharp Decline, Which has
Adversely Affected Our Financial Performance.
We initially targeted the communications markets for the sale of our
high-energy products. However, this industry, which had previously sustained
high rates of infrastructure build-out, has experienced a sharp decline in
build-out as well as maintenance spending. Significant reductions in both
maintenance budgets and capital build-out budgets at telecommunications
companies made these potential customers more conservative with their spending
and expenditure analysis and less willing to try new technology solutions, such
as our products.
It Is Difficult to Evaluate Us and to Predict Our Future Performance, Because We
Have a Short Operating History and Are a Development Stage Company. Therefore,
Our Future Financial Performance May Disappoint Investors and Result in a
Decline in Our Stock Price.
We have a limited operating history. We were formed in May 1997 to
commercialize electrical power systems based on flywheel energy storage. We are
a development stage company attempting to make the transition to the
manufacturing of new products in a new and developing sector. Unless we can
achieve significant market acceptance of our current or future products at
volumes and with margins that allow us to cover our costs of operations, we may
never advance beyond our start-up phase. In light of the foregoing, it is
difficult or impossible for us to predict when and if the Company will have
future revenue growth.
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 2003.
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 ($20,839,000) in 2002, ($26,146,000) in 2001, ($53,279,000) in
2000 and ($6,630,000) in 1999. Since our inception in May 1997, we have had net
losses to common shareholders totaling ($114,918,000). We expect to continue to
incur net losses through 2006. Although we are looking for additional ways to
economize and reduce costs, our efforts may prove even more expensive than we
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 Very 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 or obtain 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 meet our product commercialization schedule, if
any, or to satisfy the requirements of our customers or the market generally. To
date, we have focused primarily on research and development and have no
experience manufacturing flywheel energy storage systems on a commercial basis.
See "Business."
We Might Fail to Develop Successful Products.
The successful development of our products involves significant
technological and cost challenges and will require additional financing to
complete. Major risks include:
o maintaining the development schedule, as such development could take
substantially longer than anticipated;
o the cost of developing key components of our systems that have
significant technical risk and which may not be economically feasible for a
competitive product in the high-power market;
o reducing manufacturing costs for the flywheel's shaft, hub and rim,
bearings and related electronics to increase our chances of achieving
profitability;
o ensuring minimal warranty expenses through design and quality control;
o ensuring quality and cost control from our suppliers;
o raising the necessary financing to provide sufficient funding for
completion of development;
o extending the product to new applications.
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 All of
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 key components of our systems. We do not
have any contracts with all of 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
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 or cost effective basis. As a result, we could experience shortages in
supply or be unable to be cost competitive in the markets we are pursuing.
We Face Intense Competition and We May Be 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 offering 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
or other alternative energy products for sale to our potential customers, 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 we
are to adapt quickly to customers' changing demands and to changes in
technology.
Technological advances in alternative energy products or other alternative
energy technologies may render our systems obsolete. We do not have any products
or technologies other than flywheel systems under development. Our system is,
however, only one of a number of alternative energy products being developed by
potential competitors that have potential commercial applications, including
ultra capacitors, fuel cells, advanced batteries, and other alternative energy
technologies.
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 provide assurance
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 provide assurance 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.
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 metal 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. However, our flywheels are based on a composite we have
designed so that in the event of a failure, our flywheel would shut down rather
than disintegrate. To date, our testing validates this design conclusion. Also,
we believe that one of the advantages of composite flywheels over metal
flywheels is that in the event of a flywheel failure, the flywheel tends to
delaminate rather than (as in the case of metal) to break into a small number of
large fragments that have a greater possibility of bursting a containment vessel
and causing injury. A consortium of government, academic, and industry
representatives has been formed to address containment flywheel safety in the
event of this kind of flywheel failure. At this early stage of
commercialization, there are differing approaches to containment safety with
disagreement in the community on the most effective means.
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 to a large degree 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 have employment agreements that include
non-compete clauses with Messrs. Capp, CEO and President; Spiezio, Vice
President of Finance, Chief Financial Officer, Treasurer and Secretary;
Driscoll, Vice President of Engineering; and Lazarewicz, Chief Technical
Officer.
In the fourth quarter of 2001, the first quarter of 2002 and in July 2002,
we substantially reduced our workforce. Competition for skilled personnel is
intense, and as we seek to determine the right size for our workforce, we may
not be successful in attracting and retaining the personnel or executive talent
necessary to develop our products and operate profitably.
There May Be Only a Modest Number of Potential Customers for Our Products. To
the Extent We Obtain Customers, We May Have To Rely On A Limited Number Of Such
Customers, And Our Business May Be Adversely Affected By The Loss Of, Or Reduced
Purchases By, Any One Of Those Customers.
There may only be a limited number of potential customers for our product,
in which case we will be subject to the risk that the loss of or reduced
purchases by any single customer could adversely affect our business.
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.
In addition to the risks we face when operating within the U.S., additional
risks are present if we operate internationally. A part of our business strategy
may be to expand our customer base by marketing, distributing and servicing our
products internationally through distributors. We have limited experience
developing and 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 distributors to install and
provide service. 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. Also, our success in those markets 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 satisfactory distributor relationships
and enforcing contractual obligations and intellectual property rights in
foreign countries, and fluctuations in currency exchange rates. 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 provide assurance 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 be affected by 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, 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 or others 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 or
others. Our inability to maintain the proprietary nature of our technology and
processes could allow our competitors or others to limit or eliminate any
competitive advantages we may have, thereby harming our business prospects.
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 64% of our outstanding stock as of December 31, 2002. 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 has been and may
continue to 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
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.
We May not Be Able to Obtain Financing to Continue Operations and will Need to
Enter into A Merger or Acquisition and Our Shareholders may Suffer Substantial
Dilution.
