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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 for
the quarterly period ended September 30, 2003,
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
(For the transition period from to ).
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
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes ____ No __X__
The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of November 10, 2003 was 42,963,525.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Table of Contents
Page
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2003 and
December 31, 2002. 1
Unaudited Consolidated Statements of Operations for the
three and nine months ended September 30, 2003 and 2002
and for the Period May 8, 1997 (date of inception) to
September 30, 2003. 2
Unaudited Consolidated Statements of Cash Flows for nine
months ended September 30, 2003 and 2002 and for the
Period May 8, 1997 (date of inception) to
September 30, 2003. 3
Notes to Unaudited Consolidated Financial Statements. 5-9
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations. 9-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults on Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 23
Signatures 25
Certifications 26-29
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets (Unaudited)
September 30, December 31,
2003 2002
--------------------- ---------------------
Assets
Current assets:
Cash and cash equivalents $ 11,597,310 $ 18,221,766
Inventory 125,782 -
Prepaid expenses and other current assets 568,584 1,775,455
Assets held for sale - 53,715
--------------------- ---------------------
Total current assets 12,291,676 20,050,936
Property and equipment, net (Note 3) 390,594 562,929
Investments (Note 5) 1,948,214 -
Other assets 508,933 291,901
--------------------- ---------------------
Total assets $ 15,139,417 $ 20,905,766
===================== =====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 104,758 $ 77,326
Accrued compensation and benefits 127,653 226,623
Other accrued expenses 519,523 576,881
Restructuring reserve 1,492,078 1,749,738
Capital lease obligations 13,320 200,041
--------------------- ---------------------
Total current liabilities 2,257,332 2,830,609
Commitments (Note 4)
Stockholders' equity:
Preferred Stock, $.01 par value; 10,000,000 shares authorized
no shares issued or outstanding - -
Common stock, $.01 par value; 110,000,000 shares authorized;
42,961,062 and 42,812,897 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively 429,611 428,129
Deferred stock compensation (14,314) (18,413)
Additional paid-in-capital 132,860,644 132,750,525
Other comprehensive income 848,214 -
Deficit accumulated during the development stage (121,142,410) (114,985,424)
Treasury stock, at cost (99,660) (99,660)
--------------------- ---------------------
Total stockholders' equity 12,882,085 18,075,157
Total liabilities and stockholders' equity $ 15,139,417 $ 20,905,766
===================== =====================
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)
Cumulative from
May 8, 1997
(date of inception)
Three months ended September 30, Nine months ended September 30, through September 30,
2003 2002 2003 2002 2003
----------------- ----------------- ----------------- ----------------- ------------------------
Revenue $ - $ - $ - $ - $ 551,184
Operating expenses:
Selling, general and administrative 1,259,121 1,054,819 3,738,788 4,560,568 26,861,816
Research and development 752,170 1,284,746 2,663,175 6,194,870 49,457,069
Loss on sales commitments - - - - 375,974
Depreciation and amortization 44,967 462,849 188,237 1,475,084 3,854,240
Restructuring charges - 2,159,280 - 2,159,280 2,159,280
Loss on impairment of assets - 4,297,128 - 4,297,128 4,297,128
----------------- ----------------- ----------------- ----------------- ------------------------
Total operating expenses 2,056,258 9,258,822 6,590,200 18,686,930 87,005,507
----------------- ----------------- ----------------- ----------------- ------------------------
Loss from operations (2,056,258) (9,258,822) (6,590,200) (18,686,930) (86,454,323)
Other income (expense):
Interest income 29,699 115,514 131,454 418,252 3,693,457
Interest expense (676) (8,770) (6,663) (36,958) (1,093,653)
Other income (expense) 318,374 1,920 308,423 (432,602) (281,697)
----------------- ----------------- ----------------- ----------------- ------------------------
Total other income (expense), net 347,397 108,664 433,214 (51,308) 2,318,107
----------------- ----------------- ----------------- ----------------- ------------------------
Net loss (1,708,861) (9,150,158) (6,156,986) (18,738,238) (84,136,216)
Preferred stock dividends - - - - (36,825,680)
Accretion of convertible preferred stock - - - - (113,014)
----------------- ----------------- ----------------- ----------------- ------------------------
Loss to common shareholders $ (1,708,861) $ (9,150,158) $ (6,156,986) $ (18,738,238) $ (121,074,910)
================= ================= ================= ================= ========================
Loss per share, basic and diluted $ (0.04) $ (0.21) $ (0.14) $ (0.44)
================= ================= ================= =================
Weighted-average common shares
outstanding 42,883,762 42,809,361 42,837,456 42,792,154
================= ================= ================= =================
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows (Unaudited)
Cumulative from
May 8, 1997
(date of inception)
Nine months ended September 30, through September
2003 2002 30, 2003
------------------------------------------------------
Cash flows from operating activities:
Net loss $ (6,156,986) $(18,738,238) $ (84,136,216)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 188,237 1,475,084 3,854,240
Loss on sale of fixed assets - 7,342 170,868
Impairment of assets - 4,297,128 4,297,128
Restructuring charge net of payments (257,660) 1,835,625 1,492,078
Reserve for officer's note (308,423) 425,130 119,975
Interest expense relating to issuance of warrants - - 371,000
Non-cash charge for change in option terms - - 346,591
Non-cash charge for settlement of lawsuit - - 303,160
Amortization of deferred consulting expense, net - - 1,160,784
Amortization of deferred stock compensation - 19,442 1,290,253
Warrants issued for consulting services - - 1,569,366
Services and interest expense paid in preferred stock - - 11,485
Changes in operating assets and liabilities:
Inventory (125,782) - (125,782)
Prepaid expenses and other current assets 1,515,294 277,560 (788,219)
Accounts payable 27,432 (696,975) 104,758
Accrued compensation and benefits (98,970) (543,687) 127,653
Accrued interest - - 275,560
Due to related party - (35,532) -
Other accrued expenses and current liabilities (57,358) (489,486) 528,193
------------------------------------------------------
Net cash used in operating activities (5,274,216) (12,166,607) (69,027,125)
Cash flows from investing activities:
Purchase of investments (1,100,000) - (1,100,000)
Increase in other assets (226,668) - (401,886)
Purchases of property and equipment (5,916) (423,162) (8,419,631)
Sale of property and equipment 53,365 - 53,365
------------------------------------------------------
Net cash used in investing activities (1,279,219) (423,162) (9,868,152)
Cash flows from financing activities:
Initial public stock offering, net of expenses - - 49,341,537
Payment of dividends - - (1,159,373)
Shares issued under employee stock purchase plan 463 12,765 123,712
Exercise of employee stock options 115,237 - 1,290,907
Issuance of preferred stock - - 32,868,028
Repayment of subscription receivable - - 5,000,000
Proceeds from capital leases - - 495,851
Repayment of capital leases (186,721) (263,765) (1,018,075)
Proceeds from notes payable issued to investors - - 3,550,000
------------------------------------------------------
Net cash (used) provided by financing activities (71,021) (251,000) 90,492,587
(Decrease) increase in cash and cash equivalents (6,624,456) (12,840,769) 11,597,310
Cash and cash equivalents, beginning of period 18,221,766 34,601,585 -
------------------------------------------------------
Cash and cash equivalents, end of period $ 11,597,310 $ 21,760,816 $ 11,597,310
======================================================
Supplemental disclosure of non--cash transactions:
Cash paid for interest $ 6,700 $ 43,000 $ 488,126
======================================================
Cash paid for taxes $ 4,700 $ 17,000 $ 30,500
======================================================
Assets acquired through capital lease $ - $ - $ 535,445
======================================================
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Note 1. Nature of Business and Operations
Nature of Business. 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 conversion and energy storage systems that provide highly
reliable, high-quality, environmentally friendly, uninterruptible electric power
employing both proprietary and third-party technology and components for a
number of potential applications. The Company has potential markets for its
products in four broad categories: (1) power conversion systems for renewable
applications (such as the recently introduced M5 inverter product) (2) high
energy flywheel-based energy storage systems for telecom and renewable energy
applications, (3) flywheel-based high-power and energy systems for utility and
distributed generation (specifically frequency and voltage regulation)
applications, and (4) high-power uninterruptible flywheel-based power systems
(UPS) for both short (12-30 sec) and long (5-15 min) duration applications.
