UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACTOF 1934
For the fiscal year ended December 31, 2003
Commission files number 000-31973
Beacon Power Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-3372365
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
234 Ballardvale Street
Wilmington, Massachusetts 01887-1032
(Address of principal executive offices) (Zip code)
(978) 694-9121 Phone
(978) 694-9127 Fax
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, par value $.01 per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K __X___
Indicate by check mark whether the registrant is an accelerated filer (as
defined by rule 12b-2 of the Act). ___ Yes _X_ No
As of June 28, 2003 the market value of the voting stock of the registrant
held by non-affiliates of the registrant was $7,450,147.
The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of March 23, 2004 was 43,005,526.
DOCUMENTS INCORPORATED BY REFERENCE
The Exhibit Index (Item No. 15) located on pages 49 and 50 incorporates
several documents by reference as indicated therein.
Table of Contents
Page
PART I
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 4A. Executive Officers of the Company 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 27
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 50
Item 9A. Controls and Procedures 50
PART III
Item 10. Directors and Executive Officers 51
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners
And Management 58
Item 13. Certain Relationships and Related Transactions 60
Item 14. Principal Accounting Fees and Services 61
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 62
Signatures 65
Note Regarding Forward Looking Statements:
This Annual Report on Form 10-K may include statements that are not historical
facts and are considered "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These "forward-looking"
statements reflect Beacon Power Corporation's view about future events and
financial performance, including among other things, its expected future
revenues, costs of operations and capital expenditures, estimates of the
potential markets for its products, the rate of growth in those markets and the
competitive advantage that the Company's products has that will result in
gaining market share. Such statements made by the Company fall within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All such forward-looking
statements are necessarily only estimates of future results and the actual
results achieved by the Company may differ materially from these estimates due
to a number of factors as discussed in the section entitled "Item 7.
Management's Discussion and Analysis of Financial Conditions" and "Results of
Operations - Risk Factors " of this Form 10-K.
PART I
Item 1. Business
Overview
Beacon Power Corporation is a development stage company that was
incorporated on May 8, 1997. The Corporation and its subsidiary (collectively
"Beacon" or "the Company") design, develop, configure and offer 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
applications and potential applications. The Company has the following products,
which are in varying stages of development:
o A high-power, flywheel-based system, that continuously regulates the
frequency of electricity on the power grid, which the Company refers to as
its Smart Energy(TM) Matrix, that could be used by independent system
operators and regional transmission operators to regulate electrical power;
o The Smart Energy Matrix could also continuously regulate the frequency of
electricity produced by a distributed generation facility and compensate
for temporary differences between the demand for electricity and the amount
being produced by that facility;
o A high-power, flywheel-based system that could provide electricity until a
longer-term backup power source comes on-line, which the Company refers to
as its Smart Power(TM) 250;
o An electronic system that converts direct current electricity produced by
photovoltaic panels into alternating current electricity for residential
and commercial use, which the Company refers to as its Smart Power M5
inverter system; and
o A high-energy flywheel-based system that stores electricity for
telecommunications, cable systems, computer networks, and Internet markets
applications, the Company refers to this product as its Smart Energy
system.
From the Company's inception through December 31, 2003 it has incurred
losses of approximately $123.5 million. The Company does not expect to become
profitable or obtain positive cash flow before 2006. The Company must raise
additional equity to execute its business plan. Based on the Company's rate of
expenditure of cash and the additional expenditures expected in support of its
business plan, the Company will need to obtain an equity investment by early
2005 to fund:
o continuing as a going concern;
o ongoing research and development of inverter products;
o manufacturing operations;
o working capital requirements; and
o new business development,
In the event that the Company elects to begin full scale development of its
Smart Energy Matrix or Smart Power 250 flywheel systems, the amount of equity
required would increase substantially.
The Company's losses and uses of cash may fluctuate significantly from
quarter to quarter as sales (if any), costs of development, inventories and
receivables fluctuate. These fluctuations in cash requirements could put
additional pressure on the Company's cash position. There can be no assurance
that the Company will be able to raise the required capital or that sufficient
funds will be available to it on terms that it deems acceptable, if they are
available at all.
The Company continues to be accounted for as a development stage company
under Statement of Financial Accounting Standards No. 7 "Accounting and
Reporting by Development Stage Enterprises." Even though the Company had shipped
31 of its Smart Power M5 inverter systems by December 31, 2003, its operations
have not yet reached a level that would qualify it to emerge from the
development stage. The Company is selling its Smart Power M5 inverter system to
distributors who in turn sell them to installers who then make sales to
residential homeowners or commercial customers.
Products and Markets
Smart Energy Matrix
The Company has identified an application for its Smart Energy Matrix in a
well-established market with attractive pricing characteristics. This market is
frequency regulation for the power grid. In order to maintain a constant
frequency alternating current, the power grid must constantly balance the supply
of power generated with the varying demand for it. This balance is maintained
today by constant, small adjustments in the output of some of the generators
operating on the grid. Not all generators can be successfully operated with
constantly varying output, but all generators that are able to operate this way
incur higher operating costs due to increased fuel consumption and maintenance.
Using the Company's Smart Energy Matrix, frequency regulation can, for the first
time, be provided separately with higher performance and lower operating costs.
The Smart Energy Matrix is the first product that would specifically address
this application.
The requirements of the frequency regulation application match perfectly
with the characteristics of the Smart Energy Matrix, which draws excess energy
when generated power exceeds demand and delivers it when demand exceeds supply.
Unlike generator-based frequency regulation, no fuel is consumed, and no
emissions are generated. The Smart Energy Matrix's characteristics should
simplify and accelerate the process for establishing new sites and obtaining
required permits. The Smart Energy Matrix can also be located nearly anywhere
advantageous to the power grid, even within distribution systems.
From an environmental perspective, the Company's Smart Energy Matrix will
reduce fuel consumption of generators because they will be able to operate at
optimum efficiency instead of operating at less than optimum efficiency in order
to provide regulation. In addition, during peak output requirements, widespread
use of the Company's Smart Energy Matrix to provide frequency regulation would
avoid the need to utilize the most inefficient generators. Both of these changes
in the way generators are used would reduce carbon dioxide and other emissions.
Separate from the frequency regulation of the power grid market identified
above, the Company has identified an additional application for its Smart Energy
Matrix. That application is providing a high-power, flywheel-based system that
continuously regulates the frequency of electricity produced by a distributed
generation facility and compensates for temporary differences between the demand
for electricity and the amount being produced. A distributed generation facility
is any electrical power source other than the power grid, including advanced
generators such as fuel cells, natural gas engines, wind turbines, photovoltaic
arrays and microturbines which usually supply local power to facilities such as
hospitals or manufacturing plants. The Company's Smart Energy Matrix can be used
to regulate the frequency of the distributed generation facility's power in the
same way it regulates the frequency of the power grid as described above. The
Smart Energy Matrix, because of its fast response time, can also compensate for
the generators slow response characteristics and therefore supply stability to
these micro-grid facilities. In distributed generation, demand fluctuations are
a much higher percentage of power production than experienced in the power grid,
which affects the distributed generator's ability to match supply and demand.
The Smart Energy Matrix will be designed to store enough energy to deliver
one megawatt for 15 minutes and can be ganged to deliver ten or more megawatt
systems. Each Smart Energy Matrix will consist of a container housing ten
flywheels and the necessary electronics to connect to the grid. The Smart Energy
Matrix because of its container design will be able to be deployed in a few days
and it can be easily relocated.
Although the Company has finished the preliminary designs for the Smart
Energy Matrix, it will not begin significant design or development until the
market has expressed a more tangible interest in this product and the Company
has sufficient funds to complete development. Once begun, the development cycle
for completion of this product is expected to be 18 to 24 months, and achieving
significant volume production capability will take an additional six to 12
months. Therefore, the Company cannot receive revenues from this product for
approximately two to three years after development has commenced.
Smart Power 250
For uninterrupted power supply applications the Company has available it's
Smart Power 250 for short (10 to 60 seconds) duration. When grid power is
interrupted, the Company's Smart Power 250 provides power for a short time while
a diesel generator can be activated. This application would typically be for
commercial and industrial facilities. The Company does not produce the short
duration Smart Power 250, but has domestic distribution agreements in place for
the flywheel and the required electronics with their manufacturers. The Company
does not believe that the market for this product is significant. The Company
does not have any short duration Smart Power 250 units in inventory and has not
placed any purchase orders for any of the product's components. The Company has
designs based on its technology that could create a long duration Smart Power
250 that would have output power of up to 500kW or durations of ten to 15
minutes. The ability to provide run times of ten to 15 minutes would allow the
use of alternate long-term power sources such as gas turbines, fuel cells and
natural gas generators which require the longer ride through capabilities. The
Company believes that as these alternative long-term power sources become
commercialized, its product's long duration capabilities make it an ideal
component of these power sources.
Smart Power M5
The Smart Power M5 inverter system for the photovoltaic energy market
converts the direct current generated by solar cells from sunlight into
alternating current required by residential and commercial users for operating
electrical devices and reducing the amount of purchased power when it is
connected to a power grid. Solar cells contain semi-conducting material that
converts sunlight into direct current electricity. Photovoltaic modular panels
typically contain approximately 40 solar cells. The Company's Smart Energy M5
inverter system has the capacity to convert direct current electricity into up
to 5,000 watts of alternating current.
The Company began delivering its Underwriters Laboratory approved Smart
Power M5 inverter systems in December 2003. The Smart Power M5 has been designed
for use in North American grid-connected solar power applications. The Company
intends to develop on and off grid inverters for use throughout the world. The
Company also plans to develop inverters for use in low power wind turbine
applications.
Smart Energy
The Company has available for sale its Smart Energy products, which deliver
a low level of power for a long period of time (typically measured in hours).
These products include the 2kWh and 6kWh Smart Energy systems, which have
demonstrated quality performance and reliability at numerous sites. The Smart
Energy products are tailored to the telecommunications, cable systems, computer
networks, and Internet markets. The Company believes that its Smart Energy
products offer life cycle cost advantages and significant performance
improvements over conventional, battery-based back-up power sources. At this
time, does not have orders for its Smart Energy products or any inventory of
finished products and does not have purchase orders in place with vendors for
components. In the event that the Company receives significant customer orders
for these products, it will need to place orders for components with vendors and
hire and train manufacturing personnel to assemble, inspect and assist in the
installation of deliverable units.
The Company's Smart Energy systems have approximately 350,000 hours of
operation in customer sites without failure of their mechanical system, which
the Company believes verifies the reliability of their technologies. The Company
has successfully maintained power with no degradation of service in planned and
unplanned losses of utility power at several telecom and cable sites. Also, the
Company's systems can be adapted to deliver the amount of power and back-up time
required to meet specific needs of customers by integrating multiple flywheel
systems in parallel. This has been successfully demonstrated at several sites.
The Company believes that its Smart Energy technology is an excellent base
to begin development of a higher energy 25kWh flywheel system for renewable
applications when the Company determines that the market interest is sufficient
to justify that product's development.
Approvals and Certifications
The Company has obtained Underwriters Laboratory approval for its Smart
Power M5 inverter system. The California Energy Commission and New York's Public
Service Commission for on-grid applications have also approved this product.
The Company has obtained Underwriters Laboratory approval for its existing
2kWh and 6kWh Smart Energy products. The Company has also designed and certified
its Smart Energy systems in accordance with Telcordia standards, which are the
baseline for performance and safety standards established by the
telecommunications industry. The Company's Smart Energy products are the only
flywheel products that have passed a Zone 4 earthquake test while operating,
making them suitable for use anywhere in the United States. The Company's Smart
Energy flywheel systems have also been successfully tested for concurrence with
the Institute of Electrical and Electronics Engineers (IEEE) 587 standard, which
is the required standard for all Uninterruptible Power Supply systems.
The Company's Technology
Flywheel-based products
Since the Company's formation, it has been developing flywheel energy
storage products to offer superior reliability and performance at competitive
costs. The Company's composite flywheel is a rotating wheel on hybrid, magnetic
bearings that operates in a near-frictionless vacuum environment. When the rim
spins, it stores kinetic energy. The flywheel is powered up to its operational
speed, like a motor, using electricity from an external power source. The
flywheel is able to spin for extended periods with great efficiency, because
friction and drag are virtually eliminated by employing magnetic bearings and a
vacuum in the container. Because it has very low friction, little power is
required to maintain the flywheel's operating speed. When electrical power is
needed, the spinning flywheel drives a generator and its bi-directional inverter
converts the kinetic energy into electrical energy.
Steel flywheels have been used since the industrial revolution in
applications such as piston engines to store energy during the power stroke for
release during the compression stroke. These applications are limited by the
revolutions per minute at which steel flywheels are able to operate and by the
limited density of storage of energy by volume of steel. The products the
Company offers employ new enabling materials and products such as high-strength
fiber, efficient electric drives, and low-loss, long-life bearings to create new
generations of flywheel products. The Company's composite flywheels are
fabricated from high-strength, lightweight fiber composites, such as graphite
and fiberglass combined with resins, which allow the flywheel to rotate at high
speeds and store large amounts of energy relative to similar size and weight
flywheels made from metals. For example, a 600-pound steel flywheel running at
8,000 revolutions per minute will store approximately 900 watt-hours of energy
and can deliver only 850 watt-hours of energy. In contrast, the Company's
500-pound 6kWh composite flywheel running at 22,500 RPM stores 7,200 watt-hours
of energy and delivers 6,000 watt-hours of energy. On a per-pound basis, the
Company's composite flywheel technology is significantly more efficient than
steel flywheels.