In the event of a merger or acquisition, given the volatility of the
sector, our inability to sell products to date and the asset impairments we have
recognized our shareholders may suffer substantial dilution. The dilutive effect
may increase substantially if our intellectual property is not recognized as an
asset in the transaction.
We May make Investments in Other Energy Companies in Our Sector to Increase
Shareholder Values Through Strategic Alliance or Return on Investment Which do
Not Create Gains and therefore Reduce Shareholder Value.
We may make investments in other energy companies in our sector to gain
strategic alliances, channels to market or appreciation in stock value. These
investments may not provide alliances or channels to market that would increase
shareholder value. Given the volatility of share prices for companies in our
sector, general economic conditions and market fluctuations in general, the
market price of the investments may decrease and reduce shareholder value.
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, and the shareholder rights plan we adopted in September
2002, 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 implemented 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. Pursuant to a shareholder rights plan
adopted in September 2002, we issued rights as a dividend on our common stock on
October 7, 2002 each of which entitles the holder to purchase 1/100th of a share
of our newly issued preferred stock for $22.50 in the event that any person not
approved by the board of directors acquires more than 15% (30% in the case of
one large shareholder that already owned more than 15%) of our outstanding
common stock, or in the event that we are acquired by another company $22.50
worth of the common stock of the other company at half its market value (in each
case the rights held by the acquiring person are not exercisable and become
void). The shareholder rights plan was modified by rights plan amendment 1 dated
December 27, 2002. The amendment increased the beneficial ownership approved by
the board of directors from 30% to 35% for one large shareholder. 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 in
our management and board of directors.
Terrorist Attacks have Contributed to Economic Instability in the United States;
Continued Terrorist Attacks, War or Other Civil Disturbances Could Lead to
Further Economic Instability and Depress our Stock Price.
On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scope. These attacks have caused instability in the
global financial markets, and have contributed to volatility in the stock prices
of United States publicly traded companies, such as Beacon Power. These attacks
may lead to armed hostilities or to further acts of terrorism and civil
disturbances in the United States or elsewhere, which may further contribute to
economic instability in the United States and could have a material adverse
effect on our business, financial condition and operating results.
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, 2002, we had
approximately $60,000 of cash equivalents that were held in a non-interest
bearing checking account. Also at December 31, 2002, we had approximately
$2,939,000 invested in interest-bearing money market accounts, and approximately
$15,223,000 in high-grade bonds. 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 $27,000, which we
do not feel is material.
Item 8. Financial Statements and Supplementary Data
BEACON POWER CORPORATION
(A Development Stage Company)
Index to Consolidated Financial Statements
Page
Independent Auditors' Report 26
Consolidated Balance Sheets at December 31, 2002 and 2001 27
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000 and for the period May 8, 1997 (date of
inception) to December 31, 2002. 28
Consolidated Statements of Stockholders' Equity (Deficiency) for the years
ended December 31, 2002, 2001 and 2000 and for the period
May 8, 1997 (date of inception) to December 31, 2002. 29
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000 and for the period May 8, 1997 (date of
inception) to December 31, 2002. 33
Notes to Consolidated Financial Statements 35
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, 2002 and 2001, and the related consolidated statements of
operations, stockholders' equity (deficiency) and cash flows for each of the
three years in the period ended December 31, 2002 and for the period from May 8,
1997 (date of inception) through December 31, 2002. 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, 2002 and 2001 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002 and the period from May 8, 1997 (date of inception)
through December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 7, 2003
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
December 31,
2002 2001
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 18,221,766 $ 34,601,585
Assets held for sale 53,715 -
Prepaid expenses and other current assets 1,775,455 1,131,065
----------------------------------
Total current assets 20,050,936 35,732,650
Property and equipment, net (Note 3) 562,929 6,188,507
Other assets 291,901 209,796
----------------------------------
Total assets $ 20,905,766 $ 42,130,953
==================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 77,326 $ 911,465
Accrued compensation and benefits 226,623 721,130
Due to related party (Note 13) - 35,532
Other accrued expenses 576,881 941,100
Restructuring reserve 1,749,738 -
Current portion of capital lease obligations (Note 4) 200,041 335,145
----------------------------------
Total current liabilities 2,830,609 2,944,372
Capital lease obligations, net of current portion (Note 4) - 205,352
Commitments (Note 5)
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; no
shares issued or outstanding (Note 6) - -
Common stock, $.01 par value; 110,000,000 shares authorized;
42,812,897and 42,770,856 shares issued and outstanding in 2002 and
2001, respectively 428,129 427,709
Deferred stock compensation (18,413) (211,564)
Additional paid-in capital 132,750,525 132,911,256
Deficit accumulated during the development stage (114,985,424) (94,146,172)
Treasury stock, 132,000 shares, at cost (99,660) -
----------------------------------
Total stockholders' equity 18,075,157 38,981,229
----------------------------------
Total liabilities and stockholders' equity $ 20,905,766 $ 42,130,953