The Company believes its best near-term opportunities are in the development and
marketing of its M5 Power Conditioning System, which is based on intellectual
property acquired earlier this year. This system converts DC power generated by
renewable sources such as solar or wind to the AC power required by residential
and commercial users. The Company hopes to have commercial sales of its M5 Power
Conditioning System for solar applications during the fourth quarter of this
year.
The Company believes that its next-generation, high-energy 25kWh flywheel
product, which is based on existing field-proven products, will be well suited
for renewable energy uses in telecom energy storage as well as photovoltaic and
wind turbine applications. The Company believes that its current and anticipated
flywheel-based products offer life-cycle cost advantages and significant
performance improvements over conventional, battery-based back-up power and UPS
systems. The Company will not make significant expenditures beyond the design
level for the 25kWh product until those markets express a tangible interest in
its products.
In the area of utility grid and distributed generation applications, the Company
believes grid frequency regulation represents a very promising opportunity for
its flywheel technology. Transmission and distribution reliability and
efficiency depend upon frequency control of the grid. Frequency imbalances occur
when generators cannot follow load changes quickly enough. The Company believes
that its "Smart Energy Matrix", an array of high-power / high-energy flywheels,
can provide this service at costs that would be attractive to customers.
However, the Company will not make significant expenditures beyond the design
level for this product until those markets express a tangible interest.
Of the four market categories outlined above, only the power conversion systems
for renewable applications is proceeding to production. Although the Company has
designs for flywheel-based solutions for a number of applications, it would need
to complete the development and test phase prior to the beginning of actual
production. It is uncertain if or to what extent the remaining segments of its
potential business will materialize. The Company will not make significant
expenditures beyond the design level until it has identified markets in which it
believes its products will be successful, and those markets express a tangible
interest in its products. The Company may not have sufficient cash available to
complete prototype development and production of products unless additional
equity or debt financing is available.
Because the Company has not yet generated a significant amount of revenue from
its operations, it continues to be accounted for as a development stage company
under Statement of Financial Accounting Standards No. 7.
Operations. The Company has experienced net losses since its inception and, as
of September 30, 2003, had an accumulated deficit of approximately $121.1
million. The Company's business strategy is to create near-term revenues and
gross margins from the sale of its M5 inverters for solar power applications,
while building a reputation for excellent performance from its equipment and its
sales and service organization. The Company will then use the relationships it
is developing to gain market access for the Company's future products for the
renewable energy industry. For the Company's current and contemplated
flywheel-based systems, it is continuing to evaluate products in terms of the
market size and growth potential, competitive advantages that its products could
provide and probable market penetration. The Company is aggressively working to
identify probable customers and present to them the value proposition for its
products. The Company will not make the additional expenditures that would be
required for prototype development or production capabilities of its flywheel
systems until it has defined the specific markets to be served and the
marketplace has expressed tangible interest. If markets are identified in which
the Company believes its flywheel products will be successful, and those markets
express a tangible interest in its products, the Company may not have sufficient
cash available to complete prototype development and production of its products
unless additional equity or debt financing is available. The Company does not
expect to become profitable or obtain positive cash flow before 2005 and may not
achieve positive cash flow even at that point or beyond.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared
using accounting principles generally accepted in the United States of America.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to applicable rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments, consisting of normal recurring accruals considered necessary for a
fair presentation, have been included in the accompanying unaudited financial
statements. Operating results for the three and nine months ended September 30,
2003 are not necessarily indicative of the results that may be expected for the
full year ending December 31, 2003. Certain information and footnote disclosure
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. It
is suggested that these consolidated financial statements presented herein be
read in conjunction with the Company's consolidated financial statements and
notes thereto included in the Company's annual report on Form 10-K, for the year
ended December 31, 2002.
There have been no significant additions to or changes in accounting policies of
the Company since December 31, 2002 except for the investment policy highlighted
in Note 5. For a complete description of the Company's accounting policies, see
Note 2 to Consolidated Financial Statements in the Company's 2002 Annual Report
on Form 10-K.
Note 3. Property and Equipment
Property and equipment consist of the following:
Estimated
Useful September 30, December 31,
Lives 2003 2002
------------- -------------------- --------------------
Machinery and equipment 5 years $ 2,109,895 $ 1,998,631
Service vehicles 5 years 63,792 63,792
Furniture and fixtures 7 years 685,535 717,293
Office equipment 3 years 2,028,545 1,914,195
Leasehold improvements Lease term 2,072,577 2,072,577
Equipment under capital lease obligations Lease term 1,008,985 1,081,726
-------------------- --------------------
Total $ 7,969,329 $ 7,848,214
Less accumulated depreciation and amortization (3,417,718) (2,996,079)
-------------------- --------------------
Property and equipment, before impairment $ 4,551,611 $ 4,852,135
-------------------- --------------------
Less impairment reserve (4,161,017) (4,289,206)
-------------------- --------------------
Property and equipment, net $ 390,594 $ 562,929
==================== ====================
Note 4. Commitments
The Company leases office and light manufacturing space under an operating lease
through September 30, 2007 and has various operating short-term leases for
certain office and manufacturing equipment expiring through December 2003. Under
the terms of the facility lease, the Company provided the lessor with an
irrevocable letter of credit. At September 30, 2003 the balance of that letter
of credit totaled $355,232. A cash deposit secures this letter of credit.