The Company's proprietary technology enables the design of maintenance-free
flywheel products, in that its products employ an internal rather than external
vacuum system and its bearing systems have been designed and developed to have
no scheduled replacement or maintenance. Competing flywheel products rely on
bearings and external vacuum systems that require periodic maintenance and
replacement. The Company's Smart Energy flywheel systems have dramatically
longer discharge times than any other flywheel energy storage system; this is
possible because the Company's technologies result in higher amounts of stored
energy and minimal energy losses during those products' operation.
Inverter Products
The Company began developing its Smart Power M5 inverter system for
photovoltaic applications during 2003. This product and additional solar
products being developed are based on intellectual property the Company acquired
and has significantly enhanced in the areas of performance, ease of
installation, software integration, and reliability.
The Company's Smart Power M5 inverter system is designed for use in
grid-connected solar applications. When AC power is interrupted, the Smart Power
M5 inverter system immediately converts to an independent battery back-up mode,
continuing to provide electricity to critical loads. This product is the most
compact, easy-to-install and efficient product available for solar on-grid
applications. The Company plans to expand its product family to include systems
for use in solar off-grid applications as well as high voltage on-grid and
off-grid domestic applications. The Company plans to develop international
configurations for those applications it believes it can successfully market.
The Company also plans to introduce its technologies into wind turbine
applications in the future.
Research and Development
The Company believes that its research and development efforts are
essential to its ability to successfully design and deliver products to targeted
customers, as well as to modify and improve its existing products to reflect the
evolution of markets and customer needs. The Company has worked closely with
potential customers to define product features and performance requirements to
address specific needs for both flywheel based solutions and renewable energy
applications. Research and development expenses, including engineering expenses,
were approximately $3,550,000 in 2003, $7,130,000 in 2002, and $17,628,000 in
2001. The Company expects research and development expenses in 2004 to be
somewhat higher than those in 2003 due primarily to the costs of development for
several new inverter products. If the Company is able to validate market
opportunities for its flywheel based products, it may choose to make significant
levels of research and development expenditures in order to pursue those
markets. At December 31, 2003, the Company employed 18 engineers and technicians
who were engaged in research and development. At December 31, 2002, the Company
had 23 engineers and technicians.
Manufacturing
The Company assembles and tests Smart Power M5 inverters at its facility.
The Company has design drawings and process specifications to ensure the quality
of components manufactured by its suppliers. The Smart Power M5 inverter system
is a combination of off-the-shelf components and components produced to
specifications developed by the Company. The Company believes it has adequate
vendor sources for all the components for the Smart Power M5 inverter systems to
meet customer demand.
The Company's facility continues to be underutilized as a result of
reductions in development work and a lack of customer orders for its flywheel
systems. The Company maintains a limited manufacturing staff, many of whom are
skilled in Six-Sigma cost and quality control techniques. If customers begin to
order flywheel systems, the Company expects to establish assembly and test
capabilities using outside suppliers to provide components to meet product
demand. The suppliers of the Company's mechanical flywheel and the control
electronics for short duration Uninterruptible Power Supply applications are
both single-source suppliers, and the loss or interruption of supply from either
of these suppliers would adversely affect the Company's ability to market and
deliver these products.
Sales and Marketing
The Company's sales and marketing efforts for its flywheel-based product
have been focused on regional transmission operators, in particular, PJM
Interconnect system, which is the nation's first federally regulated regional
transmission operator. PJM has worked closely with the Company to evaluate the
performance characteristics of its product. PJM has informed the Company that it
believes the Company's Smart Energy Matrix flywheel system could be added to
PJM's power grid, and bid into the frequency regulation market. The Company is
presenting its Smart Energy Matrix product to other regional transmission
operators as well as power utilities in an effort to establish tangible
interest.
The Company's sales and marketing efforts in renewable energy are focused
on the sale of its Smart Power M5 inverter systems for North American solar
power applications. For the renewable energy market the Company is marketing its
Smart Power M5 inverter system to distributors in North America who provide
products to residential and commercial installers. The Company is attempting to
build market interest through advertising, trade press articles, participating
in industry conferences, technical presentations to installers, trade shows and
homeowner shows.
Marketing efforts for the Company's Smart Energy and Smart Power 250
products have been limited to providing support for its field trial systems and
identifying key prospects and working with those companies to demonstrate the
Company's product advantages, which include, life cycle cost benefits and high
reliability. The Company has installed on-site, working demonstration units of
both its Smart Energy products at various major telecommunications and cable
companies. While sales efforts for these products have been limited, the Company
plans to continue to perform market analysis to identify opportunities for
installations that require the unique characteristics of these products and to
emphasize their value proposition and greater technical benefits. Potential
customers for its Smart Power 250 product include businesses with heightened
needs for 100% reliability, such as hospitals, data centers, call centers and
other critical-use facilities. The Company believes that its products will also
be attractive to customers with power sources that are very expensive to replace
or maintain due to their location or other factors, or power sources located
where there are high or low prevailing temperatures or dramatic changes in
temperature. And from an environmental perspective, the Company believes its
flywheel products, which contain no hazardous chemicals, are more attractive to
customers when compared to lead-acid batteries.
Backlog
At December 31, 2003, the Company had shipped 31 Smart Power M5 inverter
systems to its distributors but did not recognize revenue. The Company did not
have any unfilled orders at year-end. Revenue will be recognized on these
products as they are sold by the distributors.
Customer Service
The Company intends to provide maintenance and support for its products by
utilizing its own customer service personnel as well as support as needed from
its engineering organization. In the future, the Company may elect to contract
all or part of the customer service activities to outside sources as it deems it
effective from both a customer satisfaction and Company cost perspective. The
Company's Smart Power M5 inverter system is sold with a five-year warranty.
Competition
The Company believes its Smart Energy Matrix will offer superior
performance and cost benefits over generators, which now perform the task that
will be performed by the Smart Energy Matrix. The Company believes that, given
the demands of the frequency regulation market, batteries, metal flywheel and
other alternative energy technologies, such as fuel cells and ultra capacitors,
will not compete with the Smart Energy Matrix.
There are several products that compete with the Smart Power M5 inverter
system sold by companies with greater experience in the solar power conversion
market. This market is intensely competitive, with the principal bases for
competition being system reliability, quality, brand recognition, and price. The
Company believes that it has a competitive advantage due to its product's
reliability, ability to continue to provide power when the grid fails, improved
design and efficiency benefits compared to other systems providing energy
storage.
Substantially all of the high-energy and uninterrupted power supply markets
that the Company's Smart Energy and Smart Power flywheel systems compete in are
dominated by battery-based products, rather than battery-free technologies.
These markets are intensely competitive, with the principal bases for
competition being system first cost, brand recognition, quality, and
reliability.
Additional alternative energy products that are potentially competitive
include ultra capacitors, fuel cells with integrated hydrogen generation and
storage, and super-conducting magnetic energy storage products. There are other
companies selling diesel generators and micro turbines that are competitors in
the broadest sense, although the Company believes that in most cases, its
flywheel systems will be complementary to that equipment.
The Company's Smart Energy Matrix system provides back-up power and
competes on the basis of life-cycle cost and value to the customer. Although the
Company's product offers attractive performance to cost benefit when viewed on a
life-cycle cost basis, customers are more focused on first cost, which makes it
very difficult for the Company to effectively compete. The Company plans to
continue to emphasize the value proposition of its products such as increased
dependability, environmental benefits, and their long maintenance-free life.
The Company believes that its high-energy flywheel systems provide
significant advantages to potential customers due to the numerous problems
associated with lead-acid batteries, including:
o Reliability. Batteries are not only prone to multiple problems leading to
battery failure, but when they are repeatedly used at close to their
maximum energy capacity; their output capacity can rapidly decrease,
reducing the batteries' effectiveness over time. Also, the amount of energy
available in battery systems may not readily be monitored and, therefore,
the amount of remaining energy cannot be assured.
o Life-Cycle Cost. The use of batteries has both direct and indirect costs.
In addition to bearing the initial purchase costs of the batteries, a user
must allocate significant space to large battery arrays (space that could
otherwise be allocated to revenue-generating equipment), must inspect and
test them on site every few months (as their power output degrades over
time), must cool them with costly air conditioning (if the user wishes to
avoid the rapid degradation in performance and life that results with
temperature variations), and must replace them every two to six years
(depending on type of use, environment and other factors).
o Life. In applications where discharges consume all or most of the battery's
available reserve, or where the batteries are used in facilities that are
not air-conditioned, the life of batteries is significantly reduced.
o Environmental. Batteries contain toxic materials such as lead and sulfuric
acid. They are considered hazardous waste and their disposal entails
rigorous environmental regulations. Facilities with spent batteries must
make arrangements with hazardous waste handlers for disposal. Both the
costs associated with disposal and the complexity of compliance for proper
handling, permitting and regulatory requirements continue to increase and
may accelerate sharply as pressure increases to curb such hazardous wastes.
In addition to the Company's products, there are other companies working to
offer lead free chemical batteries such as nickel metal hydride and lithium ion,
as well as alternative technologies such as super capacitors and super
conductive magnetic energy storage.
Intellectual Property
The Company's success depends upon its ability to develop and maintain the
proprietary aspects of its technologies and to operate without infringing on the
proprietary rights of others. To some extent, the Company's success also depends
upon the same abilities on the part of its suppliers.
The intellectual property rights of the Company's flywheel-based products
are based upon a combination of SatCon Technology Corporation's flywheel
technologies and patents that the Company is licensed to use, in perpetuity, and
patents that the Company holds or which are pending. The Company was issued by
SatCon a perpetual, exclusive, royalty-free, worldwide right and license to use
its flywheel technologies and patents for stationary terrestrial flywheel
applications. Those rights include eleven issued U.S. patents and eleven U.S.
and foreign patent applications that expire on various dates between 2012 and
2021. This license covers SatCon's technologies and patents and all improvements
made by SatCon through November 16, 2000, the date of Beacon's initial public
offering. The Company is not entitled to any improvements to the flywheel
technology that SatCon develops subsequent to that date. The Company expects to
develop additional intellectual properties and trade secrets as it continues
developing additional Smart Energy and Smart Power flywheel systems. The Company
owns all technology improvements it has developed that are based on the
technology licensed from SatCon. The Company also holds patents on its flywheel
vacuum system, heat pipe cooling system and output paralleling algorithm and has
25 pending U.S. and foreign patent applications, and two other applications
being prepared for filing.
The Company relies on a combination of patent, trademark, trade secret and
copyright law and contract restrictions to protect the proprietary aspects of
its technology. The Company seeks to limit disclosure of its intellectual
property by requiring employees, consultants, and any third parties with access
to its proprietary information to execute confidentiality agreements and by
restricting access to that information. The Company's patent and trade secret
rights are of material importance to its current and future prospects. The
Company is actively pursuing both national and foreign patent protection.
The short duration Smart Power 250 is based on intellectual property owned
or controlled by the manufacturers of the two main elements of that product.
The intellectual property rights for the Company's Smart Power M5 inverter
systems are based on the intellectual property assets of Advanced Energy
Systems, Inc., that the Company purchased in March 2003. These assets are
wholly-owned by the Company and include anti-islanding software, which ensures
safe grid utility interconnection and reliable transition to stand-by power when
the grid fails, as well as drawings, source code, production know-how, and all
associated documentation. The Company has made substantial improvements to these
assets.
Government Regulation
The Company does not believe that it will be subject to existing federal
and state regulatory commissions governing electric utilities and other
regulated entities. The Company believes 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 intends to encourage the
standardization of industry codes to avoid having to comply with differing
regulations on a state-by-state or locality-by-locality basis. The Company has
obtained FCC approval of its Smart Energy 250 flywheel systems. The Company
plans to pursue the appropriate approvals for all emerging products.
Employees
At December 31, 2003, the Company's headcount was 24 full-time employees
and five independent contractors, of which approximately 18 were engineers and
technicians involved in research and development and five were in sales,
marketing and customer service. The remaining six people were involved in
administrative tasks. None of the Company's employees are represented by a union
and the Company considers its relations with employees to be satisfactory.
Item 2. Properties
The Company's principal executive offices, laboratory and manufacturing
facilities are located at a single location in Wilmington, Massachusetts. This
51,650 square foot facility operates under a lease that expires on September 30,
2007.
Item 3. Legal Proceedings
The Company is not involved in any legal proceedings; however, it may from
time to time be involved in legal proceedings in the ordinary course of its
business.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters that were submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the fourth quarter of
the year covered by this report.
Item 4A. Executive Officers of the Company
The Company's executive officers, positions and their ages as of March 23,
2004, are as follows:
Name Age Position
F. William Capp 55 President and Chief Executive Officer,
Director
Matthew L. Lazarewicz 53 Vice President and Chief Technical
Officer
James M. Spiezio 56 Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary
F. William Capp
Mr. Capp has served as the Company's President and Chief Executive Officer
since December 1, 2001 when he joined Beacon Power. Prior to joining Beacon
Power, Mr. Capp was the President of the Telecommunications group of Bracknell
Corporation, a company that provided infrastructure for the telecommunications
industry with annual sales of $350 million and 30 regional offices in the US and
Canada. From 1997-2000, Mr. Capp served as the President of a division of York
International where he increased aftermarket sales by over 50% from 1997 to
1999, which were the two most profitable years in that division's history. From
1978-1997, Mr. Capp held numerous positions at Ingersoll Rand. From 1992-1997,
he served as Vice President and General Manager of the Compressor Division where
he was responsible for an operation with over 700 employees. He managed a
complex supply chain including over $100 million in purchases from a variety of
companies. From 1989-1992, Mr. Capp was the Vice President of Technology for the
Torrington Company, which is a $900 million manufacturer of bearings and
precision components to the automotive and other industries worldwide. Mr. Capp
assisted in the development of new products, new manufacturing technologies and
project management. He also held numerous other engineering positions within
Ingersoll Rand. Prior to joining Ingersoll Rand in 1978, he worked for Ford's
Truck Division in such positions as project engineering, supervisor, and product
planning. Mr. Capp received his Bachelor of Science in Aeronautical Engineering
from Purdue University, a Master of Business Administration and a Master Degree
in Mechanical Engineering from the University of Michigan. He also has his Black
Belt Training Program from the American Society for Quality.