==================================
See notes to consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative from
May 8, 1997
Year ended Year ended Year ended (date of inception)
December 31 December 31 December 31 through December
2002 2001 2000 31, 2002
------------------ ----------------- ----------------- --------------------
Revenue $ - $ - $ 50,000 $ 551,184
Cost of goods sold - - - -
------------------ ----------------- ----------------- --------------------
Gross profit - - 50,000 551,184
Operating expenses:
Selling, general and administration 5,636,903 8,939,589 4,630,915 23,123,028
Research and development 7,129,880 17,627,714 12,714,823 46,793,894
oss on sales commitments
L - - 50,974 375,974
Depreciation and amortization 1,644,230 1,323,958 401,013 3,666,003
Restructuring charges 2,159,280 - - 2,159,280
Loss on impairment of assets 4,297,128 - - 4,297,128
------------------ ----------------- ----------------- --------------------
Total operating expenses 20,867,421 27,891,261 80,415,307
17,797,725
------------------ ----------------- ----------------- --------------------
Loss from operations (20,867,421) (27,891,261) (17,747,725) (79,864,123)
Interest income 504,034 2,157,724 747,202 3,562,003
Interest expense (41,932) (303,160) (370,299) (1,086,990)
Other income (loss) (433,933) (108,971) (47,216) (590,120)
------------------ ----------------- ----------------- --------------------
Total other income, net 28,169 1,745,593 329,687 1,884,893
------------------ ----------------- ----------------- --------------------
Net loss (20,839,252) (26,145,668) (17,418,038) (77,979,230)
Preferred stock dividends - - (35,796,675) (36,825,680)
Accretion of convertible preferred stock - - (64,435) (113,014)
------------------ ----------------- ----------------- --------------------
Loss to common shareholders $ (20,839,252) $ (26,145,668) $ (53,279,148) $ (114,917,924)
================== ================= ================= ====================
Loss per share, basic and diluted $(0.49) $ (0.61) $ (10.77)
================== ================= =================
Average shares outstanding, basic 42,797,072
42,550,502 4,946,411
================== ================= =================
See notes to consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficiency)
Class A Class C
Preferred Stock Preferred Deferred
Stock Common Stock Consulting
Shares Amount Shares Amount Shares Amount Expense
-----------------------------------------------------------------------------------------
BALANCE AT MAY 8, 1997 (DATE OF
INCEPTION) - $ - - $ - - $ - $ -
Issuance of Founder's Shares - - - - 6,750,000 67,500 -
Issuance of Class A preferred stock 1,390,000 5,662,500 - - - - (275,000)
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 -
Deferred Consulting - - - - - - 175,000
Repayment of subscription receivable - - - - - - -
Issuance of Series A preferred stock
for services and interest on loans 4,594 11,485 - - - - -
Dividend on Class D preferred stock - - - - - - -
Repayment of subscription receivable - - - - - - -
Accretion of redeemable preferred stock
to redemption value - - - - - - -
Deferred Stock Compensation - - - - - - -
Amortization of Deferred Stock
Compensation - - - - - - -
Issuance of warrants for Class D shares - - - - - - -
Issuance of warrants for bridge loans - - - - - - -
Net loss - - - - - - -
-----------------------------------------------------------------------------------------
Balance, December 31, 1999 4,767,907 5,741,451 6 29,866 16,848 168 (100,000)
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 - - - - - - 598,284
Common stock issuance for consulting - - - - 134,464 1,345 (498,284)
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 -
Issuance of stock options - - - - - - -
Deferred stock compensation - - - - - - -
Amortization of deferred stock
compensation - - - - - - -
Common stock issued through Employee - - - - - - -
Stock Purchase Plan - - - - 54,956 550 -
Common stock issuance for consulting - - - - - - -
Change in option terms for severed
employees - - - - - - -
Exercise of stock options - - - - 682,586 6,826 -
Net loss - - - - - - -
------------------------------------------------------------------------------------------
Balance, December 31, 2001 - - - - 42,770,856 427,709 -
Deferred stock compensation - - - - - - -
Amortization of deferred stock
compensation - - - - - - -
Common stock issued through Employee
Stock Purchase Plan - - - - 42,041 420 -
Change in option terms for severed
employees - - - - - - -
Purchase of treasury stock - - - - - - -
Net loss - - - - - - -
-----------------------------------------------------------------------------------------
Balance, December 31, 2002 - $ - - $ - 42,812,897 $ 428,129 $ -
=========================================================================================
See notes to consolidated financial statements.
Total
Deferred Additional Stock Stockholders'
Stock Paid-in Subscription Accumulated Treasury Stock (Deficiency)
Compensation Capital Receivable Deficit Shares Amount Equity
--------------------------------------------------------------------------------------------
BALANCE AT MAY 8, 1997 (DATE OF
INCEPTION) $ - $ - $ - $ - - $ - $ -
Issuance of Founder's Shares - - - (65,000) - - -
Issuance of Class A preferred stock - - (5,000,000) - - - 387,500
Recapitalization - - - - - - -
Rounding for fractional shares - - - - - - -
Issuance of Class C preferred and
common stock - - - - - - 30,000
Deferred Consulting - - - - - - 175,000
Repayment of subscription receivable - - 2,992,492 - - - 2,992,492
Issuance of Series A preferred stock
for services and interest on loans - - - - - - 11,485
Dividend on Class D preferred stock - - - (749,005) - - (749,005)
Repayment of subscription receivable - - 2,007,508 - - - 2,007,508
Accretion of redeemable preferred
stock to redemption value - - - (48,579) - - (48,579)
Deferred Stock Compensation (65,318) 65,318 - - - - -
Amortization of Deferred Stock
Compensation 8,670 - - - - - 8,670
Issuance of warrants for Class D shares - 280,000 - (280,000) - - -
Issuance of warrants for bridge loans - 170,000 - - - - 170,000
Net loss - - - (13,576,272) - - (13,576,272)
--------------------------------------------------------------------------------------------
Balance, December 31, 1999 (56,648) 515,318 - (14,721,356) - - (8,591,201)
Dividends on redeemable convertible
preferred stock - - - (1,496,675) - - (1,496,675)