Note 5. Investments
On May 12, 2003, the Company, as part of a larger financing with other
investors, made an investment of $1,100,000 in Series A Preferred Stock of
Evergreen Solar, Inc., a Nasdaq traded, public company that specializes in
renewable energy systems manufacturing. The Company acquired 892,857 shares of
stock at a price of $1.12 and also received a three-year warrant that is
exercisable for 2,400,000 shares of Evergreen's common stock at $3.37 per share.
This investment was made for the potential market valuation gains of this
recognized market leader in photovoltaic systems; to develop a strategic
relationship with that company and further demonstrate the Company's commitment
to renewable energy that began with the announcement of its intention to provide
inverters for photovoltaic and wind turbine applications.
This investment in equity securities is classified as available for sale and is,
therefore, carried on the balance sheet at fair market value, with changes in
carrying value being recorded in Accumulated Other Comprehensive Income/ (Loss)
until the investments are sold, in accordance with the provisions of Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." Fair market value is determined using period-end
sales prices on U.S. or foreign stock exchanges. At September 30, 2003 this
investment was valued at $1,948,214 which includes the warrant at its original
cost of $100,000. The Company has recognized in other comprehensive income a
gain of approximately $848,000.
Note 6. Common Stock
Reserved Shares. At September 30, 2003 and December 31, 2002, 12,575,158 and
14,493,238 shares of common stock were reserved for issuance under the Company's
stock option plan and outstanding warrants, respectively.
Note 7. Related Party Transactions
Advance to Officers. 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 the Company's 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 September 30, 2003, the Company has collected
approximately $378,000 in payments on these advances and two of the three loans
have been paid in full. The remaining loan is to Mr. William Stanton, who serves
on the board of directors for the Company and was its former CEO and president.
The outstanding balance on Mr. Stanton's loan at September 30, 2003 was
approximately $441,000. 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 approximately $426,000 to reserve the remaining
balance of this advance. In August 2003, Mr. Stanton sold all of the stock that
secured the loan. After September 30, 2003, he reduced the loan balance by
$323,000. The remaining loan balance of $118,000 has not been forgiven and
remains outstanding, even though all stock held as security under the loan
agreement has been sold. In September 2003, the reserve balance was reduced to
$118,000. This activity is included in other expenses in the accompanying
consolidated statement of operations.
Note 8. Restructuring 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
flywheel-based products into this market. Therefore, beginning 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.
A summary of the restructuring reserves is as follows:
Beginning balance at December 31, 2002 $ 1,749,738
Charges for the period -
Payments (257,660)
-------------------
Ending balance at September 30, 2003 $ 1,492,078
===================
Note 9. 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 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.
Three months ended September 30, Nine months ended September 30,
2003 2002 2003 2002
---------------------------------------------- -----------------------------------------
Net loss to common shareholders as reported $ (1,708,861) $ (9,150,158) $ (6,156,986) $ (18,738,238)
Pro forma compensation expense 104,579 383,017 327,579 2,033,961
---------------------- ----------------------- -------------------- --------------------
Net loss--pro forma $ (1,813,440) $ (9,533,175) $ (6,484,565) $ (20,772,199)
Loss per share--as reported $ (0.04) $ (0.21) $ (0.14) $ (0.44)
Loss per share--pro forma $ (0.04) $ (0.22) $ (0.15) $ (0.49)
Weighted-average common shares outstanding 42,883,762 42,809,361 42,837,456 42,792,154
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Note Regarding Forward Looking Statements:
This Quarterly Report on Form 10-Q contains forward-looking statements
concerning, among other things, the Company's expected future revenues,
operations and expenditures and estimates of the potential markets for the
Company's services. Such statements made by the Company fall within the meaning
of the Private Securities Litigation Reform act of 1995, 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
"Certain Factors Affecting Future Operating Results" of this Form 10-Q.
Overview
The Company designs, develops, configures and offers for sale, power conversion
and energy storage systems that provide highly reliable, high-quality,
environmentally friendly, uninterruptible electric power employing both
proprietary and third-party technology and components for a number of potential
applications. The Company has segmented the potential markets for its products
into four broad categories: (1) power conversion systems (also known as
inverters) for renewable applications, (2) low power, high energy flywheel-based
energy storage systems for telecom and renewable energy applications, (3)
flywheel-based high-power and energy systems for utility and distributed
generation (specifically frequency and voltage regulation) applications, and (4)
high-power uninterruptible flywheel-based power systems (UPS) for both short
(12-30 sec) and long (5-15 min) duration applications.
The Company believes its best near-term opportunities are in the development and
marketing of its M5 Power Conditioning System and similar systems for renewable
energy applications in both photovoltaic and wind turbine systems. These systems
convert DC power generated by renewable sources such as solar or wind to the AC
power required by residential and commercial users. The Company successfully
acquired the intellectual property of Advanced Energy Systems (AES) in March of
2003, and immediately started a process of evaluating the design of the former
AES MM-5000 inverter. The Company has now reviewed and tested both the software
and hardware of the MM-5000 product and has made improvements that have been
incorporated into its M5 Power Conditioning System. The Company has several
units in field test in solar power applications and expects to have commercial
sales of its M5 Power Conditioning System during the fourth quarter of this
year.
The Company's business strategy is to create immediate revenues and gross
margins with its M5 Power Conditioning System while building a reputation for
excellence throughout the renewable energy sector from the performance of its
equipment and from its sales and service organization. The Company has hired key
personnel in electronic design as well as former employees of AES in the sales
and service area. The Company is also developing a training and certification
program to insure professional and consistent installation of its equipment to
further customer satisfaction. The Company will then use the relationships in
the solar industry it is developing through the sale of power conditioning
systems to gain market access for the Company's future products for the
renewable energy industry.
The Company also believes that its next generation high-energy 25kWh flywheel
product, which is based on existing field-proven products, will be well suited
for telecom energy storage as well as renewable energy uses in photovoltaic and
wind turbine applications. The Company's flywheel-based storage systems are an
alternative to battery storage and offer a number of advantages in comparison to
batteries. These performance advantages include improved certainty of
operations, more reliable monitoring, higher reliability, significantly longer
life, improved recharging capability, significantly reduced scheduled
maintenance, greater environmental friendliness and favorable life-cycle costs.
The telecom market has not led to orders due to customer preferences for
first-cost comparisons over longer life-cycle costs. It is uncertain when or to
what extent this segment of the Company's potential business will materialize.
The Company however, believes that customers in the renewable energy market are
more likely to purchase products on a life-cycle cost basis but the Company will
not make significant expenditures beyond the design level for this product until
those markets express a tangible interest in its products.
The Company believes that it may have long-term opportunities for revenues in
flywheel-based high-power and energy systems for utility grid and distributed
generation (specifically frequency and voltage regulation) applications, and
high-power uninterruptible flywheel-based power systems (UPS) for both short
(12-30 sec) and long (5-15 min) duration applications.
The Company believes grid frequency regulation and distributed generation
represents a very promising opportunity for its flywheel technology.