Matthew L. Lazarewicz
Mr. Lazarewicz has served as the Company's Vice President of Engineering
since February 1999, and was named Chief Technical Officer in September of 2001.
Prior to joining the Company, Mr. Lazarewicz worked for General Electric Company
in various capacities. He started his 25-year career with the General Electric
Company in the gas turbine division as a design engineer. After a transfer to GE
Aircraft Engines, he progressed through a variety of positions in design,
manufacturing, quality, marketing, and product support in both military and
commercial applications. Most recently he served as a manager of program
independent analysis from 1996 to 1999, and he was the mechanical design manager
for the F414 engine used in the Navy front line F/A18 fighter from 1991 to 1996.
This included the development through production phases. He was recognized as
the GE Aircraft Engines "Engineer of the Year" and received the Department of
Defense "Excellence in Acquisition" Award for his leadership of this project.
Mr. Lazarewicz is a Registered Professional Engineer in the Commonwealth of
Massachusetts and received both Bachelor's and Master's Degrees in Mechanical
Engineering from the Massachusetts Institute of Technology. Mr. Lazarewicz also
completed his Master's Degree in Management at the Massachusetts Institute of
Technology Sloan School of Management.
James M. Spiezio
Mr. Spiezio joined the Company in May 2000. He has served as Vice President
of Finance, Chief Financial Officer and Treasurer since July 2000, Secretary
since March 2001, and the company's Corporate Controller from May 2000 to July
2000. He worked as a financial consultant from November 1999 to May 2000. He has
over twenty-five years of diversified manufacturing and financial management
experience. Prior to acting as an independent financial consultant, Mr. Spiezio
was the Chief Financial Officer at Starmet Corporation, a diversified
metallurgical manufacturing company engaged in both the commercial and
government sectors, from January 1993 to November 1999. While at Starmet he also
served as President of a wholly owned chemical and manufacturing facility for
five years and held additional financial management positions including
Corporate Controller and Manager Planning and Analysis. Prior to joining
Starmet, Mr. Spiezio held financial management positions with United
Technologies Corporation, Pratt & Whitney Aircraft Group in accounting, cost
control and business analysis. Prior to Pratt & Whitney, Mr. Spiezio held
financial management positions with General Electric Company in both the Power
Systems and Apparatus Services business groups. Mr. Spiezio is a graduate of the
Indiana University School of Business.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the NASDAQ SmallCap Market under
the symbol "BCON". The following table sets forth the high and low sales price
of the common stock for the period indicated.
High Low
Twelve months ended December 31, 2003
Fourth quarter $1.54 $0.70
Third quarter $1.34 $0.24
Second quarter $0.48 $0.16
First quarter $0.30 $0.16
Twelve months ended December 31, 2002
Fourth quarter $0.44 $0.14
Third quarter $0.31 $0.15
Second quarter $0.58 $0.21
First quarter $1.50 $0.50
On March 23, 2004, the last reported sale price of the Company's common
stock on the NASDAQ SmallCap Market was $1.01 per share, and there were 303
holders of record of common stock. The number of record holders does not include
shares held in "street name" through brokers.
The Company has never declared or paid cash dividends on shares of its
common stock. The Company expects to retain any future earnings to finance the
expansion of its business, and therefore does not expect to pay cash dividends
in the foreseeable future. Payment of future cash dividends, if any, will be at
the discretion of the Company's board of directors after taking into account
various factors, including the Company's financial condition, operating results,
current and anticipated cash needs and plans for expansion.
Recent Sales of Unregistered Securities
During 2003, the Company issued no unregistered securities.
Item 6. Selected Consolidated Financial Data
The following selected financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the related notes, found
elsewhere in this Form 10-K.
The following tables present selected historical financial data for the
years ended December 31, 2003, 2002, 2001, 2000, 1999, and for the period from
May 8, 1997, the date of the Company's inception, through December 31, 2003.
Period from
Date
of Inception
(May 8, 1997)
to
Year ended December 31,
December 31,
2003 2002 2001 2000 1999 2003
------------------------------------------------------------------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues $ - $ - $ - $ 50 $ 269 $ 551
------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 4,936 5,637 8,940 4,631 1,559 28,059
Research and development 3,550 7,130 17,628 12,715 3,506 50,344
Loss on sales commitments - - - 51 325 376
Depreciation and amortization 285 1,644 1,324 401 219 3,951
Restructuring charges - 2,159 - - - 2,159
Loss on impairment of assets 367 4,297 - - - 4,664
------------------------------------------------------------------
Total operating expenses 9,138 20,867 27,892 17,798 5,609 89,553
------------------------------------------------------------------
Loss from operations (9,138) (20,867) (27,892) (17,748) (5,340) (89,002)
Interest and other income (expense), net 520 28 1,746 330 (331) 2,405
------------------------------------------------------------------
Net loss (8,618) (20,839) (26,146) (17,418) (5,671) (86,597)
Preferred stock dividends - - - (35,797) (917) (36,826)
Accretion of redeemable convertible preferred
stock - - - (64) (42) (113)
------------------------------------------------------------------
Loss to common shareholders (8,618) (20,839) (26,146) (53,279) (6,630) (123,536)
==================================================================
Net loss per share, basic and diluted ($0.20) ($0.49) ($0.61) ($10.77) ($393.52)
===================================================
Shares used in computing net loss per share, 42,886 42,797 42,551 4,946 17
basic and diluted
===================================================
As of December 31,
2003 2002 2001 2000 1999
-------------------------------------------------------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $9,314 $18,222 $34,602 $62,497 $234
Working capital 9,048 17,220 32,788 59,224 (878)
Total assets 12,599 20,906 42,131 67,738 974
Redeemable convertible preferred stock - - - - 4,535
Total stockholders' equity (deficiency) $9,497 $18,075 $38,981 $63,308 ($8,591)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with its financial statements, the
notes to those financial statements and other financial information appearing
elsewhere in this document. In addition to historical information, the following
discussion and other parts of this document contain forward-looking statements
that reflect plans, estimates, intentions, expectations and beliefs. Actual
results could differ materially from those discussed in the forward-looking
statements. See "Note Regarding Forward-Looking Statements." Factors that could
cause or contribute to such differences include, but are not limited to, those
set forth in the "Risk Factors " section and contained elsewhere in this Form
10-K.
Overview
When the Company recognized that its Smart Energy products as alternative
backup solutions to the telecommunications industry were not on a path to
produce meaningful revenues, the Company initiated a series of cost cutting
measures throughout 2002 and 2003. The focus of these efforts was to reduce cash
usage while preserving the Company's intellectual properties and maintaining the
integrity of its public company requirements while evaluating all potential
product markets for the Company's technologies and considering acquisitions or
mergers that could lead to increased shareholder value. Based on this
evaluation, which is ongoing, the Company (i) believes that it has identified
two promising applications for its Smart Energy Matrix product and (ii) has
introduced its Smart Power M5 inverter system into the renewable energy market
and delivered 31 units in 2003.
The Company must raise additional equity to execute its business plan.
Based on the Company's rate of expenditure of cash and the additional
expenditures expected in support of its business plan, the Company will need to
obtain an equity investment by early 2005 to fund:
o continuing as a going concern;
o ongoing research and development of inverter products;
o manufacturing operations;
o working capital requirements; and
o new business development,
In the event that the Company elects to begin full scale development of its
Smart Energy Matrix or Smart Power 250 flywheel systems, the amount of equity
required would increase substantially.
The Company will not undertake this development or make investments without
expressions of tangible interest from the marketplace and having identified
sufficient funding to ensure that it could complete development of this product.
From inception through December 31, 2003, the Company has incurred losses
of approximately $123.5 million. The Company expects to continue to incur losses
as it expands its product development, commercialization program, and expansion
of its manufacturing capabilities.
The Company recognized an asset impairment charge in 2003 and restructuring
and asset impairment charges in 2002. The Company, as required by Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," periodically evaluates all of its property and
equipment in light of facts and circumstances and the outlook for future cash
flows. As a result of its ongoing evaluations, in 2003 the Company took a
non-cash charge of approximately $0.4 million representing the impairment of
capitalized costs of internally developed intellectual property including
various patents and patents pending relating to the Company's flywheel
technology. In 2002 the Company took a non-cash charge of $6.5 million of which
$4.3 million represented impaired capital equipment and leasehold improvements,
$1.9 million related to a reserve against future lease payments and related
facility costs and $0.3 million relating to severance costs. These charges
related to a substantial portion of the Company's long-term assets being idled,
including machinery and equipment, tooling, office furniture and fixtures and
leasehold improvements. The portion of the reserve that relates to future lease
payments is classified as "Restructuring reserve" in the current liabilities
section of the balance sheet.
Revenues. Although the Company has begun shipment of commercial products,
its operations have not yet reached a level that would qualify it to emerge from
the development stage. Therefore it continues to be accounted for as a
development stage company under Statement of Financial Accounting Standards No.
7 "Accounting and Reporting by Development Stage Enterprises." The Company has
begun shipping its Smart Power M5 inverter system in the solar renewable energy
market through domestic distributors who in turn sell the Company's products to
installers who then make sales to residential homeowners or commercial
customers. The Company has established that it will recognize revenues, in
accordance with accounting principles generally accepted in the United States of
America, based on the sales by its distributors to their customers. The Company
has determined that this treatment will ensure that the recognition of revenue
cannot be impacted by any disputes between the Company and its distributors on
product or possible issues resulting from technology risk as new products are
commercialized that may have enhanced functionality to product already delivered
to distributors. The Company is continuing to evaluate markets for its flywheel
systems but has not recognized revenues in 2003, 2002 or 2001. Prior to the
fourth quarter of 2000, the Company recorded revenues as a result of development
contracts with government entities focused on the design of flywheel
technologies. The Company has placed development prototypes with potential
customers and shipped pre-production units. These products were provided to
potential customers without charge or on a demonstration basis to allow the
Company access to field test information and to demonstrate the application of
the technologies.
Selling, General and Administrative Expenses. The Company's sales and
marketing expenses consist primarily of compensation and benefits for sales and
marketing personnel and related business development expenses. During 2003, the
Company increased its sales and marketing efforts for its flywheel based
products, to introduce its concepts for frequency regulation and Smart Energy
Matrix applications. The Company also continued to market the Smart Power 250.
The Company expanded its sales and marketing effort into the renewable energy
market for its Smart Power M5 inverter product. The Company continues to rely on
engineering personnel to provide technical specifications and product overviews
to its potential customer base. The Company expects sales and marketing expenses
to continue to increase as it expands efforts to define new markets for its
products. General and administrative expenses consist primarily of compensation
and benefits related to the Company's corporate staff, professional fees,
insurance and travel. The Company expects that its selling, general and
administrative expenses will increase during 2004 as compared to 2003 as a
result of expanded sales and marketing expenses.
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 and development process. These costs are expected to increase
in 2004 as compared to 2003. While the Company does not expect to incur
significant additional costs for its existing flywheel products, the Company
does expect to incur costs for the design and development of additional products
for renewable energy applications. The costs of development of its flywheel
systems will be significant if the Company determines there is sufficient market
validation to initiate development of these products and it has funding to
complete this work.
Loss on Sales Commitments. The Company will establish reserves for
anticipated losses on sales commitments when its cost estimates indicate a loss
will be incurred. The Company did not accrue such losses during 2003 or 2002. In
the second half of 2001 the Company reversed projected losses contemplated and
recognized during 2000 and early 2001. The Company is most likely to recognize
probable losses on sales commitments early in a product's introduction prior to
being able to realize expected decreases in cost per unit through engineering
design changes, operating efficiencies, and volume purchasing discounts.
Restructuring and asset impairment charges. The Company recognized
restructuring and asset impairment charges during 2003 and 2002. The Company's
initial products were focused on the telecom industry. As a result of the
overall economic downturn and in particular the significant decline in capital
and maintenance spending in telecom as well as the low price of lead-acid
batteries, the Company has not been successful in selling products into this
market and therefore has taken non-cash asset impairment charges of $0.4 million
in 2003 and aggregating $4.3 million in 2002, pursuant to Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets."
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 its facilities. The Company
has intellectual property in the form of patents on its flywheel vacuum system,
its heat pipe cooling systems, DC output paralleling, anti-islanding software,
drawings, source code, and production know-how on its Smart Power M5 inverter
system, and expects to obtain other patents during 2004 and beyond.
Interest and Other Income/Expense, net. The Company's non-operating income
and expenses are primarily attributable to interest income relating to cash on
hand from its private financings and initial public offering and interest
expense associated with its capital.
Results of operations:
Comparison of Year ended December 31, 2003 and 2002
Year ended December 31,
2003 2002 $ Change % Change
------------------------------------------
(in thousands)
Revenues $ - $ - $ - N/A
Selling, general and administrative 4,937 5,637 (700) -12%
Research and development 3,550 7,130 (3,580) -50%
Depreciation and amortization 285 1,644 (1,359) -83%
Restructuring and impairment of assets 367 6,456 (6,089) -94%
Interest and other income (expense), net 520 28 492 1757%
Revenue. Proceeds from the sale of demonstration and test of 2kWh and 6kWh
Smart Energy flywheel units as well as engineering services performed for other
companies has been applied as a reduction against research and development
expense and has not been recorded as revenue. These amounts were approximately
$130,000 and $79,000 for 2003 and 2002, respectively. The Company did record
deferred revenue for the first time during the fourth quarter of 2003 for
shipments to distributors of its Smart Power M5 inverter systems.