Issuance of warrants - 36,070,366 - (34,300,000) - - 1,770,366
Deferred stock compensation revaluation (2,944,649) 2,944,649 - - - - -
Amortization of deferred stock
compensation 930,638 - - - - - 930,638
Accretion of redeemable preferred
stock to redemption value - - - (64,435) - - (64,435)
Proceeds from stock offering, net of
expenses - 49,249,537 - - - - 49,341,537
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 - - - - 36,694,668
Deferred consulting - - - - - - 598,284
Common stock issuance for consulting - 496,939 - - - - -
Payment of accrued dividend - 1,077,714 - - - - 1,086,307
Cashless warrant exercise - (19,829) - - - - -
Exercise of stock options - 451,674 - - - - 456,477
Net loss - - - (17,418,038) - - (17,418,038)
--------------------------------------------------------------------------------------------
Balance, December 31, 2000 (2,070,659) 132,958,758 - (68,000,504) - - 63,307,928
Issuance of stock options - 303,160 - - - - 303,160
Deferred stock compensation revaluation 1,566,906 (1,566,906) - - - - -
Amortization of deferred stock
compensation 340,081 - - - - - 340,081
Common stock issued through Employee
Stock Purchase Plan - 109,394 - - - - 109,944
Common stock issuance for consulting (47,892) 47,892 - - - - -
Change in option terms for severed
employees - 346,591 - - - - 346,591
Exercise of stock options - 712,367 - - - - 719,193
Net loss - - - (26,145,668) - - (26,145,668)
--------------------------------------------------------------------------------------------
Balance, December 31, 2001 (211,564) 132,911,256 - (94,146,172) - - 38,981,229
Deferred stock compensation revaluation 173,616 (173,616) - - - - -
Amortization of deferred stock
compensation 19,535 - - - - - 19,535
Common stock issued through Employee
Stock Purchase Plan - 12,885 - - - - 13,305
Purchase of treasury stock - - - - 132,000 (99,660) (99,660)
Net loss - - - (20,839,252) - - (20,839,252)
--------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ (18,413) $132,750,525 $ -$(114,985,424) 132,000 $ (99,660) $18,075,157
============================================================================================
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Cash Flows
Cumulative from
May 8, 1997
(date of inception)
Year ended December 31, through December
2002 2001 2000 31, 2002
----------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (20,839,252) $ (26,145,668) $ (17,418,038) $ (77,979,230)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,644,230 1,323,958 401,013 3,666,003
Loss on sale of fixed assets 14,481 108,971 47,416 170,868
Impairment of assets 4,297,128 - - 4,297,128
Restructuring charge net of severance paid 1,749,738 - - 1,749,738
Reserve for officers note 428,398 - - 428,398
Interest expense relating to issuance of warrants - - 201,000 371,000
Non-cash charge for change in option terms - 346,591 - 346,591
Non-cash charge for settlement of lawsuit - 303,160 - 303,160
Amortization of deferred consulting expense, net - - 598,284 1,160,784
Amortization of deferred stock compensation 19,534 340,081 930,638 1,290,253
Warrants issued for consulting services - - 1,569,366 1,569,366
Accrued loss on sales commitments - - 50,974 375,974
Services and interest expense paid in preferred stock - - - 11,485
Changes in operating assets and liabilities:
Inventory - 207,613 (207,613) -
Prepaid expenses and other current assets (1,172,448) (273,928) (841,150) (2,303,513)
Accounts payable (834,139) (816,865) 1,315,184 77,326
Accrued compensation and benefits (494,507) 444,044 167,880 226,623
Accrued interest - - 111,420 275,560
Due to related party (35,532) (17,193) 52,725 -
Accrued loss on sales commitments - - (375,974) (375,974)
Other accrued expenses and current liabilities (364,219) (40,570) 938,449 585,551
---------------------------------------------------------------------
Net cash used in operating activities (15,586,588) (24,219,807) (12,458,426) (63,752,909)
Cash flows from investing activities:
Decrease/(Increase) in other assets - 664,986 (683,054) (175,218)
Purchases of property and equipment (466,081) (4,320,064) (3,019,266) (8,413,715)
---------------------------------------------------------------------
Net cash used in investing activities (466,081) (3,655,078) (3,702,320) (8,588,933)
Cash flows from financing activities:
Initial public stock offering, net of expenses - - 49,341,537 49,341,537
Payment of dividends - (1,159,373) - (1,159,373)
Shares issued under employee stock purchase plan 13,305 109,944 - 123,249
Exercise of employee stock options - 719,193 456,477 1,175,670
Issuance of preferred stock - - 28,351,791 32,868,028
Repayment of subscription receivable - - - 5,000,000
Proceeds from capital leases - 495,851 - 495,851
Repayment of capital leases (340,455) (186,247) (126,307) (831,354)
Proceeds from notes payable issued to investors - - 400,000 3,550,000
---------------------------------------------------------------------
Net cash (used) provided by financing activities (327,150) (20,632) 78,423,498 90,563,608
Increase (decrease) in cash and cash equivalents (16,379,819) (27,895,517) 62,262,752 18,221,766
Cash and cash equivalents, beginning of period 34,601,585 62,497,102 234,350 -
---------------------------------------------------------------------
Cash and cash equivalents, end of period $18,221,766 $34,601,585 $62,497,102 $ 18,221,766
=====================================================================
Supplemental disclosure of non-cash transactions:
Cash paid for interest $48,926 $34,000 $370,000 $ 481,426
=====================================================================
Cash paid for taxes $17,000 $ 1,600 $ 1,800 $ 25,800
=====================================================================
Assets acquired through capital lease $ - $ - $281,034 $ 535,445
=====================================================================
See notes to consolidated financial statements.
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. Because the Company has not yet generated a
significant amount of revenue from its principal operations, it is 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's organizational structure has no divisions or
subsidiaries dictated by product lines, geography or customer type.
Operations. The Company has experienced net losses since its inception and, as
of December 31, 2002, had an accumulated deficit of approximately $115 million.