Transmission and distribution reliability and efficiency depend upon frequency
control of the grid. Frequency imbalances occur when generators cannot follow
load changes quickly enough. Today, this control is done by cycling generator
output to match constantly changing loads. This cycling has a negative impact on
generator life and results in additional maintenance costs for the generators
that provide this service. The Company believes that its "Smart Energy Matrix,"
an array of high-power / high-energy flywheels, can provide frequency control
service without incurring the high maintenance costs of generators. The
Company's matrix design would provide a significant amount of stored energy (one
megawatt for 15 minutes) to address a requirement of every utility system; that
of maintaining a constant frequency alternating current. Frequency regulation is
unique among the ancillary services that are sold into Regional Transmission
Operators such as PJM Interconnection, L.L.C. (PJM) in that it is nominally a
zero energy service i.e., the down regulation and up regulation are close to
being in balance. Because this is the case, frequency regulation appears to be
especially well suited to the characteristics of the Company's flywheel matrix
design. The Company believes that today, no other energy storage system exists
that can cost effectively offer the combination of required cyclic life, fast
response, ease of connecting to the grid, and simple operation. At today's
prices for frequency regulation services, the Company believes that its flywheel
matrix design could result in very attractive financial returns. The Company
believes its Smart Energy Matrix can be introduced using today's market
mechanisms to participate directly as an independent regulation service
provider. This approach is expected to bypass the traditionally long adoption
period of new technology by the utility industry. The Company is seeking
appropriate partners to fund and demonstrate this potential application. The
Company will not make significant expenditures beyond the design level for this
product until it has formed a partner relationship.
For UPS applications, the Company believes that its 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. Users of electricity can experience significant losses if their
electricity supply is partially or wholly interrupted, such as by sags, surges
and temporary interruptions. The highest level of power quality required for
today's sophisticated electronic and industrial applications requires an
uninterruptible power system (UPS) close to the place of use. Today's UPS
systems typically use short duration (12-30 sec) energy storage to start
fast-responding diesel generators. The Company offers such a product through its
relationship with other companies. In addition, the Company's unique Smart
Energy Matrix design for high-energy flywheels could deliver power for up to 15
minutes and provide excellent load following for the slower responding natural
gas generators and gas turbines. Again, the Company will not make significant
expenditures beyond the design level for this product until customers express a
tangible interest in its products.
Of the four market categories outlined above, only the power conversion systems
for renewable applications is proceeding to production. Although the Company has
designs for flywheel-based solutions for a number of applications, the Company
would need to complete the development and test phase prior to the beginning of
actual production. It is uncertain if or to what extent the remaining segments
of its potential business will materialize. The Company will not make
significant expenditures beyond the design level until it has identified markets
in which its products will be successful, and those markets express a tangible
interest in its products. The Company does not expect to have sufficient cash
available to complete prototype development and production of products unless
additional equity or debt financing is available.
The Company is marketing its M5 Power Conditioning System in the photovoltaic
market and expects to begin shipments in the fourth quarter of this year. In
addition, the Company has available for sale 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. The Company also has 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. Additionally, the
Company has designed a high-energy product (25kWh) for potential applications in
the renewable energy market for both photovoltaic and wind turbine uses. The
Company may not have sufficient cash available to complete prototype development
and production of products unless it raise additional equity or obtain debt
financing.
From its inception through September 30, 2003 the Company has incurred losses of
approximately $121.1 million. The Company does not expect to become profitable
or obtain positive cash flow before 2005 and may not achieve positive cash flow
even at that point or beyond. Also, the Company's losses and uses of cash may
fluctuate significantly from quarter to quarter as its costs of development,
production and marketing fluctuate. In addition, the Company may make additional
investments that it considers strategic.
Results of operations:
Comparison of three months ended September 30, 2003 and 2002
Revenues. The Company continues to evaluate markets for its current products and
other future products but did not recognize revenues for the three months ended
September 30, 2003 or 2002
Selling, General and Administrative Expenses. The Company's sales and marketing
expenses consist primarily of compensation and benefits for its sales and
marketing personnel and related business development expenses. The Company's
general and administrative expenses consist primarily of compensation and
benefits related to its corporate staff, professional fees, insurance costs and
travel. Selling, general and administrative expenses totaled approximately
$1,259,000 and $1,055,000 for the three months ended September 30, 2003 and
2002, respectively. The increase of approximately $204,000 or 19% is primarily
the result of increased costs of Directors and Officers Liability Insurance
premiums partially offset by lower headcount.
Research and Development. The Company's 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 process. These costs were reduced significantly during 2002
when the Company reduced its headcount on March 12 and July 19, 2002. The
Company is incurring costs for emerging inverter product development but is not
doing significant development work on flywheel products. While the Company does
not expect to incur any significant additional development costs for its
existing flywheel products, it may incur significant costs for the development
of new inverter products, flywheel design prototypes or staffing the
manufacturing function and establishing required processes for commercial
production of its products. The Company will begin prototype development and
establishing production capabilities for its flywheel products only after it has
defined the specific markets to be served and the marketplace has expressed
tangible interest. While the Company will begin development of new inverter
products and will continue to undertake modest design efforts on new
high-powered flywheel products, it expects its cost of research and development
in 2003 to continue to be significantly reduced compared to 2002. Research and
development expenses totaled approximately $752,000 and $1,285,000 for the three
months ended September 30, 2003 and 2002, respectively. The decrease of $533,000
or 41% is primarily the result of lower headcount compared to 2002.
Depreciation and Amortization. The Company's depreciation and amortization is
primarily related to depreciation on capital expenditures and the amortization
of lease and leasehold costs related to our facilities. The Company also has
intellectual property in the form of a patent on its vacuum system that it began
to amortize in 2002. Depreciation and amortization totaled approximately $45,000
and $463,000 for the three months ended September 30, 2003 and 2002,
respectively. The decrease of $418,000 or 90% is attributable to the decrease in
the remaining net book values of its assets.
Interest and Other Income/Expense, net. The Company's non-operating income and
expenses are primarily attributable to interest income resulting from cash on
hand, partially offset by interest expense associated with its capital leases.
Interest income for the three months ended September 30, 2003 was approximately
$30,000, compared to $131,000 for the same period in 2002. The decrease in 2003
compared to the prior year is the result of lower cash balances and lower
interest rates.
Interest expense decreased to approximately $1,000 for the three months ended
September 30, 2003 from approximately $9,000 for the same period in 2002.
Interest expense relates to assets leased under capital leases.
Other income of approximately $318,000 for the three months ended September 30,
2003 relates to a partial reversal of a reserve on the loan balance of the
Company's former CEO, net of accrued interest.