Selling, General and Administrative Expenses. The decrease from 2002 to
2003 of approximately $700,000 was primarily the result of lower consulting
expenditures in 2003 than the prior year. The Company expects its selling,
general and administrative expenses to increase in 2004 over 2003 due primarily
to marketing and sales expenses associated with both flywheel and inverter
products.
Research and Development Expenses. The decrease from 2002 to 2003 of
approximately $3,580,000 is primarily due to decreased compensation and benefit
costs related to reductions in the number of engineering and manufacturing
personnel as well as lower expenditures on development materials. The Company
expects cost of research and development in 2004 to be somewhat higher than 2003
as it expands development of its product line for renewable energy products. The
business plan does not include significant development of the Company's Smart
Energy Matrix product.
Depreciation and Amortization. The decrease from 2002 to 2003 of
approximately $1,359,000 is primarily attributable to the reduction in the
depreciable base of the Company's assets that resulted from the restructuring
and asset impairment charges recorded in 2002. Depreciation in 2004 will be
lower than 2003 due to existing assets becoming fully depreciated and minimal
additions to property and equipment in 2004.
Restructuring and asset impairment charges. The Company recognized an asset
impairment charge for its flywheel patents and patents pending in 2003 of
approximately $367,000. In 2002 the Company recognized both restructuring and
asset impairment charges of approximately $2,200,000 and $4,300,000,
respectively. The Company does not expect to recognize any restructuring or
asset impairment charges in 2004.
Interest and Other Income/ (Expense), net. The increase from 2002 to 2003
of approximately $492,000 is primarily attributable to the reversal of a reserve
for loans to officers taken in the prior year as a result of payments on those
loans being received, accrued dividends on the Company's investment in Evergreen
Solar Preferred Stock, and lower interest expense associated with smaller
capital leases, which expired during the second half of 2003.
Comparison of Year ended December 31, 2002 and 2001
Year ended December 31,
2002 2001 $ Change % Change
------------------------------------------
(in thousands)
Revenues $ - $ - $ - N/A
Selling, general and administrative 5,637 8,940 (3,303) -37%
Research and development 7,130 17,628 (10,498) -60%
Depreciation and amortization 1,644 1,324 320 24%
Restructuring and impairment of assets 6,456 - 6,456 N/A
Interest and other income (expense), net 28 1,746 (1,718) -98%
Revenue. Proceeds from the sale of demonstration and test of 2kWh and 6kWh
Smart Energy flywheel units as well as engineering services performed for other
companies has been applied as a reduction against research and development
expense and has not been recorded as revenue. These amounts were approximately
$79,000 and $69,000 for 2002 and 2001, respectively.
Selling, General and Administrative Expenses. The decrease from 2001 to
2002 of approximately $3,303,000 was primarily due to the decreased compensation
and benefit costs that resulted from a reduction in staffing. During October
2001, March 2002 and again in July 2002, the Company reduced its headcount by 8,
11 and 7 respectively.
Research and Development Expenses. The decrease from 2001 to 2002 of
approximately $10,498,000 was primarily due to decreased development material
expenditures and compensation and benefit costs that resulted from a reduction
in staffing. During October 2001, March 2002 and again in July 2002, the Company
reduced its headcount by 29, 24 and 18 respectively.
Depreciation and Amortization. The increase from 2001 to 2002 of
approximately $320,000 was attributable to amortization of leasehold
improvements at the Company's facility in Wilmington Massachusetts as well as
amortization on additional machinery and equipment and other capital assets
acquired in 2001.
Restructuring and asset impairment charges. The Company recognized
restructuring and asset impairment charges in 2002. The Company's initial
products were focused on the telecom industry. As a result of the overall
economic downturn and in particular the significant decline in capital and
maintenance spending in telecom as well as the low price of lead-acid batteries,
the Company has not been successful in selling products into this market.
Therefore, in July 2002, in an effort to reduce its monthly cash spending rate,
the Company implemented a number of cost-cutting measures to ensure the
availability of resources necessary to pursue its business strategy for a
reasonable period but at a significantly lower cash expenditure rate and on a
less ambitious timetable. As a result, a substantial portion of the Company's
long-term assets were idled, including machinery and equipment, tooling, office
furniture and fixtures 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". The Company took restructuring and impairment charges of $6.5 million
of which $4.3 million represents impaired capital equipment and leasehold
improvements, $1.9 million related to a reserve against future lease payments
and facility costs and $.3 million related to severance costs. The assets held
for sale have been grouped together and classified as "Assets held for sale" in
the current assets section of the balance sheet. Assets held for sale have been
written down to their fair value based on quotes from vendors and other market
factors. The reserve against future lease payments is classified as
"Restructuring reserve" in the current liabilities section of the balance sheet.
Interest and Other Income/ (Expense), net. The decrease from 2001 to 2002
of approximately $1,718,000 was primarily the result of lower interest income
associated with the lower cash balances, lower interest rate yields on
investments and a reserve of approximately $426,000 for the loan to the former
CEO.
Liquidity and Capital Resources
Year ended December 31,
----------------------------------------------
2003 2002 2001
----------------------------------------------
(in thousands)
Cash and cash equivalents $ 9,314 $ 18,222 $ 34,602
Working capital 9,048 17,220 32,788
Cash provided by (used in)
Operating activities (7,651) (15,587) (24,220)
Investing activities (1,291) (466) (3,655)
Financing activities 35 (327) (21)
----------------------------------------------
Net decrease in cash and cash equivalents $ (8,907) $ (16,380) $ (27,896)
==============================================
Current ratio 3.9 7.1 12.1
==============================================
The Company's cash requirements depend on many factors, including but not
limited to, research and development activities, continued efforts to
commercialize its products, facilities costs as well as general and
administrative expenses. The Company expects to make significant expenditures to
fund its operations, develop technologies and explore opportunities to find and
develop additional markets to sell its products. The Company has taken
significant actions to reduce its cash expenditures for product development,
infrastructure and production readiness by significantly reducing headcount,
development spending and capital expenditures over the last two years. 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 continued to do preliminary design of potential products for markets under
consideration for its flywheel systems and has purchased intellectual properties
and incurred development costs for its newest product in the renewable energy
market.
The Company must raise additional equity to execute its business plan.
Based on the Company's rate of expenditure of cash and the additional
expenditures expected in support of its business plan, the Company will need to
obtain an equity investment by early 2005 to fund:
o continuing as a going concern;
o ongoing research and development of inverter products;
o manufacturing operations;
o working capital requirements; and
o new business development,
In the event that the Company elects to begin full scale development of its
Smart Energy Matrix or Smart Power 250 flywheel systems, the amount of equity
required would increase substantially.
In as much as the Company is not expecting to become profitable or cash
flow positive until at least 2006, its ability to continue as a going concern
will depend on being able to raise additional capital. The Company may not be
able to raise this capital at all, or if it is able to do so, it may be on terms
that are adverse to shareholders. The Company believes that it cannot use debt
financing to meet its cash requirements.
The Company's significant long-term contractual obligations as of December
31, 2003 are as follows:
Cash Payments Due During the Year Ended December 31,
----------------------------------------------------------------------------------
Description of Commitment 2004 2005 2006 2007 2008 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------
Operating Leases 490,675 500,359 529,413 397,059 - - 1,917,506
The amounts listed for operating leases represent payments for the
occupancy of the Company's principal executive offices, laboratory and
manufacturing facilities located in Wilmington, Massachusetts. The Company's
commitment on this lease is secured by an irrevocable letter of credit in the
amount of $355,232. A cash deposit secures this letter of credit.
The Company may make investments in companies for strategic business
reasons. Because the Company's primary motivation in making these investments
may not be to realize a profit on the investment itself, but rather to expand
its business prospects, these investments may lack any financial return to the
Company, may result in a loss of principal and may lack liquidity.
On March 24, 2003 the Company purchased, for approximately $146,000, the
inverter electronics technologies of Advanced Energy Systems, Inc to strengthen
its entry into the renewable energy market.
On May 15, 2003 the Company invested $1,000,000 in Series A Preferred Stock
of Evergreen Solar, Inc., a public company that specializes in renewable energy
sources, in order to develop a strategic relationship with that company. The
Company believes that this investment may provide significant financial returns
on investment. The Company's investment was part of a larger financing provided
by several investors. The Company made its investment on the same terms as the
other investors in this financing, except that the Company was permitted to
purchase a three-year warrant for $100,000 that is exercisable for 2,400,000
shares of Evergreen's common stock. Evergreen's financing was a private
placement of $29,475,000 of Series A Preferred Stock and the above warrant.
Perseus 2000, L.L.C., an affiliate of one of the Company's stockholders, Perseus
Capital, L.L.C., invested $3 million in Evergreen's Series A Preferred Stock in
this financing. Mr. Philip J. Deutch and Mr. Kenneth M. Socha, members of the
Board of Directors of the Company, are Managing Director and Senior Managing
Director, respectively, of Perseus, L.L.C., and Mr. Deutch led the Evergreen
Solar Series A Preferred financing and is one of four individuals from the
Evergreen investor group to be added to the Board of Directors of Evergreen.
Messrs. Deutch and Socha disclosed their possible conflict relating to this
transaction, and abstained from voting on the matter. In addition, Mr. Deutch
has not taken part in any discussions concerning this investment. Beacon's
participation in the transaction was evaluated, debated and approved by all the
disinterested directors of the Company, after full disclosure of relevant facts
and circumstances.
The Company believes that the Evergreen investment will provide the Company
additional access to the renewable energy market, which it believes has
significant potential for its Smart Power M5 inverter system and additional
products it plans to develop. While the Company believes that its investment in
Evergreen represents a possible gain upon liquidation, there can be no assurance
that it will and there can be no assurance that the Company will be able to
liquidate its position in the event that it requires cash on a short term basis.
Investments such as those made in Evergreen Solar and the acquisition of
the intellectual properties of Advanced Energy Systems may accelerate the
Company's need to raise capital. The Company may not be able to raise this
capital at all, or if it is able to do so, it may be on terms that are extremely
dilutive to shareholders.
Inflation
The Company's operations have not been materially affected by inflation.
Risk Factors
The Company May Not Be Able to Continue as a Going Concern, as its Cash Balances
Are Sufficient to Fund Operations Only Through Approximately April 2005.
As shown in the consolidated financial statements, the Company incurred
significant losses from continuing operations of $8,618,000, $20,839,000,
and $26,146,000 and cash decreases of $8,907,000, $16,379,000 and
$27,896,000, during the years ended December 31, 2003, 2002 and 2001,
respectively. The Company has $9,314,000 of cash and cash equivalents on
hand at December 31, 2003. The Company has not recorded any revenue from
sales of its products. These factors, among others, indicate that the
Company may be unable to continue as a going concern.
Deloitte & Touche LLP, the Company's independent auditors, have included an
explanatory paragraph related to a going concern uncertainty in their audit
report on the Company's consolidated financial statements for the fiscal
year ended December 31, 2003, which states that "the Company's recurring
losses from operations and negative cash flows raise substantial doubt
about its ability to continue as a going concern."
The Company's financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
has not made any adjustments to its financial statements as a result of the
going concern uncertainty. If the Company cannot continue as a going
concern, it may have to liquidate its assets and may receive significantly
less than the values at which they are carried on its financial statements.
Any shortfall in the proceeds from the liquidation of the Company's assets
would directly reduce the amounts that holders of its common stock could
receive in liquidation.
The Company expects its cash position to fund operations approximately
through April 2005 according to its business plan. The Company is exploring
opportunities to raise additional capital through equity offerings,
strategic alliances and other financing vehicles, but it does not make any
assurances that sufficient funds will be available to it on terms that it
deems acceptable, if they are available at all.
The Company Needs Additional Financing.
The Company will need additional financing to execute its business plan.
The Company cannot be certain that it will be able to raise additional
funds on terms acceptable to the Company or at all. If future financing is
not available or is not available on acceptable terms, the Company would
not be able to continue as a going concern.. See "Selected Historical
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company's Stockholders may be Adversely Affected if the Company Issues
Additional Equity to Obtain Financing.
If the Company raises additional funds by issuing additional equity
securities, existing stockholders may be adversely affected because new
investors may have superior rights than current shareholders and current
shareholders may be diluted.
The Company May Not Be Able to Reduce Its Product Cost Enough to Make The
Company's Prices Competitive.
There can be no assurance that the Company will be successful in lowering
production costs through product designs or volume discounts, which may
prevent market acceptance of its products due to its pricing for products.
The Company Has No Experience Manufacturing Inverter Systems or Flywheel Energy
Storage Systems on a Commercial Basis. In the Event of Significant Sales, the
Company Will Need to Develop or Obtain Manufacturing Capacity for Its Products.
Should the Company experience significant 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. 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 will 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.
It Is Difficult to Evaluate the Company and to Predict Its Future Performance
Because of Its Short Operating History and the Fact that It is a Development
Stage Company.
The Company has a limited operating history and is a development stage
company. Unless the Company can achieve significant market acceptance of
its current or future products at volumes and with margins that allow it to
cover its costs of operations, the Company may never advance beyond the
start-up phase.
See "Business," "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company Has Incurred Losses Since Its Inception and Anticipates Continued
Losses Through at Least 2006.
The Company has incurred net losses and negative cash flows since its
inception in May 1997. The Company had net losses of approximately
($8,618,000) in 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, the
Company has had net losses totaling ($123,536,000). The Company expects to
continue to incur net losses through at least 2006. Although the Company is
looking for additional ways to economize and reduce costs, its efforts may
prove even more expensive than anticipated. The Company's revenue must grow
substantially to offset these higher expenses and become profitable. Even
if the Company does achieve profitability, it may be unable to sustain or
increase its profitability in the future.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Because the Company Depends on Third-Party Suppliers for the Development and
Supply of Key Components for Its Products, It Could Experience Disruptions in
Supply that Could Delay or Decrease Its Revenues.