The Company is currently facing the challenge of identifying potential
applications and the ongoing development and refinement of its commercial
products. This ongoing research and development is expected to require
significant outlays of capital. As discussed in Note 7, 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 June 30, 2004. The Company has taken
significant actions over the last eighteen months to reduce its cash
expenditures for product development, infrastructure and production readiness.
Headcount, development spending and capital expenditures have been significantly
reduced. The Company has focused its activity on market analysis in terms of
size of markets, competitive aspects and advantages that our products could
provide. Preliminary design and development of potential products for markets
under consideration continue. No expenditures for prototype development or
production capabilities will be made until the specific markets to be served
have been defined. In the event that development or production capabilities
costs are higher than anticipated the Company may need to raise additional
funding earlier than expected.
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 accounting principles generally accepted in the United States of
America, 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.
Employee Advances. During 2001, the Company advanced approximately $785,000 to
three officers of the Company. These advances are interest bearing and secured
by the officers' holdings of Beacon Power Corporation common stock and were
provided to the officers to allow them to exercise stock options and in one
case, to pay the related taxes. Through December 31, 2002, the Company has
collected approximately $311,000 in payments on these advances. In June 2002,
due to the current market value of the pledged securities and the uncertainty of
collection of the advance, the Company took a charge in the amount of $426,148
to reserve the remaining balance of the advance to Mr. William Stanton, its
former CEO and president. This loan, however, has not been cancelled, and is
partially secured by 308,318 shares of the Company's stock. Mr. Stanton
continues to be a director of the Company. This charge is included in other
expenses in the accompanying consolidated statement of operations. The remaining
advance balance of approximately $68,000 at December 31, 2002 is included in
prepaid and other assets in the accompanying consolidated balance sheet.
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.
Other Assets. Other assets consist of unamortized legal expenses related to
patents and various deposits on long-term assets and on the Company's operating
facility.
Loss on Sales Commitments. When the Company has sales commitments that are firm,
have fixed-prices and the direct costs to manufacture products covered by the
Company's firm sales commitments are in excess of the fixed selling prices,
revenue and cost of revenue on such sales commitments are recorded as deliveries
are made. 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, 2002, no estimated losses on sales commitments are
anticipated.
Long-Lived Assets. In accordance with Statement of Financial Accounting
Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets, 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 an impairment of
long-lived assets and recognized restructuring and asset impairment charges in
2002.
Restructuring and asset impairment charges. The Company's initial products were
focused on the telecom industry. As a result of the overall economic downturn
and in particular the significant decline in capital and maintenance spending in
telecom as well as the low price of lead-acid batteries, the Company has not
been successful in selling products into this market. Therefore, in July 2002,
in an effort to reduce its monthly cash-spending rate, the Company implemented a
number of cost-cutting measures to ensure the availability of resources
necessary to pursue its business strategy for a reasonable period but at a
significantly lower cash expenditure rate. As a result, a substantial portion of
its long-term assets have been idled, including machinery and equipment,
tooling, office furniture and fixtures, and equipment and leasehold
improvements. The Company has evaluated all of its property and equipment as
required by Statement of Financial Accounting Standards No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets" and, as a result, has taken a
restructuring and impairment charge of $6.5 million of which $4.3 million
represents impaired capital equipment and leasehold improvements, $.3 million
relates to severance costs and $1.9 million relates to a reserve against future
lease payments and related facility costs. The assets held for sale have been
grouped together and classified as "Assets held for sale" in the current assets
section of the balance sheet. Assets held for sale have been written down to
their fair value based on quotes from vendors and other market factors. The
reserve against future lease payments is classified as "Restructuring reserve"
in the current liabilities section of the balance sheet.
The restructuring reserves are as follows:
Employee severance Facility related Asset impairment
Beginning balance $ - $ - $ -
Charges for the period 323,656 1,835,624 4,297,128
Other - - (7,922)
Payments (323,656) (85,886) -
---------------------- ------------------------ -------------------------
Ending balance at December 31, 2002 $ - $ 1,749,738 $ 4,289,206
====================== ======================== =========================
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. In 2002 the company implemented FASB Statement of
Financial Accounting Standards No. 148 ("SFAS 148"), Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS 148 amends current disclosure
requirements and requires prominent disclosures on both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for financial reports containing financial statements for
interim periods beginning after December 15, 2002. SFAS 148 also provides
alternative methods of transition for a voluntary change to fair value based
methods of accounting which have not been adopted at this time. 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 a calculation under FASB
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans."
No stock-based compensation is reflected in net earnings for options granted to
employees as all options granted under the plan had an exercise price equal to
or greater than the market price of the underlying stock at the date of the
grant. The following table illustrates the effect on net earnings and earnings
per share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123 "Accounting for Stock-Based Compensation" to stock-based
employee compensation.
Year ended Year ended Year ended
December 31 December 31 December 31
2002 2001 2000
--------------------------------------------------
Net loss to common shareholders
as reported $ (20,839,251) $ (26,145,668) $ (53,279,148)
Net loss--pro forma (23,837,863) (28,753,668) (54,175,173)
Loss per share--as reported $ (0.49) $ (0.61) $ (10.77)
Loss per share--pro forma $ (0.56) $ (0.68) $ (10.95)
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:
2002 2001 2000
-----------------------------------------------------
Risk-free interest rate 2.5% - 3.6% 3.0% - 6.25% 6.25% and 6.5%
Expected life of option 1-3 years 1-3 years 3 years
Expected dividend payment rate,
as a percentage of the stock price
on the date of grant 0% 0% 0%
Assumed volatility 130% - 137% 100% - 135% 100%
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 13).