Liquidity and Capital Resources
The Company's cash requirements depend on many factors, including its research
and development activities, continued efforts to commercialize products and
additional market development. The Company expects to make significant
expenditures to fund its working capital, develop technologies and explore
opportunities to find and develop other markets to sell its products. However,
the Company has taken significant actions over the last two years to reduce its
cash expenditures for product development, infrastructure and production
readiness. The Company has significantly reduced spending on headcount,
development work and capital expenditures. The Company has focused its activity
on market analysis in terms of size of markets, competitive aspects and
advantages that its products could provide. The Company has performed
development work on its emerging inverter products and has continued to do
preliminary design and development of potential flywheel products for markets
under consideration. The Company is not making expenditures for prototype
development or production capabilities until it has defined the specific market
to be served and in the case of all products other than power conversion
systems, that market has expressed a tangible interest in the products.
Net cash used in operating activities was approximately ($5,274,000) and
($12,167,000) for the nine months ended September 30, 2003 and 2002,
respectively. The primary component to the negative cash flow from operations is
from net losses. For the first nine months of 2003, the Company had a net loss
of approximately ($6,157,000). This included a reversal of a portion of the
reserved note to its former CEO of approximately ($323,000) net of interest
reserved of $14,577, facility related cash payments charged against
restructuring reserves of approximately ($258,000), and depreciation and
amortization of approximately $188,000. Changes in operating assets and
liabilities generated approximately $1,261,000 of cash during the first nine
months of 2003. The primary components were increases in accounts payable of
approximately $27,000 and decreases in prepaid expenses of approximately
$1,515,000. These were offset by increases in inventory of approximately
($126,000), and decreases in accrued expenses and other current liabilities of
approximately ($57,000) and accrued compensation and benefits of approximately
($99,000). For the first nine months of 2002, the Company had a net loss of
approximately ($18,738,000). This included non-cash charges of approximately
$8,060,000 primarily attributable to a loss on impairment of assets and
restructuring of $6,133,000; a reserve against a note receivable from the
Company's former CEO of $426,000; and depreciation and amortization of
approximately $1,475,000. Changes in operating assets and liabilities used
approximately ($1,488,000) of cash during the first nine months of 2002. The
primary components were a decrease in accounts payable of approximately
($697,000), a decrease in accrued compensation and benefits of approximately
($544,000) and a decrease in other accruals and current liabilities of
($489,000). These uses of cash were offset by a decrease in prepaid expense and
other current assets of approximately $278,000.
Net cash used in investing activities was approximately ($1,279,000) and
($423,000) for the nine months ended September 30, 2003 and 2002, respectively.
The principal uses of cash during the first nine months of 2003 were primarily
related to an investment in Evergreen Solar, Inc. of ($1,100,000), increases in
other assets totaling ($227,000), purchase of capital equipment of ($6,000) and
the principal sources of cash were from the sale of certain impaired machinery
and equipment of the Company of approximately $53,000. The principal uses of
cash during the first nine months of 2002 were related to purchases of machinery
and equipment totaling approximately ($423,000).
Net cash used by financing activities was approximately ($71,000) and ($251,000)
for the nine months ended September 30, 2003 and 2002, respectively. For the
first nine months of 2003, the cash used for financing activities related to
repayment of capital leases of ($187,000), offset by cash proceeds from the
exercise of employee stock options of approximately $115,000 and the issue of
stock under the employee stock purchase plan of approximately $1,000. For the
first nine months of 2002 the cash used for financing activities related to
repayment of capital leases of approximately ($264,000) offset by cash proceeds
from the employee stock purchase plan of approximately $13,000.
Based on the Company's Business Plan, which includes the cash flow benefits of
significantly reduced headcount, development spending and capital expenditures
as well as the revenues and margins associated with its emerging inverter
electronics business, the Company believes that its cash and cash equivalents
and future cash flow from operations will satisfy the Company's working capital
needs through 2004. However, this belief assumes no expenditures for prototype
development or production capabilities for flywheel products, which could
require significant amounts of cash. In the event that the Company is not able
to obtain development contracts from customers to fund prototype development,
these expenditures, if made, could significantly reduce the number of months its
cash and cash equivalents and future cash flow from operations will satisfy
working capital needs. In as much as the Company does not expect to become
profitable or cash flow positive until at least 2005, its ability to continue as
a going concern will depend on achieving its Business Plan and may require being
able to raise additional capital or obtain debt financing. If additional capital
or debt financing is required, the Company may not be able to raise additional
capital, or if it is able to do so, it may be on terms that are extremely
dilutive to its shareholders.
Certain Factors Affecting Future Operating Results
The following factors, as well as others mentioned in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 (filed March 31, 2003),
could cause actual results to differ materially from those indicated by
forward-looking statements made in this Quarterly Report on Form 10-Q:
The Value Proposition of our Inverter Power Conditioning Systems May Not Be
Recognized.
There can be no assurance that the Company will be able to compete
successfully against other suppliers of inverters. To compete successfully
the Company must establish the value proposition of its products based upon
dependability, operational benefits, and maintenance-free life, or it must
develop other strategic alternatives.
We May Not be Able to Establish a Distribution Structure to Sell Our Inverter
Power Conditioning Systems.
The Company expects to market its Power Conditioning Systems through
distributor channels. The Company does not have experience in these
distribution channels or the photovoltaic markets and may not be successful
in establishing adequate channels to market. Even if the Company is able to
establish these channels to market there can be no assurances that adequate
distribution volumes can be achieved to sustain operations.
We Acquired the Intellectual Properties for the Inverter Power Conditioning
Systems from a Company in Bankruptcy.
The Company purchased the intellectual property that its Inverter Power
Conditioning Systems are based on from AES, a company in bankruptcy, which
had sold units that are not supported by warranties. And in some cases
these units are not functioning as expected. Although the Company will
provided warranties for its products and it has made engineering changes to
provide reliable performance, there can no assurance that the Company's
sales efforts will not be adversely affected by the performance of the
unwarranted products in the field.
We Face Intense Competition from other Inverter Manufacturers.
The performance of other inverter manufacturer's products may improve to
compete more effectively with what the Company considers to be the superior
performance characteristics of its product. This could affect the Company's
ability to maintain pricing that it considers essential to provide
sufficient cash flow to continue its operations if additional financing is
not available.
The Renewable Energy Market may not Maintain the Market Growth Upon Which our
Business Plan is Based, Which Could Adversely Affected Our Financial
Performance.
While the renewable energy industry has continued to grow at solid compound
annual growth rates, there can be no assurances that these rates of growth
will continue, which could significantly reduce the revenues that the
Company could realize and therefore adversely affect its financial
performance.
The Value Proposition of our High-Energy Flywheel Products May Not Be
Recognized.
There can be no assurance that the Company will be able to compete
successfully against batteries. To compete successfully the Company must
establish the value proposition of its products based upon their
dependability, environmental benefits, and long maintenance-free life, or
it must develop other strategic alternatives.
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 Flywheel Products.
The performance of batteries has improved while battery prices have
declined due to lower 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 the Company to establish the value proposition of its
high-energy products.
The Telecommunications Industry Has Experienced a Sharp Decline, Which has
Adversely Affected Our Financial Performance.