The Company's business, prospects, results of operations, or financial
condition could be harmed if it 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.
Because certain key components that are complex, and difficult to
manufacture and 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 it is pursuing.
The Company's Financial Performance Could Be Adversely Affected by its 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 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 and second quarters of 2002, the
Company substantially reduced its workforce. Competition for skilled
personnel is intense and, if the Company seeks to increase the 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.
The Company's Financial Performance Could be Adversely Affected by Needs to Hire
and Retain Key Sales Personnel.
Because the Company's future success depends to a large degree on the
success of its sales organization, the Company's ability to meet its
business plan will depend significantly on whether it can attract and
retain sales personnel. The current sales organization has been impacted by
both health issues and a resignation. Competition for skilled sales is
intense 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 the Company's
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 the Company is Unable to Successfully Market, Distribute and Service Its
Products Internationally it May Experience a Shortfall in Expected Revenues and
Profitability.
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 ultimately market, distribute
and service 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.
Any Failure to Protect the Company's Intellectual Property Could Seriously
Impair Its 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.
The Share Prices of Companies in the Company's Sector have been Highly Volatile
and the Company's 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.
There may be Other Technologies Under Development That Could Prevent the Company
from Achieving or Sustaining Its Ability to Sell Products or to Do So at Prices
that will Yield Profits.
There are number of technology companies in various stages of development.
The Company cannot give assurance that some or all of its target markets
and pricing plans could not be displaced by emerging technologies.
The Company Has an Investment in Other Companies in Its Sector to Increase
Shareholder Value Through Strategic Alliance or Return on Investment Which do
Not Create Gains and therefore Reduce Shareholder Value.
Given the Company's financial position, its ability to make investments in
other companies is very limited at this time. However, in the future, the
Company may make investments in other 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 the Company's 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 the Company's Stock Price.
On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scope. These attacks have caused instability in
the global financial markets, and have contributed to volatility in the
stock prices of United States publicly traded companies, such as Beacon
Power. These attacks may lead to armed hostilities or to further acts of
terrorism and civil disturbances in the United States or elsewhere, which
may further contribute to economic instability in the United States and
could have a material adverse effect on the Company's business, financial
condition and operating results.
Government Regulation May Impair the Company's Ability to Market 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 federal,
state or local government entities may seek to impose regulations.
Product Liability Claims Against the Company Could Result in Substantial
Expenses and Negative Publicity Which Could Impair Successful Marketing of
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 the Company's Flywheel Products or Those of The Company's
Competitors Could Reduce Market Demand or Acceptance for Flywheels in General.
A serious accident involving either flywheels or competitors' similar
products could be a significant deterrent to customer acceptance and
adversely affect the Company's financial performance. There is the
possibility of accident with any form of energy storage. In particular, if
a metal flywheel fails and the stored energy is released, the flywheel
could break apart into fragments that 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 and shut down rather than (as in
the case of metal) to break into a number of large fragments that have a
greater possibility of bursting a containment vessel and causing injury. At
this early stage of commercialization, there are differing approaches to
containment safety with disagreement in the community on the most effective
means.
The Market for Using the Company's Smart Energy Matrix to Provide Frequency
Regulation has not been Established.
The Company believes that the use of its Smart Energy Matrix will be
successful in the frequency regulation market. However, this market is
currently being served by using generators and, while the Company believes
its product offers greater efficiencies than generators, and produces
positive investment returns for the independent service providers, there
can be no assurance that the Company will be able to establish its product
in that market.
The Value Proposition of the Company's Smart Energy 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. 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
even more difficult for the Company to establish the value proposition of
its Smart Energy products.
The Company Might Fail to Develop Successful Flywheel Products.
The successful development of the Company's flywheel products involves
significant technological and cost challenges and will require additional
financing to complete. Major risks include:
o maintaining the development schedule and achieve technical success, as
such development could take substantially longer than anticipated;
o the cost of developing key components of the Company's systems that
have significant technical risk and which may not be economically
feasible for a competitive product;
o ensuring long-life and maintenance free performance through design and
quality control;
o ensuring quality and cost control from suppliers; and
o raising the necessary financing.
The Company's Sales Efforts may be Adversely Affected by the Reputation of the
Bankrupt Company from which The Company Acquired the Intellectual Properties for
the Smart Power M5 Inverter System.
The Company purchased the intellectual property that its Smart Power M5
inverter system are based on from Advanced Energy Systems, Inc., 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 be no
assurance that the Company's sales efforts will not be adversely affected
by the performance of the unwarranted products in the field.
The Value Proposition of the Company's Inverter Systems May Not Be Recognized.
There can be no assurance that the Company will be able to compete
successfully and gain market share in the renewable energy market. To
compete successfully the Company must establish its value proposition as
cost effective for end users based upon its product's price, dependability,
operational benefits, and long life.
The Company May Not be Able to Establish a Distribution Channels to Sell Its
Inverter Systems.
The Company expects to market its Smart Power M5 inverter system as well as
future inverter products through distributor channels. The Company does not
have experience in these distribution channels or in the photovoltaic
markets, and may not be successful in establishing adequate market volume
through this distribution strategy. Even if the Company were able to
establish sufficient sales volumes, there can be no assurance that these
channels will continue to provide adequate volumes for the Company's
products in the future.
The Channels to Market For Photovoltaic Products are Not Stable and have Changed
Substantially in the Last Year.
The photovoltaic market is growing rapidly, but the sales and distribution
channels are not stable.. In the last year, the cross section of these
distributors has changed as some photovoltaic module manufacturers have
left the market for "balance of systems" products such as the Company's
Smart Power M5 inverter system, and other distributors have been merged. In
particular, several of the large volume distributors have reduced their
product offerings to only solar panels. When these types of change take
place, it often results in a period of uncertainty in the sales and
distribution channels, leading to fewer and smaller orders being placed.
The Company is using a strategy of selling through full-service, wholesale
distributors and there can be no assurance that this strategy will be
successful in the channel structure that continues to be restructured.
Inverter Sales may Not be Achieved.
If the value proposition that the Company offers to the market is not
accepted, or if the market does not continue to grow, or if the sales
channels to market continue to be in a state of change, then the Company
may not achieve sales of inverters. If sales are not achieved, then profits
will not be realized, resulting in further need for additional investor
funding which may not be available on acceptable terms, or at all.
The Company Faces Intense Competition in the Inverter Markets.
There are a number of companies located in the United States, Canada, and
abroad that are offering electronic inverters into the photovoltaic market
and the number of products being offered is increasing. Many of these
companies have more substantial manufacturing, marketing, and sales
capabilities as well as brand recognition and established market positions.
They may also have greater research, development and commercialization
capabilities. There can be no assurance that the Company will be able to
compete or be able to adapt as quickly to changing customer needs.
The Company Might Fail to Develop Successful Additional Inverter Products.
The successful development of additional inverter products involves
technological and cost challenges and will require additional financing to
complete. Major risks include:
o maintaining the development schedule for these products, as such
development could take substantially longer than anticipated;
o the cost of developing key components of the Company's systems that
have technical risk and which may not be economically feasible for a
competitive product in the renewable energy market;
o reducing manufacturing and assembly costs to increase the Company's
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; and
o extending each product design into as many applications and markets as
possible.
The Photovoltaic Energy Market may not Maintain the Market Growth Upon Which the
Company's Business Plan is Based.
Although photovoltaic installations have continued to grow at solid
compound annual growth rates of greater than 20%, there can be no assurance
that these rates of growth will continue.
The Company's High-Energy Flywheels Face Intensified Competition from Batteries
Due to Batteries' Declining Prices and Improved Life. As a Consequence Customers
are Less Likely to Accept the Value Proposition of the Company's High-Energy
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 have made
it very difficult for the Company to establish the value proposition of its
high-energy flywheel products.
The Telecommunications Industry Continues to Experience lower rates of Build-Out
and Maintenance Spending.
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 which began in 2000
and has continued and there can be no certainty of when or if this market
will recover. Significant reductions in both maintenance budgets and
capital build-out budgets at telecommunications companies caused these
potential customers to be more conservative with their spending and
expenditure analysis and less willing to try new technology solutions, such
as the Company's flywheel systems.
The Company Might Fail to Develop Successful Additional High-Energy Flywheel
Products.
The successful development of additional high-energy flywheel products
involves significant technological and cost challenges and will require
additional financing to complete. Major risks include:
o maintaining the development schedule for these products, as such
development could take substantially longer than anticipated;
o the cost of developing key components of the Company's systems that
have significant technical risk and which may not be economically
feasible for a competitive product in the high-energy market;
o reducing manufacturing costs for the flywheel's shaft, hub and rim,
bearings and related electronics to increase the Company's 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; and
o extending the product to new applications.
The Company Faces Intense Competition and May Be Unable to Compete Successfully
in the High-Energy Flywheel Markets.
The markets for uninterruptible electric power are intensely competitive.
There are a number of companies located in the United States, Canada, and
abroad that are offering battery based energy storage options. 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.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company cash equivalents and investments, all of which have maturities of
less than one year, may expose the Company to interest rate risk. At December
31, 2003, the Company had approximately $60,000 of cash equivalents that were
held in a non-interest bearing checking account. Also at December 31, 2003, the
Company had approximately $9,254,000 invested in interest-bearing money market
accounts. The fair value of these investments approximates their cost. A 10%
change in interest rates would change the investment income realized on an
annual basis by approximately $9,000 which the Company does not feel is
material.