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 carry forwards using the currently enacted
tax rates and laws. A valuation allowance is provided to the extent realization
of deferred tax assets is not considered more likely than not.
Research and Development. Research and development costs are expensed as
incurred.
Financial Instruments. The carrying amount of cash and cash equivalents,
accounts payable, accrued expenses, notes payable to investors and capital lease
obligations approximate their fair values.
Concentration of Credit Risk. Financial instruments that potentially subject the
Company to significant concentration of credit risk consist primarily of cash
and cash equivalents. Substantially all of the Company's cash and cash
equivalents are managed by one financial institution. At December 31, 2002 and
2001, 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.
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. Potentially
dilutive securities have been excluded from the computation as their effect is
antidilutive.
3. Property and Equipment
Property and equipment consisted of the following at December 31:
Estimated
Useful
Lives 2002 2001
----------------------------------------------
Machinery and equipment 5 years $1,998,631 $ 1,996,711
Furniture and fixtures 7 years 717,293 733,018
Service vehicles 5 years 63,792 63,792
Office equipment 3 years 1,914,195 2,030,653
Leasehold improvements Lease term 2,072,577 2,072,577
Equipment under capital lease
obligations Lease term 1,081,726 1,081,726
----------------------------------
Total 7,848,214 7,978,477
Less accumulated depreciation
and amortization (2,996,079) (1,789,970)
----------------------------------
Property and equipment, net 4,852,135) 6,188,507
Less Impairment reserve (4,289,206) -
-------------------------------
$ 562,929 $ 6,188,507
===============================
4. Capital Lease Obligations
The Company leases equipment under capital lease agreements expiring through
September 2003. Future obligations under such capital leases as of December 31,
2002 are as follows:
2003 $ 206,662
Less amount representing interest (6,621)
---------------
Current portion of capital lease obligations $ 200,041
===============
5. 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 which expired October 2001. At December 31, 2002, the Company has
provided the lessor with an irrevocable letter of credit in the amount of
$355,232. This letter of credit is secured by a cash deposit.
Future minimum annual lease payments under non-cancelable operating leases as of
December 31, 2002 are as follows:
2003 $490,675
2004 490,675
2005 500,359
2006 529,413
2007 $397,059
Total rent expense was $436,083, $567,239 and $473,576, during 2002, 2001 and
2000, respectively.
6. Preferred Stock
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, 2002 and 2001, there are 10 million
shares of preferred stock authorized with none outstanding.
7. 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.
Shareholder rights plan. In September 2002, the Company's Board of Directors
approved a Shareholder Rights Plan. Under the plan, each holder of common stock
on October 7, 2002 automatically received a distribution of one Right for each
share of common stock held. Each Right entitles the holder to purchase 1/100th
of a share of our newly issued preferred stock for $22.50 in the event that any
person not approved by the board of directors acquires more than 15% (35% in the
case of one large shareholder that already owned more than 15%) of our
outstanding common stock, or in the event that we are acquired by another
company, $22.50 worth of the common stock of the other company at half its
market value (in each case any rights held by the acquiring person are not
exercisable and become void).
Reserved Shares. At December 31, 2002, 14,493,238 shares of common stock were
reserved for issuance under the Company's stock option plan and outstanding
warrants.
8. Redeemable Convertible Preferred Stock and Stock Warrants
Class D Redeemable Convertible Preferred Stock and Class D Stock Warrants. Prior
to its initial public offering, the Company's capital structure included Class D
redeemable convertible preferred stock ("Class D Stock"). All outstanding shares
of the Class D Stock plus accrued dividends were either converted into shares of
common stock during the initial public offering or were paid in cash in February
2001. After the initial public offering, the Company amended its charter and
cancelled all its Class D Stock.
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. Upon issuance of the
warrants, this amount was 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 Redeemable Convertible Preferred Stock and Class E Stock Warrants. Prior
to its initial public offering, the Company's capital structure included Class E
redeemable convertible preferred stock ("Class E Stock"). All outstanding shares
of the Class E Stock plus accrued dividends were either converted into shares of
common stock during the initial public offering or were paid in cash in February
2001. After the initial public offering, the Company amended its charter and
cancelled all its Class E Stock.
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, warrants to purchase 315,000
shares, 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 was approximately $344,000. Since
these warrants replaced the August 2, 1999 warrants, the amount allocated to the
August 1999 warrants have been reallocated to Class E Stock Warrants and the
remaining $174,000 was 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 102,398 of its warrants, in a
cashless transaction, to purchase 84,433 shares of the Company's common stock.
Class F Redeemable Convertible Preferred Stock and Class F Stock Warrants. Prior
to its initial public offering, the Company's capital structure included Class F
redeemable convertible preferred stock ("Class F Stock"). All outstanding shares
of the Class F Stock plus accrued dividends were either converted into shares of
common stock during the initial public offering or were paid in cash in February
2001. After the initial public offering, the Company amended its charter and
cancelled all its Class F Stock.
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 was recorded as a dividend to the
holders of the Class F Stock and credited to additional paid-in-capital during
2000. These warrants expire on May 23, 2005. During December 2000, two investors
exercised 1,884,800 of their warrants, in a cashless transaction, to purchase
1,289,600 shares of the Company's common stock.
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 to purchase 50,000
shares of common stock may exercise its warrant at any time prior to January 31,
2002. None of these warrants were exercised prior to January 31, 2002 and the
warrants have expired. The holder of the other warrant to purchase 20,000 shares
of common stock may exercise its warrant at any time prior to August 2, 2005.
These warrants were fully vested upon the issuance and 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 and 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 was approximately $150,000 and $1,100,000 at December 31, 2001 and
2000. 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%
9. 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.