The Company initially targeted the communications markets for the sale of
its 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 the Company's flywheel systems.
We May Not Be Able to Reduce Our Product Cost for Inverter Products or
High-Energy Flywheels Enough to Make Our Prices Competitive.
There can be no assurance that the Company will be successful in lowering
its production costs through lower cost designs, volume discounts or
improvements in manufacturing process, which may prevent market acceptance
of its products.
We Have No Experience Manufacturing Inverter Power Conditioning Systems or
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 the Company experience customer demand for its inverter or flywheel
products, it will need to develop or obtain manufacturing capacity to meet
quality, profitability and delivery schedules. The Company may need to
establish additional manufacturing facilities, expand its current
facilities or expand third-party manufacturing. The Company has no
experience in the volume manufacture of inverter or flywheel systems and
there can be no assurance that it will be able to accomplish these tasks,
if necessary, on a timely basis to meet customer demand or at all. In fact,
the Company has taken actions to conserve cash including idling its
manufacturing capabilities through headcount reduction, delaying the
development of its manufacturing process documentation and the capital
build-out. The Company may not achieve profitability if it cannot develop
or obtain efficient, low-cost manufacturing capability, processes and
suppliers that will enable the Company to meet the quality, price,
engineering, design and production standards or production volumes required
to meet its product commercialization schedule, if any, or to satisfy the
requirements of its customers or the market generally.
We Will Need Additional Financing, Which May not Be Available to Us on
Acceptable Terms or At All.
The Company will need to secure additional financing in the future to carry
out its Business Plan. While the Company believes its cash balances will
fund operations through 2004, it 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.
The Company cannot be certain that it will be able to raise additional
funds on acceptable terms or at all. If future financing is required and it
is not available or is not available on acceptable terms, the Company's
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 the Company raises additional funds by issuing additional equity
securities, 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 Removed from the SmallCap Market System of Nasdaq.
The Company has been granted an extension until December 8, 2003 to achieve
compliance with the Nasdaq listing requirement to maintain a minimum
closing bid price of one dollar for ten consecutive trading days. In the
event that the Company is unable to meet this listing requirement, and
appeals for additional time to achieve compliance are unsuccessful, the
Company's stock could no longer be eligible for quotation on the Nasdaq
SmallCap Market. Should the Company's stock lose its eligibility to be
quoted on the SmallCap Market, it will seek to have its stock quoted on the
OTCBB. While the Company knows of no reason that its stock will not be
accepted for quotation on OTCBB, it cannot guarantee that acceptance. If
the Company's stock is not accepted for listing on the OTCBB, it will be
listed on the pink sheets.
We Have Agreed with the Nasdaq to Seek Shareholder Approval for and, in the
Event Such Approval is Obtained, to Effect a Reverse Stock Split. This Split may
have One or More Adverse Effects on Shareholders and May Not Achieve Its Goal of
Allowing Us to Meet Nasdaq Requirements to Maintain the Listing of Our Stock.
The effect of a reverse split upon the market price of the Company's common
stock cannot be predicted with any certainty, and the history of similar
stock split combinations for companies in like circumstances is varied. It
is possible that the per share price of the Company's common stock after
the reverse split will not rise in proportion to the reduction in the
number of shares of its common stock outstanding resulting from the reverse
stock split, and there can be no assurance that the market price per
post-reverse split share will either exceed or remain in excess of the
$1.00 minimum bid price required by Nasdaq for a sustained period of time.
The market price of the Company's common stock is based also on other
factors that are unrelated to the number of shares outstanding, including
the Company's future performance. In addition, there can be no assurance
that the Company will not be delisted due to a failure to meet other
continued listing requirements even if the market price per post-reverse
split share of its common stock remains in excess of $1.00. The liquidity
of the Company's common stock may be reduced by the proposed reverse split
given the reduced number of shares that would be outstanding after the
reverse stock split. See "Subsequent Event" below.
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.
The Company has a limited operating history. The Company was formed in May
1997 to commercialize electrical power systems based on flywheel energy
storage. The Company is a development stage company attempting to make the
transition to the manufacturing of new products in a new and developing
sector. Unless the Company can achieve significant market acceptance of its
current or future products at volumes and with margins that allow it to
cover costs of operations, the Company may never advance beyond the
start-up phase. In light of the foregoing, it is difficult or impossible
for the Company to predict when and if the Company will achieve
profitability.
We Have Incurred Losses Since Our Inception and Anticipate Continued Losses
Through at Least 2005.
The Company has incurred net losses to common shareholders and negative
cash flows since its inception in May 1997. The Company had net losses to
common shareholders of approximately ($6,157,000) through September 30,
2003, ($20,839,000) in 2002, ($26,146,000) in 2001, ($53,279,000) in 2000
and ($6,630,000) in 1999. Since its inception in May 1997, the Company has
had net losses to common shareholders totaling ($121,075,000). The Company
expects to continue to incur net losses through at least 2005. Although the
Company is looking for additional ways to economize and reduce costs, its
efforts may prove even more expensive than anticipated. Revenue must grow
substantially if the Company is to offset these higher expenses and become
profitable. Even if the Company does achieve profitability, it may be
unable to sustain or increase profitability in the future.
We Might Fail to Develop Successful Products for the Markets in Power
Conditioning or Flywheel Systems.
The successful development of the Company's 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 its 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 the chances of achieving
profitability;
o ensuring minimal warranty expenses through design and quality control;
o ensuring quality and cost control from 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 Inverter and Flywheel 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.
The Company's business, prospects, results of operations, or financial
condition could be harmed if the Company is unable to maintain satisfactory
relationships with suppliers. To accelerate development time and reduce
capital investment, the Company relies on third-party suppliers for several
key components of its systems. The Company does not have contracts with all
of these suppliers. If these suppliers should fail to timely deliver
components that meet the Company's quality, quantity, or cost standards,
then the Company could experience production delays or cost increases and
its financial performance could be adversely affected. Because the
components with limited sources are key components that are complex,
difficult to manufacture and may require long lead times, the Company may
have difficulty finding alternative suppliers on a timely or cost effective
basis. As a result, the Company could experience shortages in supply or be
unable to be cost competitive in the markets being pursued.
We Face Intense Competition and We May Be Unable to Compete Successfully in the
Inverter or Flywheel Market.
The markets for renewable energy electronic inverters and 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 electronic inverters and flywheel energy storage technology.
The Company also competes 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 competing or
other alternative energy products for sale to the Company's 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 the Company's systems and could be brought to market more
quickly. To the extent they already have name recognition, their products
may enjoy greater initial market acceptance among potential customers.
These competitors may also be better able than the Company 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 the Company's systems obsolete. The Company
does not have any products or technologies other than its inverters or
flywheel systems under development. The Company's flywheel systems compete
with a number of alternative energy products, as well as other products
being developed by potential competitors that have potential commercial
applications, including ultra capacitors, fuel cells, advanced batteries,
and other alternative energy technologies. The Company's inverter power
conversion systems compete with products of more established inverter
companies.