Item 8. Financial Statements and Supplementary Data
BEACON POWER CORPORATION
(A Development Stage Company)
Index to Consolidated Financial Statements
Page
Independent Auditors' Report 29
Consolidated Balance Sheets at December 31, 2003 and 2002 30
Consolidated Statements of Operations for the years ended December 31,
2003, 2002 and 2001 and for the period May 8, 1997 (date of
inception) to December 31, 2003. 31
Consolidated Statements of Stockholders' Equity (Deficiency) for the years
ended December 31, 2003, 2002 and 2001 and for the period
May 8, 1997 (date of inception) to December 31, 2003. 32
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001 and for the period May 8, 1997 (date of
inception) to December 31, 2003. 36
Notes to Consolidated Financial Statements 38
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Beacon Power Corporation:
We have audited the accompanying consolidated balance sheets of Beacon Power
Corporation and subsidiary (the "Company") (a development stage company) as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity (deficiency) and cash flows for each of the
three years in the period ended December 31, 2003 and for the period from May 8,
1997 (date of inception) through December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Beacon Power
Corporation and subsidiary as of December 31, 2003 and 2002 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003 and the period from May 8, 1997 (date of inception)
through December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and
negative cash flows raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 25, 2004
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
December 31, December 31,
2003 2002
----------------- ------------------
Assets
Current assets:
Cash and cash equivalents $ 9,314,493 $ 18,221,766
Accounts receivable, trade 128,133 -
Inventory 238,684 -
Prepaid expenses and other current assets 773,226 1,775,455
Investments 1,695,638 -
Assets held for sale - 53,715
----------------- ------------------
Total current assets 12,150,174 20,050,936
Property and equipment, net (Note 3) 357,180 562,929
Other assets 91,325 291,901
----------------- ------------------
Total assets $ 12,598,679 $ 20,905,766
================= ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 148,075 $ 77,326
Accrued compensation and benefits 883,195 226,623
Other accrued expenses 664,527 576,881
Restructuring reserve 1,406,191 1,749,738
Current portion of capital lease obligations - 200,041
----------------- ------------------
Total current liabilities 3,101,988 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;
43,107,526 and 42,961,062 shares issued and outstanding at
December 31, 2003 and 2002, respectively 431,075 428,129
Deferred stock compensation (832,639) (18,413)
Additional paid-in-capital 133,069,472 132,750,525
Other comprehensive income 531,880 -
Deficit accumulated during the development stage (123,603,437) (114,985,424)
Treasury stock, at cost (99,660) (99,660)
----------------- ------------------
Total stockholders' equity 9,496,691 18,075,157
Total liabilities and stockholders' equity $ 12,598,679 $ 20,905,766
================= ==================
See notes to consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative from
May 8, 1997
Year ended Year ended Year ended (date of inception)
December December December Through December
2003 2002 2001 31, 2003
----------------- ----------------- ----------------- ---------------------
Revenue $ - $ - $ - $ 551,184
Operating expenses:
Selling, general and administration 4,936,575 5,636,903 8,939,589 28,059,603
Research and development 3,549,592 7,129,880 17,627,714 50,343,486
Loss on sales commitments - - - 375,974
Depreciation and amortization 284,733 1,644,230 1,323,958 3,950,736
Restructuring charges - 2,159,280 - 2,159,280
Loss on impairment of assets 366,788 4,297,128 - 4,663,916
----------------- ----------------- ----------------- ---------------------
Total operating expenses 9,137,688 20,867,421 27,891,261 89,552,995
----------------- ----------------- ----------------- ---------------------
Loss from operations (9,137,688) (20,867,421) (27,891,261) (89,001,811)
Interest income 217,964 504,034 2,157,724 3,779,967
Interest expense (6,713) (41,932) (303,160) (1,093,703)
Other income (loss) 308,424 (433,933) (108,971) (281,696)
----------------- ----------------- ----------------- ---------------------
Total other income, net 519,675 28,169 1,745,593 2,404,568
----------------- ----------------- ----------------- ---------------------
Net loss (8,618,013) (20,839,252) (26,145,668) (86,597,243)
Preferred stock dividends - - - (36,825,680)
Accretion of convertible preferred stock - - - (113,014)
----------------- ----------------- ----------------- ---------------------
Loss to common shareholders $ (8,618,013) $(20,839,252) $(26,145,668) $ (123,535,937)
================= ================= ================= =====================
Loss per share, basic and diluted $ (0.20) $ (0.49) $ (0.61)
================= ================= =================
Average shares outstanding, basic 42,885,675 42,797,072 42,550,502
================= ================= =================
See notes to consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficiency)
Class A Class C Deferred Deferred
Preferred Stock Preferred Stock Common Stock Consulting Stock
Shares Amount Shares Amount Shares Amount Expense Compensation
-----------------------------------------------------------------------------------------------
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION) - $ - - $ - - $ - $ - $ -
Issuance of Founder's Shares - - - - 6,750,000 67,500 - -
Issuance of Class A preferred stock 1,390,000 5,662,500 - - - - (275,000) -
Recapitalization 3,373,313 67,466 - - (6,746,626) (67,466) - -
Rounding for fractional shares - - - - (2) - - -
Issuance of Class C preferred and
common stock - - 6 29,866 13,476 134 - -
Proceeds from stock offering, net
of related expenses - - - - 9,200,000 92,000 - -
Conversion of Series A preferred
stock (4,767,907) (5,741,451) - - 9,535,814 95,358 - -
Conversion of Series C preferred stock - - (6) (29,866) 12 - - -
Conversion of convertible preferred stock - - - - 19,823,704 198,237 - -
Deferred Consulting - - - - - - 773,284 -
Series A Issuance for Consulting - - - - 134,464 1,345 (498,284) -
Repayment of subscription receivable - - - - - - - -
Issuance of Series A preferred stock for
services and interest on loans 4,594 11,485 - - - - - -
Dividend on Class D preferred stock - - - - - - - -
Dividends on redeemable convertible
preferred stock - - - - - - - -
Payment of accrued dividend - - - - 859,330 8,593 - -
Repayment of subscription receivable - - - - - - - -
Accretion of redeemable preferred stock
to redemption value - - - - - - - -
Deferred Stock Compensation - - - - - - - (3,009,967)
Amortization of Deferred Stock Compensation - - - - - - - 939,308
Issuance of warrants - - - - - - - -
Cashless Warrant exercise - - - - 1,982,876 19,829 - -
Exercise of Stock Options - - - - 480,266 4,803 - -
Net loss - - - - - - - -
-----------------------------------------------------------------------------------------------
Balance, December 31, 2000 - $ - - $ - 42,033,314 420,333 $ - $ (2,070,659)
Deferred Stock Compensation revaluation - - - - - - - 1,566,906
Issuance of stock options for
consulting services - - - - - - - (47,892)
Amortization of Deferred Stock Compensation - - - - - - - 340,081
Issuance of Stock Options to settle lawsuit - - - - - - - -
Shares issued through ESPP - - - - 54,956 550 - -
Option extension for CEO - - - - - - - -
Option extension for severed employees - - - - - - - -
Exercise of Stock Options - - - - 682,586 6,826 - -
Net loss - - - - - - - -
-----------------------------------------------------------------------------------------------
Balance, December 31, 2001 - $ - - $ - 42,770,856 $ 427,709 $ - $ (211,564)
Deferred Stock Compensation revaluation - - - - - - - 173,616
Amortization of Deferred Stock Compensation - - - - - - - 19,535
Shares issued through ESPP - - - - 42,041 420 - -
Purchase of Treasury Stock - - - - - - - -
Net loss - - - - - - - -
-----------------------------------------------------------------------------------------------
Balance, December 31, 2002 - $ - - $ - 42,812,897 $ 428,129 $ - $ (18,413)
Deferred Stock Compensation revaluation - - - - - - - (87,031)
Issuance of restricted stock units for bonus - - - - - - - (727,195)
Shares issued through ESPP - - - - 5,494 54 - -
Unrealized gains on available-for-sale
securities - - - - - - - -
Exercise of Stock Options - - - - 289,135 2,892 - -
Net loss - - - - - - - -
-----------------------------------------------------------------------------------------------
Other comprhensive loss - - - - - - - -
-----------------------------------------------------------------------------------------------
Balance, December 31, 2003 - $ - - $ - 43,107,526 $ 431,075 $ - $ (832,639)
===============================================================================================
See notes to consolidated financial statements.
Accumulated Total
Additional Stock Other Stockholders'
Paid-in Subscription Retained Comprehensive Treasury Stock (Deficiency)
Capital Receivable Deficit Income (Loss) Shares Amount Equity
-----------------------------------------------------------------------------------------------
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)$ - $ - $ - $ - - $ - $ -
Issuance of Founder's Shares - - (67,500) - - - -
Issuance of Class A preferred stock - (5,000,000) - - - - 387,500
Recapitalization - - - - - - -
Rounding for fractional shares - - - - - - -
Issuance of Class C preferred and common stock - - - - - - 30,000
Proceeds from stock offering, net
of related expenses 49,249,537 - - - - - 49,341,537
Conversion of Series A preferred stock 5,646,093 - - - - - -
Conversion of Series C preferred stock 29,866 - - - - - -
Conversion of convertible preferred
stock 36,496,431 - - - - - 36,694,668
Deferred Consulting - - - - - - 773,284
Series A Issuance for Consulting 496,939 - - - - - -
Repayment of subscription receivable - 2,992,492 - - - - 2,992,492
Issuance of Series A preferred stock for
services and interest on loans - - - - - - 11,485
Dividend on Class D preferred stock - - (749,005) - - - (749,005)
Dividends on redeemable convertible
preferred stock - - (1,496,675) - - - (1,496,675)
Payment of accrued dividend 1,077,714 - - - - - 1,086,307
Repayment of subscription receivable - 2,007,508 - - - - 2,007,508
Accretion of redeemable preferred stock
to redemption value - - (113,014) - - - (113,014)
Deferred Stock Compensation 3,009,967 - - - - - -
Amortization of Deferred Stock Compensation - - - - - - 939,308
Issuance of warrants 36,520,366 - (34,580,000) - - - 1,940,366
Cashless Warrant exercise (19,829) - - - - - -
Exercise of Stock Options 451,674 - - - - - 456,477
Net loss - - (30,994,310) - - - (30,994,310)
-----------------------------------------------------------------------------------------------
Balance, December 31, 2000 132,958,758 $ - (68,000,504) - - - $ 63,307,928
Deferred Stock Compensation
revaluation (1,566,906) - - - - - -
Issuance of stock options for
consulting services 47,892 - - - - - -
Amortization of Deferred Stock Compensation - - - - - - 340,081
Issuance of Stock Options to
settle lawsuit 303,160 - - - - - 303,160
Shares issued through ESPP 109,394 - - - - - 109,944
Option extension for CEO 315,394 - - - - - 315,394
Option extension for severed employees 31,197 - - - - - 31,197
Exercise of Stock Options 712,367 - - - - - 719,193
Net loss - - (26,145,668) - - - (26,145,668)
-----------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 132,911,256 $ - $(94,146,172) $ - - $ - $ 38,981,229
Deferred Stock Compensation revaluation (173,616) - - - - - -
Amortization of Deferred Stock Compensation - - - - - - 19,535
Shares issued through ESPP 12,885 - - - - - 13,305
Purchase of Treasury Stock - - - - 132,000 (99,660) (99,660)
Net loss - - (20,839,252) - - - (20,839,252)
-----------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 132,750,525 $ - $(114,985,424) $ - 132,000 $ (99,660) $ 18,075,157
Deferred Stock Compensation revaluation 87,031 - - - - - -
Issuance of restricted stock units for bonus - - - - - - (727,195)
Shares issued through ESPP 911 - - - - - 965
Exercise of Stock Options 231,005 - - - - - 233,897
Unrealized gains on available-for-sale
securities - - - 531,880 - - 531,880
Net loss - - (8,618,013) - - - (8,618,013)
-----------------------------------------------------------------------------------------------
Comprehensive loss - - (8,618,013) 531,880 - - (8,086,133)
-----------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 133,069,472 $ - $(123,603,437) $ 531,880 132,000 $ (99,660) $ $9,496,691
===============================================================================================
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Cash Flows
Cumulative from
May 8, 1997
(date of inception)
Year ended December 31, through December
2003 2002 2001 31, 2003
------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (8,618,013) $(20,839,252) $(26,145,668) $ (86,597,243)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 284,734 1,644,230 1,323,958 3,950,737
Loss on sale of fixed assets - 14,481 108,971 170,868
Impairment of assets 366,788 4,297,128 - 4,663,916
Restructuring charge net of expenses paid (343,547) 1,749,738 - 1,406,191
Reserve (reversal) for officers note (308,423) 428,398 - 119,975
Interest expense relating to issuance of warrants - - - 371,000
Non-cash charge for change in option terms - - 346,591 346,591
Non-cash charge for settlement of lawsuit - - 303,160 303,160
Amortization of deferred consulting expense, net - - - 1,160,784
Amortization of deferred stock compensation - 19,534 340,081 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:
Accounts receivable (128,133) - - (128,133)
Inventory (238,684) - 207,613 (238,684)
Prepaid expenses and other current assets 1,310,652 (1,172,448) (273,928) (992,861)
Accounts payable 70,749 (834,139) (816,866) 148,075
Accrued compensation and benefits (70,623) (494,507) 444,044 156,000
Accrued interest - - - 275,560
Dividend receivable (63,758) - - (63,758)
Due to related party - (35,532) (17,193) -
Other accrued expenses and current liabilities 87,646 (364,219) (40,570) 673,197
------------------------------------------------------------------------
Net cash used in operating activities (7,650,612) (15,586,588) (24,219,807) (71,403,521)
Cash flows from investing activities:
Purchase of investments (1,100,000) - - (1,100,000)
Increase in other assets (236,854) - 664,986 (412,072)
Purchases of property and equipment (7,993) (466,081) (4,320,064) (8,421,708)
Sale of property and equipment 53,365 - - 53,365
------------------------------------------------------------------------
Net cash used in investing activities (1,291,482) (466,081) (3,655,078) (9,880,415)
Cash flows from financing activities:
Initial public stock offering, net of expenses - - - 49,341,537
Payment of dividends - - (1,159,373) (1,159,373)
Shares issued under employee stock purchase plan 965 13,305 109,944 124,214
Exercise of employee stock options 233,897 - 719,193 1,409,567
Issuance of preferred stock - - - 32,868,028
Repayment of subscription receivable - - - 5,000,000
Proceeds from capital leases - - 495,851 495,851
Repayment of capital leases (200,041) (340,455) (186,247) (1,031,395)
Proceeds from notes payable issued to investors - - - 3,550,000
------------------------------------------------------------------------
Net cash provided by (used in) financing activities 34,821 (327,150) (20,632) 90,598,429
(Decrease)increase in cash and cash equivalents (8,907,273) (16,379,819) (27,895,517) 9,314,493
Cash and cash equivalents, beginning of period 18,221,766 34,601,585 62,497,102 -
------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 9,314,493 $ 18,221,766 $ 34,601,585 $ 9,314,493
========================================================================
Supplemental disclosure of non--cash transactions:
Cash paid for interest $ 6,700 $ 48,926 $ 34,000 $ 488,126
========================================================================
Cash paid for taxes $ 4,700 $ 17,000 $ 1,600 $ 30,500
========================================================================
Assets acquired through capital lease $ - $ - $ - $ 535,445
========================================================================
See notes to consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. Nature of Business and Operations
Nature of Business. Beacon Power Corporation (the "Company" or "Beacon") (a
development stage company) was incorporated on May 8, 1997 as a wholly owned
subsidiary of SatCon Technology Corporation ("SatCon"). Since its inception,
Beacon has been engaged in the development of flywheel devices for storing and
transmitting kinetic energy. As discussed in Note 6, during the fourth quarter
of 2000, the Company completed an initial public offering of its common stock
and raised approximately $49.3 million net of offering expenses. In 2003 the
Company began development and manufacturing activities in the area of power
conversion systems for the renewable energy market. Because the Company has not
yet generated a significant amount of revenue from its principal operations, it
is accounted for as a development stage company under Statement of Financial
Accounting Standards No. 7. The Company has a single operating segment,
manufacturing alternative power sources. The Company's organizational structure
has no divisions or subsidiaries dictated by product lines, geography or
customer type.
Operations. The Company has experienced net losses since its inception and,
as of December 31, 2003, had an accumulated deficit of approximately $123.6
million. The Company is currently facing the challenge of identifying potential
applications, and the ongoing development and refinement, of its commercial
products. This ongoing research and development is expected to require
significant additional outlays of capital. The Company has taken significant
actions over the last two years to reduce its cash expenditures for product
development, infrastructure and production readiness. Headcount, development
spending and capital expenditures have also been significantly reduced. The
Company has focused its activity on market analysis in terms of size of markets,
competitive aspects and advantages that the Company's products could provide.