Stock option activity since inception is as follows:
Weighted- Weighted-
Average Average
Number of Exercise Fair
Shares Price Value
----------------------------------------
Outstanding at inception -
Granted 2,314,000 $ 0.89 0.36
Canceled, forfeited or expired (305,688)
----------------------------------------
Outstanding, December 31, 1999 2,008,312 0.89
Granted 3,443,688 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
Granted 2,361,007 2.94 1.93
Exercised (682,586) 1.05
Canceled, forfeited or expired (1,561,560) 4.07
----------------------------------------
Outstanding, December 31, 2001 4,849,901 2.37
Granted 3,050,628 1.16 .38
Exercised - -
anceled, forfeited or expired (2,513,186) 2.25
----------------------------------------
Outstanding, December 31, 2002 5,387,343 $ 1.78
===========================
The following table summarizes information about stock options outstanding at
December 31, 2002:
Vested
Weighted- ----------------------------
Average Weighted- Weighted-
Number Remaining Average Average
of Options Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price of Options Price
- ------------- ----------- ---------- --------- ----------- ------------
$0.32 - $0.89 3,307,497 8.76 $0.80 2,247,513 $0.82
$1.00 - $2.50 1,005,979 8.47 $2.18 823,332 $2.23
$3.00 - $4.10 737,335 8.55 $3.33 707,335 $3.33
$5.10 - $6.10 238,893 8.39 $5.58 192,734 $5.62
$6.90 - $7.22 54,776 8.81 $7.04 44,777 $7.03
$9.25 - $9.31 42,863 9.14 $9.26 41,197 $9.26
Included in the above schedules are grants of 45,000, 50,000 and 130,000 options
made to non-employee consultants in 2002, 2001 and 2000, respectively.
10. 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. Shares
purchased under the Plan in 2002 and 2001 totaled 42,041 and 54,956,
respectively and the weighted average grant date fair value of the shares
purchased was $0.28 in 2002 and $2.00 in 2001. No shares were issued under this
Plan during the year ended December 31, 2000. There are 931,301 shares available
under the Plan at December 31, 2002.
11. 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,
2002 2001 2000 2002
--------------------------------------------------------------------
State - current $ - $ 17,156 $ - $ 17,156
Federal--deferred (7,377,177) (9,919,839) (5,115,236) (27,040,235)
State--deferred (824,557) (1,679,472) (993,055) (4,313,787)
Increase in valuation allowance 8,201,734 11,599,311 6,108,291 31,354,022
--------------------------------------------------------------------
Provision for income taxes $ - $ 17,156 $ - $ 17,156
====================================================================
A reconciliation of the statutory federal rate to the effective rate for all
periods is as follows:
Statutory federal rate benefit (34) %
State, net of federal effect (6)
Valuation allowance provided 40
-------
Effective rate --%
======
The components of the Company's deferred tax assets and liabilities consisted of
the following at December 31:
2002 2001
---------------------------------
Long-term assets:
Net operating loss carry forwards $ 26,081,296 $20,279,512
Research and development credits 2,214,815 2,208,080
Restructuring reserves 2,415,578 -
---------------------------------
Other 642,334 664,696
---------------------------------
Net deferred tax assets before valuation allowance 31,354,022 23,152,288
Less valuation allowance (31,354,022) (23,152,288)
-----------------------------
Net deferred tax assets $ - $ -
=============================
The valuation allowance increased by $8,201,734 in 2002 and $11,599,311 in 2001,
primarily due to the generation of net operating loss carry forwards and credits
for which realization is not reasonably assured.
The Company has available for future periods net operating loss carry forwards
for federal and state tax purposes of approximately $65,050,177 and $66,274,676,
respectively, as of December 31, 2002. In addition, the Company has business
credits of approximately $1,621,423 and $593,392 for federal and state purposes,
respectively as of December 31, 2002. The net operating loss carry forwards
begin to expire in 2012 for federal and 2002 for state tax purposes. The federal
research and development credits begin to expire in 2012. The Company did not
pay any income taxes from inception to December 31, 2002.
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 carry forwards which could be utilized annually to
offset future taxable income and income tax liabilities. The amount of any
annual limitation is determined based upon the Company's value prior to an
ownership change.
12. Benefit Plan
In 1998, the Company created a 401(k) Profit Sharing Plan (the "Plan") for its
full-time employees. Each participant in the Plan may elect to contribute a
percentage of his or her annual compensation to the Plan on a pre-tax basis up
to the annual limit established by the Internal Revenue Service. The Company
matches employee contributions at a rate of 50% up to the first 6% of the
employee's contributions. The Company may also elect to make a profit-sharing
contribution at 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 $113,257, $189,883 and
$102,085 during 2002, 2001 and 2000, respectively.
13. Related Party Transactions
Strategic Investment. On March 24, 2003, the Company announced that it had
committed to invest $1,000,000 in the Series A Preferred Stock of Evergreen
Solar, Inc., a public company which specializes in renewable energy sources, in
order to develop a strategic relationship with that company. Our investment was
part of a larger financing provided by several investors. We made our investment
on the same terms as the other investors in this financing, except that we also
were permitted to purchase a three-year warrant for $100,000 that is exercisable
for 2,400,000 shares of Evergreen's common stock. This warrant makes our
investment terms more favorable than those received by the other investors.
Evergreen's financing was a private placement of $29.475 million of its Series A
Preferred Stock and the above warrant. Perseus 2000, L.L.C., an affiliate of one
of the Company's stockholders, Perseus Capital, L.L.C., invested $3 million in
Evergreen's Series A Preferred Stock in this financing. Mr. Philip J. Deutch and
Mr. Kenneth M. Socha, members of the Board of Directors of the Company, are
Managing Director and Senior Managing Director, respectively, of Perseus,
L.L.C., and Mr. Deutch is one of four individuals from the Evergreen investor
group to be added to the Board of Directors of Evergreen when the investment
closes.