Government Regulation May Impair Our Ability to Market Our Products.
Government regulation of the Company's products, whether at the federal,
state or local level, including any change in regulations, on tariffs,
product buy downs or tax rebates relating to purchase and installation of
its products, may increase the cost and price of its systems, and may have
a negative impact on the Company's revenue and profitability. The Company
cannot provide assurance that its products will not be subject to existing
or future federal and state regulations governing traditional electric
utilities and other regulated entities. The Company expects that its
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. The
Company does not know the extent to which any existing or new regulations
may impact its ability to distribute, install and service its products.
Once the Company's products reach the commercialization stage and
distributing its systems begins, federal, state or local government
entities 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.
The Company's business exposes it to potential product liability claims
that are inherent in the manufacturing, marketing and sale of
electro-mechanical products, and as such, the Company may face substantial
liability for damages resulting from the faulty design or manufacture of
products or improper use of products by end users. The Company cannot
provide assurance that its product liability insurance will provide
sufficient coverage in the event of a claim. Also, the Company cannot
predict whether it will be able to maintain such coverage on acceptable
terms, if at all, or that a product liability claim would not materially
adversely affect its business, financial condition or the price of its
common stock. In addition, negative publicity in connection with the faulty
design or manufacture of the Company's products would adversely affect its
ability to market and sell its products.
Safety Failures by Our Products or Those of Our Competitors Could Reduce Market
Demand or Acceptance for Renewable Energy Inverters or Flywheels in General.
A serious accident involving either inverters or flywheels or competitors'
similar products could be a significant deterrent to customer acceptance
and adversely affect the Company's financial performance. With any form of
energy storage, including machinery, chemicals, fuel or other means of
energy storage, there is the possibility of accident. In particular, 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, the Company's flywheels are based on a composite design so that in
the event of a failure, the Company's flywheel would shut down rather than
disintegrate. To date, the Company's testing validates this design
conclusion. Also, the Company believes 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. With inverters, the potential for
personal injury or property damage from faulty electronics exists. However,
the Company's inverters have been tested and quality standards established
to insure safe operation.
Our Financial Performance Could Be Adversely Affected by Our Need to Hire and
Retain Key Executive Officers and Skilled Technical Personnel.
Because the Company's future success depends to a large degree on the
success of its technology, the Company's competitiveness will depend
significantly on whether it can attract and retain skilled technical
personnel, especially engineers, and can retain members of its executive
team. The Company has employment agreements that include non-compete
clauses with Messrs. Capp, CEO and President; Spiezio, Vice President of
Finance, Chief Financial Officer, Treasurer and Secretary; and Lazarewicz,
Vice President and Chief Technical Officer.
In the fourth quarter of 2001, the first quarter of 2002 and in July 2002,
the Company substantially reduced its workforce. Competition for skilled
personnel is intense and, as the Company seeks to determine the right size
for its workforce, it may not be successful in attracting and retaining the
personnel or executive talent necessary to develop products and operate
profitably.
There May Be Only a Modest Number of Potential Customers for Our Products.
There may only be a limited number of potential customers for the Company's
products, in which case the Company will be subject to the risk that the
loss of or reduced purchases by any single customer could adversely affect
its 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 the Company faces when operating within the U.S.,
additional risks are present if the Company operates internationally. A
part of the Company's business strategy is to expand its customer base by
marketing, distributing and servicing products internationally through
distributors. The Company has limited experience developing and
manufacturing products to comply with the commercial and legal requirements
of international markets. The Company's ability to properly service its
products internationally will depend on third-party distributors to install
and provide service. There is no assurance that the Company will be able to
locate service providers in every region or that these providers will
effectively service its products. Also, the Company's success in those
markets will depend, in part, on its ability to secure foreign customers
and its ability to manufacture products that meet foreign regulatory and
commercial requirements. In addition, the Company's 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 the
Company is unable to successfully market, distribute or service its
products internationally, it may never experience profitability and the
Company's stock price may decline.
Any Failure to Protect Our Intellectual Property Could Seriously Impair Our
Competitive Position.
The Company cannot provide assurance that it has or will be able to
maintain a significant proprietary position on the basic technologies used
in its inverter and flywheel systems. The Company's ability to compete
effectively against alternative technologies will be affected by its
ability to protect proprietary technology, systems designs and
manufacturing processes. The Company does not know whether any of its
pending or future patent applications under which it has 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 the Company's technology or
processes, or will protect it from competitors. Even if all the Company's
patent applications are issued and are sufficiently broad, they may be
challenged or invalidated. The Company could incur substantial costs in
prosecuting or defending patent infringement suits, and such suits would
divert funds and resources that could be used in the Company's business.
The Company does not know whether it has been or will be completely
successful in safeguarding and maintaining its proprietary rights.
Further, the Company's competitors or others may independently develop or patent
technologies or processes that are substantially equivalent or superior to those
of the Company. If the Company is found to be infringing on third-party patents,
the Company does not know whether it 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 the Company's systems.
The Company relies, in part, on contractual provisions to protect trade
secrets and proprietary knowledge. These agreements may be breached, and
the Company may not have adequate remedies for any breach. The Company's
trade secrets may also be known without breach of such agreements or may be
independently developed by competitors or others. The Company's inability
to maintain the proprietary nature of its technology and processes could
allow competitors or others to limit or eliminate any competitive
advantages the Company may have, thereby harming its 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 the Company prior to its initial public offering own
approximately 45.5% of its outstanding stock as of September 30, 2003. If a
sufficient number of these stockholders were to vote together as a group,
they would have the ability to control the Company's 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 the 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 the Company's 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 the Company, or its competitors, patent or
proprietary rights developments, energy blackouts 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 the Company's
common stock, which could affect its ability to attract additional capital
to fund 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, the Company's inability to sell products to date and the asset
impairments it has recognized, the Company's shareholders may suffer
substantial dilution. The dilutive effect may increase substantially if the
Company's 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 Value Through Strategic Alliances or Return on Investment Which do
Not Create Gains and Therefore Reduce Shareholder Value.
The Company may make investments in other energy companies in its sector to
gain strategic alliances, channels to market or appreciation in stock
value. These investments may not increase shareholder value. Given the
volatility of share prices for companies in this 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 the Company's certificate of incorporation and by-laws and in
the Delaware corporate law, and the shareholder rights plan 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 the Company's 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 the Company's annual
stockholder meeting in 2001, it 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, the Company issued rights as a dividend on
common stock on October 7, 2002 each of which entitles the holder to
purchase 1/100th of a share of 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 the Company's outstanding common stock, or in the event
of an acquisition 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,
the Company's 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 the Company's 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. 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 the Company's business, financial condition and
operating results.