Preliminary design of potential products for markets for its flywheel products
under consideration has continued. No expenditures for prototype development or
production capabilities will be made until the specific markets to be served
have been defined. The Company has begun production of an inverter product for
solar energy applications. The Company must raise additional equity to execute
its business plan and continue as a going concern. Based on the Company's
current cash usage rates and additional expenditures expected in support of its
business plan the Company will need to obtain an equity investment by early 2005
to cover expenses relating to continuing operations, working capital, completing
additional inverter products' prototype development and production of emerging
inverter products. In the event that the Company elects to begin full scale
development of its Smart Energy Matrix systems, the amount of equity required
would increase substantially.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Going concern. The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As shown
in the consolidated financial statements, the Company incurred significant
losses from continuing operations of $8,618,000, $20,839,000, and $26,146,000
and cash decreases of $8,907,000, $16,379,000 and $27,896,000, during the years
ended December 31, 2003, 2002 and 2000, respectively. The Company has $9,314,000
of cash and cash equivalents on hand at December 31, 2003. The Company has not
recorded any revenue from sales of its products. These factors, among others,
indicate that the Company may be unable to continue as a going concern. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Management recognizes that the Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to allow the Company
to satisfy its obligations on a timely basis. The generation of sufficient cash
flow is dependent, not only on the successful expansion of the Company's share
of the market for its current product and the establishment of new markets for
products under development, but also on its ability to obtain additional equity
investments. Management believes that the successful achievement of these
initiatives combined with the generation of additional cash via equity
offerings, should provide the Company with sufficient resources to meet its near
term cash requirements. In addition, the Company is also considering a number of
other strategic financing alternatives, however, no assurance can be made with
respect to the long-term viability of the Company.
Accounting Principles. The accompanying consolidated financial statements
have been prepared using accounting principles generally accepted in the United
States of America.
Consolidation. The accompanying consolidated financial statements include
the accounts of the Company and its subsidiary Beacon Power Securities
Corporation. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Recapitalization. The accompanying financial statements reflect a
recapitalization of the Company in 1997 when one shareholder exchanged shares of
common stock for Class A preferred stock.
Summary of Significant Accounting Policies
Use of Estimates. The preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents include demand
deposits and highly liquid investments with maturity of three months or less
when acquired. Cash equivalents are stated at cost, which approximates market
value.
Inventories. Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist of raw materials, work in process and
finished goods held for resale. Inventory balances are comprised of the
following amounts as of December 31, 2003:
Raw materials $ 104,362
Work in progress 26,001
Finished goods 108,321
----------------------
Total inventories $ 238,684
Investments. The Company's investment in Evergreen Solar (see Note 13) is
classified as available-for-sale and is recorded on the consolidated balance
sheet at fair value. Unrealized gains or losses on this investment are included
as a separate component of accumulated other comprehensive income (loss), net of
any tax effect.
Employee Advances. During 2001, the Company advanced approximately $785,000
to three officers of the Company. These advances are interest bearing and
secured by the officers' holdings of Beacon Power Corporation common stock and
were provided to the officers to allow them to exercise stock options and in one
case, to pay the related taxes. Through December 31, 2003, the Company had
collected approximately $667,000 in principal payments on these advances. In
June 2002, due to the current market value of the pledged securities and the
uncertainty of collection of the advance, the Company took a charge in the
amount of $426,000 to reserve the remaining balance of the advance to Mr.
William Stanton, its former CEO and president. During 2003, a portion of this
reserve was reversed due to a partial payment of $323,000 from the proceeds of
the sale of the Beacon common stock that secured the loan. This balance of this
loan of $118,000 is still reserved, however, it has not been cancelled. Mr.
Stanton continues to be a director of the Company. This charge is included in
other expenses in the accompanying consolidated statement of operations. All
other officers have paid their respective loan balances in full as of December
31, 2003.
Property and Equipment. Property and equipment, including leasehold
improvements, are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets.
Other Assets. Other assets consist of intellectual property relating to the
Company's Smart Power M5 inverter system purchased from Advanced Energy Systems,
Inc. and deposits securing performance on the Company's operating lease of its
facility.
Loss on Sales Commitments. At December 31, 2003 the Company had no sales
commitments and therefore no analysis of loss on sales commitments was required.
When the Company has sales commitments that are firm, have fixed-prices, and the
direct costs to manufacture products covered by the Company's firm sales
commitments are in excess of the fixed selling prices, revenue and cost of
revenue on such sales commitments are recorded as deliveries are made. Direct
costs consist of materials and direct labor costs. These excess costs have been
estimated and accrued as losses on sales commitments in the period in which the
sales commitment is made. Estimates of costs to manufacture products are
reviewed and revised periodically and changes in estimated losses from such
revisions are recorded in the accounting period in which the revisions are made.
Long-Lived Assets. In accordance with Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", long-lived assets to be held and used by the Company are reviewed to
determine whether any events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. The conditions considered
include whether or not the asset is in service, has become obsolete, or whether
external market circumstances indicate that the carrying amount may not be
recoverable. The Company recognizes a loss for the difference between the
estimated fair value of the asset and the carrying amount. The fair value of the
asset is measured using either available market prices or estimated discounted
cash flows. The Company's analyses indicate that there has been an impairment of
long-lived assets and recognized an asset impairment charge in 2003 and
restructuring and asset impairment charges in 2002.
Restructuring and asset impairment charges. The Company's initial products
were focused on the telecom industry. As a result of the overall economic
downturn and in particular the significant decline in capital and maintenance
spending in telecom as well as the low price of lead-acid batteries, the Company
has not been successful in selling products into this market. Therefore, in
December of 2003, the Company recorded a non-cash asset impairment charge of
$0.4 million in order to reduce the carrying amount of its flywheel related
patents and patents pending as the estimated future cash flows anticipated from
these assets is substantially in doubt. Also, in July 2002, in an effort to
reduce its monthly cash-spending rate, the Company implemented a number of
cost-cutting measures to ensure the availability of resources necessary to
pursue its business strategy for a reasonable period but at a significantly
lower cash expenditure rate. As a result, a substantial portion of its long-term
assets have been idled, including machinery and equipment, tooling, office
furniture and fixtures, and equipment and leasehold improvements. The Company
has evaluated all of its property and equipment as required by Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" and, as a result, has taken a restructuring and
impairment charge of $6.5 million of which $4.3 million represents impaired
capital equipment and leasehold improvements, $.3 million relates to severance
costs and $1.9 million relates to a reserve against future lease payments and
related facility costs. The assets held for sale have been grouped together and
classified as "Assets held for sale" in the current assets section of the
balance sheet. Assets held for sale have been written down to their fair value
based on quotes from vendors and other market factors. The reserve against
future lease payments is classified as "Restructuring reserve" in the current
liabilities section of the balance sheet.
The restructuring reserves are as follows:
Beginning balance at December 31, 2002 $ 1,749,738
Charges for the period -
Payments (343,547)
------------------
Ending balance at December 31, 2003 $ 1,406,191
==================
Revenue Recognition. Revenue is recognized on transfer of title, typically
when products are shipped and all related costs are estimable. For sales to
distributors, the Company makes an adjustment to defer revenue until they are
subsequently sold by distributors.
Stock-Based Compensation. In 2002 the Company implemented FASB Statement of
Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS 148 amends current disclosure
requirements and requires prominent disclosures on both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for financial reports containing financial statements for
interim periods beginning after December 15, 2002. SFAS 148 also provides
alternative methods of transition for a voluntary change to fair-value based
methods of accounting, which have not been adopted at this time. Compensation
expense associated with awards of stock or options to employees is measured
using the intrinsic-value method. Deferred compensation expense associated with
awards to non-employees is measured using the fair-value method and is amortized
over the vesting period of three years using a calculation under FASB
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans."
No stock-based compensation is reflected in net earnings for options
granted to employees as all options granted under the plan had an exercise price
equal to or greater than the market price of the underlying stock at the date of
the grant. The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123 "Accounting for Stock-Based Compensation"
to stock-based employee compensation.
Year Ended December 31,
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
Net loss to common shareholders as reported $ (8,618,013) $(20,839,251) $(26,145,668)
Pro forma compensation expense 400,148 2,998,612 2,608,000
---------------------------------------------------
Net loss--pro forma $ (9,018,161) $(23,837,863) $(28,753,668)
===================================================
Loss per share--as reported $ (0.20) $ (0.49) $ (0.61)
Loss per share--pro forma $ (0.21) $ (0.56) $ (0.68)
The fair value of the options on their grant date was measured using the
Black-Scholes option-pricing model. Key assumptions used to apply this
option-pricing model are as follows:
2003 2002 2001
--------------------------------------------------------------
Risk-free interest rate 1.22% - 3.56% 2.48% - 3.56% 3.0% - 6.25%
Expected life of option 1-3 years 1-3 years 1-3 years
Expected dividend payment rate, as a
percentage of the stock price on the date of
grant 0% 0% 0%
Assumed volatility 109% - 137% 130% - 137% 100% - 135%
The option-pricing model used was designed to value readily tradable stock
options with relatively short lives. However, management believes that the
assumptions used to value the options and the model applied yield a reasonable
estimate of the fair value of the grants made under the circumstances (see also
Note 8).
Income Taxes. Deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and tax loss and credit carry forwards using the currently
enacted tax rates and laws. A valuation allowance is provided to the extent
realization of deferred tax assets is not considered more likely than not (see
Note 11).
Research and Development. Research and development costs are expensed as
incurred.
Financial Instruments. The carrying amount of cash and cash equivalents,
accounts payable, accrued expenses, notes payable to investors and capital lease
obligations approximate their fair values.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to significant concentration of credit risk consist
primarily of cash and cash equivalents. At December 31, 2003 and 2002, the
Company had cash balances at a financial institution in excess of federally
insured limits. However, the Company does not believe that it is subject to
unusual credit risk beyond the normal credit risk associated with commercial
banking relationships.
Comprehensive Loss. Comprehensive loss is the combination of reported net
loss and other comprehensive income, which consists of the unrealized gain on
the Company's investment in Evergreen Solar.
Loss Per Share - Basic and Diluted. Basic loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
each period. Diluted loss per share was computed in the same manner. Potentially
dilutive securities have been excluded from the computation, as their effect is
antidilutive.
3. Property and Equipment
Property and equipment consisted of the following at December 31:
Estimated
Useful December 31, December 31,
Lives 2003 2002
------------- -------------------- --------------------
Machinery and equipment 5 years $2,111,972 $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 $7,971,406 $7,848,214
Less accumulated depreciation and amortization (3,453,209) (2,996,079)
-------------------- --------------------
Property and equipment, before impairment $4,518,197 $4,852,135
-------------------- --------------------
Less impairment reserve (4,161,017) (4,289,206)
-------------------- --------------------
Property and equipment, net $357,180 $562,929
==================== ====================
4. Commitments
The Company leases office and light manufacturing space under an operating
lease through September 30, 2007. At December 31, 2003, the Company has provided
the lessor with an irrevocable letter of credit in the amount of $355,232. The
Company entered into a manufacturing agreement with a vendor for an integral
component of the Company's M5 power conversion system. The Company provided the
vendor with an irrevocable letter of credit in the amount of $50,000 that
expires on October 3, 2004. Both letters of credit are secured by a cash
deposit.
Future minimum annual lease payments under non-cancelable operating leases
as of December 31, 2003 are as follows:
2004 490,675
2005 500,359
2006 529,413
2007 $397,059
Total rent expense was $215,415, $436,083, and $567,239, during 2003, 2002,
and 2001, respectively.
The Company has placed purchase orders with its suppliers to fulfill its
Smart Power M5 production requirements for 2004. These orders include
non-cancelable commitments of approximately $855,000.
5. Preferred Stock
As a result of the initial public offering of the Company's common stock
and the conversion of all outstanding shares of all classes of the preferred
stock, the Company amended its charter and cancelled all its classes of
preferred stock. The Company then added a new class of preferred stock that can
be issued in the future by filing a Certificate of Designations with the
specific terms as set by its Board of Directors. At December 31, 2003 and 2002,
there are 10 million shares of preferred stock authorized with none outstanding.
6. Common Stock
Initial Public Offering. During the fourth quarter of 2000, the Company
sold 9,200,000 shares of its common stock, inclusive of the underwriters' over
allotment, at an initial public offering price of $6 per share. Net proceeds to
the Company as a result of the stock offering totaled approximately $49.3
million reflecting gross proceeds of $55.2 million net of underwriter
commissions of approximately $3.9 million and other estimated offering costs of
approximately $2.0 million.
Shareholder rights plan. In September 2002, the Company's Board of
Directors approved a Shareholder Rights Plan. Under the plan, each holder of
common stock on October 7, 2002 automatically received a distribution of one
Right for each share of common stock held. Each Right entitles the holder to
purchase 1/100th of a share of the Company's newly issued preferred stock for
$22.50 in the event that any person not approved by the board of directors
acquires more than 15% (35% in the case of one large shareholder that already
owned more than 15%) of the outstanding common stock, or in the event that the
Company is acquired by another company, $22.50 worth of the common stock of the
other company at half its market value (in each case any rights held by the
acquiring person are not exercisable and become void).
Reserved Shares. At December 31, 2003, 11,755,157 shares of common stock
were reserved for issuance under the Company's stock option plan and outstanding
warrants.
7. Redeemable Convertible Preferred Stock and Stock Warrants
Class D Redeemable Convertible Preferred Stock and Class D Stock Warrants.
Prior to its initial public offering, the Company's capital structure included
Class D redeemable convertible preferred stock ("Class D Stock"). All
outstanding shares of the Class D Stock plus accrued dividends were either
converted into shares of common stock during the initial public offering or were
paid in cash in February 2001. After the initial public offering, the Company
amended its charter and cancelled all its Class D Stock.
Under the conditions of the Class D Stock offering, the Company issued
warrants in October 1999 to three investors to purchase 772,500 shares of common
stock at $1.67, 772,500 shares of common stock at $2.25, and 772,500 shares of
common stock at $3.00 (the "October 1999 warrants"). The estimated fair value of
the warrants at the date of their issuance was $280,000. Upon issuance of the
warrants, this amount was recorded as a dividend to the holders of the Class D
Stock and credited to additional paid-in-capital. These warrants expire December
31, 2004.
Additional warrants were issued under the Class D Stock agreement during
April 2000 to three investors to purchase 712,500 shares of common stock at
$1.67 per share, 712,500 shares of common stock at $2.25 per share, and 712,500
shares of common stock at $3.00 per share. Upon issuance of these warrants, the
Company recorded a dividend of approximately $1,300,000 for the fair market
value of these warrants based on the Black-Scholes option pricing model. These
warrants expire December 31, 2004.