Employee Advances. During 2001, the Company advanced approximately $785,000 to
three officers of the Company. These advances are interest bearing and secured
by the officers' holdings of Beacon Power Corporation common stock and were
provided to the officers to allow them to exercise stock options and in one
case, to pay the related taxes. Through December 31, 2002, the Company has
collected approximately $311,000 in payments on these advances. In June 2002,
due to the current market value of the pledged securities and the uncertainty of
collection of the advance, the Company took a charge in the amount of $426,148
to reserve the remaining balance of the advance plus incremental interest to Mr.
William Stanton, its former CEO and president. This loan, however, has not been
cancelled, and is partially secured by 308,318 shares of the Company's stock.
Mr. Stanton continues to be a director of the Company. This charge is included
in other expenses in the accompanying consolidated statement of operations. The
remaining advance balance of approximately $68,000 at December 31, 2002 is
included in prepaid and other assets in the accompanying consolidated balance
sheet.
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. Through 2000
$1,061,000 was recorded as consulting expense relating to these agreements, and
399,464 shares of Class A Stock was 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 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. Through 2000, SatCon performed certain research and
development, administrative and other services for the Company. Amounts paid to
SatCon for such services amounted to approximately $551,000 during 2000.
Inventory. Through 2001 the Company used SatCon to perform certain engineering
and other processing tasks on certain of the electrical components of its
product. The Company had payables to SatCon for electronic component purchases
totaling $35,532 at December 31, 2001.
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.
14. Subsequent Events
On March 24, 2003, the Company committed to invest $1,100,000 in Evergreen
Solar, Inc., a publicly traded company specializing in photovoltaic products.
Also on March 24, 2003, the Company paid approximately $141,000 for the
intellectual property assets of Advanced Energy Systems, Inc., a supplier of
inverter electronics.
15. 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.
2002
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------
$
Revenue - $ - $ - $ -
Loss from operations (5,681,606) (3,746,500) (9,258,822) (2,180,493)
Net loss $ (5,550,895) $ (4,037,184) $ (9,150,158) $(2,101,015)
Loss per share - basic and diluted $ (0.13) $ (0.09) $ (0.21) $ (0.05)
Weighted-average common shares
outstanding 42,770,856 42,795,821 42,809,361 42,811,667
2001
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------
Revenue $ - $ - $ - $ -
Loss from operations (6,296,072) (6,869,317) (8,063,401) (6,662,471)
Net loss $ (5,799,436) $ (6,302,084) $ (7,588,410) $(6,455,738)
Loss per share - basic and diluted $ (0.14) $ (0.15) $ (0.18) $ (0.15)
Weighted-average common shares
outstanding 42,169,642 42,523,462 42,739,635 42,760,695
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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 2003 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.
Item 14. Controls and Procedures
Mr. F. William Capp, the Company's Chief Executive Officer, and Mr. James M.
Spiezio, the Company's Chief Financial Officer, have evaluated the effectiveness
of the Company's disclosure controls and procedures as of a date within 90 days
before the filing date of this annual report. Based upon that evaluation, they
have concluded that the Company has in place controls and other procedures that
are designed to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Since the date of the evaluation, there
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 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.
(b) Reports on Form 8-K
Form 8-K filed on October 4, 2002 with respect to a Shareholders Rights
(c ) 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).
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).
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 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).
10.1.20 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).
10.1.21 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).
10.1.22 Employment agreement dated December 1, 2001 between F. William Capp and Beacon Power
Corporation.
10.1.23 Employment agreement dated May 6, 2002 between Matthew L. Lazarewicz and Beacon Power
Corporation.
10.1.24 Employment agreement dated October 25, 2002 between William J. Driscoll and Beacon Power
Corporation.
10.1.25 Employment agreement dated October 25, 2002 between James M. Spiezio and Beacon Power
Corporation.
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.)
12.1 Shareholder Rights Agreement dated as of September 25, 2002. (Incorporated by reference to Exhibit No.
99.1 to the Current Report on Form 8-K of Beacon Power Corporation filed on October 4, 2002)
12.2 Amendment to Shareholder Rights Agreement dated as of December 27, 2002.
23.1 Consent of Deloitte & Touche LLP
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
-------------------------------------------
F. William Capp
President and Chief Executive Officer
Date: March 31, 2003
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
/s/ F. William Capp President and Chief Executive Officer,
- -------------------- and Director
F. William Capp (Principal Executive Officer) March 31, 2003
/s/ James M. Spiezio Vice President of Finance, Chief Financial
- -------------------- Officer, Treasurer and Secretary
James M. Spiezio (Principal Financial Officer) March 31, 2003
/s/ Philip J. Deutch
Philip J. Deutch Director March 31, 2003
/s/ Jack P. Smith
Jack P. Smith Director March 31, 2003
/s/ Kenneth M. Socha
Kenneth M. Socha Director March 31, 2003
/s/ William E. Stanton
William E. Stanton Director March 31, 2003
CERTIFICATION
I, F. William Capp, certify that:
1. I have reviewed this annual report on Form 10-K of Beacon Power Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ F. William Capp
-------------------
F. William Capp
Chief Executive Officer
CERTIFICATION
I, James M. Spiezio, certify that:
1. I have reviewed this annual report on Form 10-K of Beacon Power Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ James M. Spiezio
--------------------
James M. Spiezio
Chief Financial Officer
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-50260 of Beacon Power Corporation on Form S-8 of our report dated March 7,
2003 appearing in this Annual Report on Form 10-K of Beacon Power Corporation
for the year ended December 31, 2002.
/S/ Deloitte & Touche, LLP
Boston, MA
March 28, 2003