Subsequent Event
On March 13, 2002, while the Company's common stock was quoted on the Nasdaq
National Market, Nasdaq notified the Company that it had failed to maintain a
closing bid price of at least $1.00 per share for 30 consecutive trading days.
Pursuant to the Nasdaq's rules, the Company was given a 90-day period, through
June 11, 2002, to satisfy that requirement. On July 10, 2002, the Company
voluntarily transferred the quotation of its common stock to the Nasdaq SmallCap
Market. Pursuant to Nasdaq's rules, the Company was then afforded the period
available to SmallCap issuers to regain compliance with the bid price
requirement, which was through September 9, 2002. On September 10, 2002, the
Company was notified that, although it failed to satisfy the bid price
requirement within the specified time period, the Company was eligible for a
second period, which was through March 10, 2003, as contemplated by the Nasdaq's
rules. Due to changes to Nasdaq's rules, the company was then given another
period, through June 6, 2003, to satisfy the bid price requirement. On June 6,
2003, however, the Company had not satisfied that requirement and it was not
eligible for any additional compliance periods. Accordingly, Nasdaq informed the
Company that its common stock was subject to removal from the SmallCap Market.
The Company requested a hearing before a Nasdaq Listing Qualifications Panel on
this issue on June 18, 2003, which stayed the removal. The Panel's decision,
delivered on August 5, 2003, noted that Nasdaq had pending before the Securities
and Exchange Commission a proposal to change its minimum bid price rules, and
that if such proposals were then in effect the Company would have had additional
compliance periods. Accordingly, the Panel granted the Company a 60-day
extension (until October 6, 2003) to allow for further developments in the SEC
rule-making process. On October 6, 2003, the Company still had not satisfied the
minimum bid price requirement. On October 10, 2003 Nasdaq notified the Company
that because it satisfied all the requirements, other than minimum bid price,
for initially having its common stock quoted on the SmallCap Market, it would,
if the Nasdaq's proposal pending before the SEC were then in effect, have
qualified for a further compliance period until March 13, 2004, the second
anniversary of its initial failure to meet the minimum bid price requirement.
Accordingly, Nasdaq extended the period the Company had to meet the minimum bid
price until December 8, 2003 provided the Company committed to seek shareholder
approval for a reverse stock split to address the bid price deficiency on or
before March 13, 2004 and to thereafter promptly effect the split. On October
10, 2003, the Company made this commitment to Nasdaq.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's cash equivalents and investments, all of which have maturities of
less than one year, may expose the Company to interest rate risk. At September
30, 2003, the Company had approximately $60,000 of cash equivalents that were
held in non-interest bearing accounts. Also at September 30, 2003, the Company
had approximately $738,000 of cash equivalents that were held in interest
bearing checking accounts and $10,799,000 invested in interest-bearing money
market accounts. A 10% change in interest rates would change the investment
income realized on an annual basis by approximately $12,000, which the Company
does not believe is material.
Item 4. 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 the end of the period
covered by this quarterly report. Based upon that evaluation, they have
concluded that at that time the Company had in place controls and other
procedures that were 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 that time,
there have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls.
PART II
Item 1. Legal Proceedings
On June 30, 2003, Vlado Ostovic, an independent engineer who resides in Germany,
commenced a lawsuit against the Company in Middlesex Superior Court in
Cambridge, Massachusetts. Mr. Ostovic alleged that the Company owed him $36,700
for engineering consulting services performed under a written agreement with the
Company. Mr. Ostovic's Complaint was served on the Company on or about July 16,
2003. The Company offered to pay Mr. Ostovic for hours worked pursuant to the
contract rate, which amounted to approximately $18,000. Mr. Ostovic was not
willing to accept this proposal. Through negotiations, Mr. Ostovic and the
Company agreed to settle this matter for $22,440.
Item 2. Changes in Securities
On November 16, 2000, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (File No. 333-43386) effective. In
the Company's initial public offering during the fourth quarter of 2000, it sold
9,200,000 shares of its common stock, inclusive of the underwriters' over
allotment, at an initial public offering price of $6.00 per share. The Company
received net proceeds from its initial public offering of approximately $49.3
million, reflecting gross proceeds of $55.2 million net of underwriter
commissions of approximately $3.9 million and other offering costs payable to
persons, other than directors or officers, of approximately $2.0 million.
From November 16, 2000 to September 30, 2003, the Company spent approximately
$9.9 million for inventory and materials used in research and development and
$7.2 million for property and equipment, including the build-out of its facility
at 234 Ballardvale Street in Wilmington, MA. In addition, the Company spent
approximately $1.2 million to pay dividends on our preferred stock that accrued
through the date of its initial public offering. The Company has spent
approximately $37.3 million for other working capital needs. In addition to the
above, the Company advanced funds totaling approximately $785,000 to three
officers of the Company. Through September 30, 2003, the Company has collected
approximately $378,000 in payments on these advances and two of the three loans
have been paid in full. The remaining loan is to Mr. William Stanton, who serves
on the board of directors for the Company and was its former CEO and president.
The outstanding balance on Mr. Stanton's loan at September 30, 2003 was
approximately $441,000. 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 approximately $426,000 to reserve the remaining
balance of this advance. In August 2003, Mr. Stanton sold all of the stock that
secured the loan. After September 30, 2003, he reduced the loan balance by
$323,000. The remaining loan balance of $118,000 has not been forgiven and
remains outstanding, even though all stock held as security under the loan
agreement has been sold. In September 2003, the reserve balance was reduced to
$118,000. This activity is included in other expenses in the accompanying
consolidated statement of operations.
Other than as disclosed above, none of these amounts were direct or indirect
payments to directors or officers of the issuer or their associates or to
persons owning 10% or more of the Company's common stock or to any of its
affiliates.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer required by 13a-14(a)
31.2 Certification of Chief Financial Officer required by 13a-14(a)
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K
None
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
Date: November 14, 2003 By: /s/ F. William Capp
-------------------
F. William Capp
President and Chief Executive Officer
November 14, 2003 By: /s/ James M. Spiezio
-------------------
James M. Spiezio
Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary, Principal Financial Officer
Exhibit 31.1
CERTIFICATION
I, F. William Capp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Beacon Power
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of
September 30, 2003 based upon such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
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 and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 14, 2003
/s/ F. William Capp
-------------------
F. William Capp
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, James M. Spiezio, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Beacon Power
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of
September 30, 2003 based upon such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
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 and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 14, 2003
/s/ James M. Spiezio
--------------------
James M. Spiezio
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report of Beacon Power Corporation
(the "Company") on Form 10-Q for the period ended September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, F. William Capp, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and (2) The information contained in the
Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
November 14, 2003
By /s/F. William Capp
------------------
F. William Capp
Chief Executive Officer
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report of Beacon Power Corporation
(the "Company") on Form 10-Q for the period ended September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, James M. Spiezio, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and (2) The information contained in the
Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
November 14, 2003
By: /s/James M. Spiezio
-------------------
James M. Spiezio
Chief Financial Officer