In December 2000, an investor exercised a portion of its warrants, in a
cashless transaction, to purchase 300,000 shares of the Company's common stock
at $1.67, 300,000 shares of the Company's common stock at $2.25 and 300,000
shares of the Company's common stock at $3.00 per share. Net shares issued
totaled 608,843.
Class E Redeemable Convertible Preferred Stock and Class E Stock Warrants.
Prior to its initial public offering, the Company's capital structure included
Class E redeemable convertible preferred stock ("Class E Stock"). All
outstanding shares of the Class E Stock plus accrued dividends were either
converted into shares of common stock during the initial public offering or were
paid in cash in February 2001. After the initial public offering, the Company
amended its charter and cancelled all its Class E Stock.
In conjunction with the issuance of the Senior Notes in August 1999, the
Company issued warrants to four investors to purchase 315,000 shares of Class E
Stock at an exercise price of $2.50 per share (the "August 1999 warrants"). The
estimated fair value of these warrants at the date of grant was $170,000. This
amount was recorded as a discount on the Senior Notes and was charged to
interest expense in 1999, as the Senior Notes were demand notes. These warrants
were to expire on August 2, 2004.
In conjunction with the Class E Stock conversion, warrants to purchase
315,000 shares, issued in conjunction with the issuance of the Senior Notes in
August 1999, were cancelled. In exchange, warrants to purchase 306,535 shares of
Class E Stock at $2.50 per share were issued. These warrants expire April 7,
2005. The estimated fair market value of these warrants was approximately
$344,000. Since these warrants replaced the August 2, 1999 warrants, the amount
allocated to the August 1999 warrants have been reallocated to Class E Stock
Warrants and the remaining $174,000 was charged to interest expense in the year
ended December 31, 2000. As a result of the initial public stock offering by the
Company in the fourth quarter of 2000, the holders of the warrants are now
entitled to purchase 613,070 shares of the Company's common stock instead of the
Class E Stock.
In December 2000, an investor exercised its 102,398 of its warrants, in a
cashless transaction, to purchase 84,433 shares of the Company's common stock.
Class F Redeemable Convertible Preferred Stock and Class F Stock Warrants.
Prior to its initial public offering, the Company's capital structure included
Class F redeemable convertible preferred stock ("Class F Stock"). All
outstanding shares of the Class F Stock plus accrued dividends were either
converted into shares of common stock during the initial public offering or were
paid in cash in February 2001. After the initial public offering, the Company
amended its charter and cancelled all its Class F Stock.
In conjunction with the issuance of the Class F Stock, the Company issued
warrants to seven investors to purchase 6,333,333 shares of its common stock at
an exercise price of $2.25. The estimated fair value of the warrants at the date
of their issuance was $33,000,000. This amount was recorded as a dividend to the
holders of the Class F Stock and credited to additional paid-in-capital during
2000. These warrants expire on May 23, 2005. During December 2000, two investors
exercised 1,884,800 of their warrants, in a cashless transaction, to purchase
1,289,600 shares of the Company's common stock.
Consultant Warrants. The Company issued warrants to two consultants that
are exercisable for an aggregate of 70,000 shares of its common stock at an
exercise price of $6.00 per share. The holder of one of these warrants to
purchase 50,000 shares of common stock may exercise its warrant at any time
prior to January 31, 2002. None of these warrants were exercised prior to
January 31, 2002 and the warrants have expired. The holder of the other warrant
to purchase 20,000 shares of common stock may exercise its warrant at any time
prior to August 2, 2005. These warrants were fully vested upon the issuance and
the Company recorded a charge to consulting expense of $213,861.
On October 24, 2000, the Company issued 240,000 warrants to an investor at
an exercise price of $2.10 per share in conjunction with an agreement by an
affiliate of that investor to provide the Company with technical expertise. One
half of the warrants vest immediately and the remainder vest as services are
utilized. During the fourth quarter of 2000, the company recorded a charge to
consulting expense for $1,355,505 to recognize the fair market value of the
vested warrants. The Company has deferred the remaining warrants and will
revalue the amount and record additional expense as necessary in future quarters
as the remaining services are provided. Deferred compensation relating to these
warrants was approximately $105,000 and $18,000 at December 31, 2003 and 2002.
The agreement terminates and any unvested options are forfeited on October 24,
2005.
All warrants were valued on the date of grant using the Black-Scholes
(common stock) or the Binary Option Pricing Model (preferred stock). The
assumptions used to value these warrants were as follows:
April August October
2000 2000 1999 1999 1997
Warrants Warrants Warrants Warrants Warrants
------------------------------------------------------------
Risk-free interest rate 6.15% 6.5% 5.62% 5.86% 6.25%
Expected life of warrant 12 months Various 30 months 27 months 24 months
Expected dividend payment rate, as a percentage
of the stock price on the date of grant 0% 0% 0% 0% 0%
Assumed volatility 73% 100% 60% 60% 48%
8. Stock Options
The Company's option plans provide for the granting of stock options to
purchase up to 9,000,000 shares of the Company's common stock. Options may be
granted to employees, officers, directors and consultants of the Company with
terms of up to 10 years. Under the terms of the option plans, incentive stock
options ("ISOs") are to be granted at fair market value of the Company's stock
at the date of grant, and nonqualified stock options (NSOs) are to be granted at
a price determined by the Board of Directors. ISOs and NSOs generally vest
ratably over 36 months from the grant date and have contractual lives of up to
10 years.
Stock option activity since inception is as follows:
Weighted- Weighted-
Average Average
Number of Exercise Fair
Shares Price Value
------------------------------------
Outstanding at inception -
Granted 5,757,688 $ 2.17 1.35
Exercised (480,266) 0.89
Canceled, forfeited or expired (544,382) 1.99
------------------------------------
Outstanding, December 31, 2000 4,733,040 2.50
Granted 2,361,007 2.94 1.93
Exercised (682,586) 1.05
Canceled, forfeited or expired (1,561,560) 4.07
------------------------------------
Outstanding, December 31, 2001 4,849,901 2.37
Granted 3,050,628 1.16 0.38
Exercised - -
Canceled, forfeited or expired (2,513,186) 2.25
------------------------------------
Outstanding, December 31, 2002 5,387,343 1.78
Granted 367,099 1.26 0.07
Exercised (289,135) 0.81
Canceled, forfeited or expired (2,649,378) 1.95
------------------------------------
Outstanding, December 31, 2003 2,815,929 $ 1.59
========================
The following table summarizes information about stock options outstanding
at December 31, 2003:
Weighted- Vested
--------------------------------
Average Weighted- Weighted-
Number Remaining Average Average
of Options Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price of Options Price
$.255-$.89 2,022,228 7.9 $0.80 1,815,566 $0.81
$1.00 - $2.50 399,104 6.82 $2.20 399,104 $2.20
$3.00 - $4.10 190,000 6.57 $3.94 190,000 $3.94
$5.10 - $6.10 171,541 7.06 $5.64 163,203 $5.66
$6.90 - $7.22 21,389 8.16 $7.08 18,889 $7.09
$9.25 - $9.31 11,667 7.43 $9.30 11,667 $9.30
Included in the above schedules are grants of 0, 45,000, 0 and 130,000
options made to non-employee consultants in 2003, 2002, 2001 and 2000,
respectively.
9. Employee Stock Purchase Plan
On October 15, 2000 the Company adopted an Employee Stock Purchase Plan
(the "Plan") under which eligible employees are able to purchase shares of the
Company's Common Stock at 85% of the market value at the date of the start of
each six month option period or the end of such period, whichever is lower.
Under the provisions of the Plan up to 1,000,000 shares are authorized. Shares
purchased under the Plan in 2003, 2002 and 2001 totaled 5,494, 42,041 and
54,956, respectively and the weighted average grant date fair value of the
shares purchased was $0.18 in 2003, $0.28 in 2002 and $2.00 in 2001. There are
897,509 shares available under the Plan at December 31, 2003.
10. Restricted Stock Units.
During 2003 the Company put into place a long-term incentive plan (LTIP)
for all executives and employees for 2003 and 2004. Based on the Company's cash
requirements and the need to retain its professional staff, the Company
determined that it would be in the best interest of it and its employees to
implement a Deferred Compensation Plan
The LTIP has eliminated the previous cash bonus structure for successful
performance and replaced it with a program whereby the Company establishes goals
that are strategically aligned to the Company's performance and, therefore,
shareholder value. The LTIP agreement is intended to provide employees deferred
compensation in the form of restricted stock units (or "RSUs") at no cost to the
recipient, that can be converted into shares of Company's common stock through
establishing and evaluating quarterly, or in some cases yearly, targets for the
employee and, following each quarter, determining the number of RSUs to accrue
and to be granted in four equal installments in the fiscal year following the
fiscal year with respect to which employee accrued the RSUs. Employees have the
right to convert their RSUs into shares at any time after such grant, subject to
a quarterly vesting schedule. The Company's employees earned 667,151 RSUs for
the fiscal year ended December 31, 2003, which are not available for exercise
until satisfaction of the quarterly vesting period during 2004. The grants are
recorded as deferred stock compensation until they are earned over the vesting
schedule, at which time, the value of the RSUs will be recorded as compensation
expense in the Company's Income Statement.
11. Income Taxes
The components of the provision (benefit) for income taxes consisted of the
following:
Cumulative
from date of
inception
through
Year ended December 31, December 31,
--------------------------------------------------
Components of Provision 2003 2002 2001 2003
-------------------------------------------------------------------
State Current $ 1,956 $ - $ 17,156 $ 19,112
Federal Def (5,807,539) (7,377,177) (9,919,839) (32,847,774)
State Def (1,169,696) (824,557) (1,679,472) (5,483,483)
Increase in Valuation 6,977,235 8,201,734 11,599,311 38,331,257
-------------------------------------------------------------------
Provision/(Benefit) $ 1,956 $ - $ 17,156 $ 19,112
===================================================================
A reconciliation of the statutory federal rate to the effective rate for
all periods is as follows:
Statutory federal rate benefit (34) %
State, net of federal effect (6)
Valuation allowance provided 40
-----
Effective rate --%
The components of the Company's deferred tax assets and liabilities
consisted of the following at December 31:
2003 2002
----------------------------------
Long term assets:
Net operating loss carryforwards $ 29,965,300 $ 26,081,296
Research & development credits 2,577,524 2,214,815
Loss on sales commitments 0 0
Restructuring reserves 2,373,598 2,415,578
Other 135,966 642,333
----------------------------------
Net deferred tax assets before valuation 35,052,388 31,354,022
allowance
Less valuation allowance (35,052,388) (31,354,022)
----------------------------------
Net deferred tax assets $ - $ -
==================================
The valuation allowance increased by $3,698,366 in 2003 and $8,201,734 in
2002, primarily due to the generation of net operating loss carry forwards and
credits for which realization is not reasonably assured.
The Company has available for future periods net operating loss carry
forwards for federal and state tax purposes of approximately $75,080,000 and
$73,746,000, respectively, as of December 31, 2003. In addition, the Company has
business credits of approximately $1,734,000 and $843,203 for federal and state
purposes, respectively as of December 31, 2003. The net operating loss carry
forwards begin to expire in 2012 for federal and 2002 for state tax purposes.
The federal research and development credits begin to expire in 2012. The
Company did not pay any income taxes from inception to December 31, 2003.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may have limited, or may limit in the future,
the amount of net operating loss carry forwards which could be utilized annually
to offset future taxable income and income tax liabilities. The amount of any
annual limitation is determined based upon the Company's value prior to an
ownership change.
12. Benefit Plan
In 1998, the Company created a 401(k) Profit Sharing Plan (the "Plan") for
its full-time employees. Each participant in the Plan may elect to contribute a
percentage of his or her annual compensation to the Plan on a pre-tax basis up
to the annual limit established by the Internal Revenue Service. The Company
matches employee contributions at a rate of 50% up to the first 6% of the
employee's contributions. The Company may also elect to make a profit-sharing
contribution at the discretion of the Board of Directors. Employee contributions
are fully vested. Company matching and profit sharing contributions vest 20%
after two years of service consisting of at least 1,000 hours per calendar year
and 20% annually thereafter. Company contributions were $63,671, $113,257 and
$189,883 during 2003, 2002 and 2001 respectively.
13. Related Party Transactions
Strategic Investment. On May 15, 2003, the Company invested $1,000,000 in
the Series A Preferred Stock of Evergreen Solar, Inc., a public company, which
specializes in renewable energy sources, in order to develop a strategic
relationship with that company. This investment was part of a larger financing
provided by several investors. The Company made its investment on the same terms
as the other investors in this financing. The Company purchased 892,857 shares
of the Series A Preferred Stock of Evergreen, for $1.12 per share. In addition
the Company purchased a three-year warrant exercisable for 2,400,000 shares of
Evergreen's common stock. The warrant has a purchase price of $100,000 and a
cash exercise price of $3.37 per share. Evergreen's financing was a private
placement of $29.475 million of its Series A Preferred Stock and the above
warrant. Perseus 2000, L.L.C., an affiliate of one of the Company's
stockholders, Perseus Capital, L.L.C., invested $3 million in Evergreen's Series
A Preferred Stock, and led the investor group in this financing. Mr. Philip J.
Deutch and Mr. Kenneth M. Socha, members of the Board of Directors of the
Company, are Managing Director and Senior Managing Director, respectively, of
Perseus, L.L.C., and Mr. Deutch is one of four individuals from the Evergreen
investor group that was added to the Board of Directors of Evergreen when the
investment closed.
14. Quarterly Results (Unaudited)
In management's opinion, this unaudited information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any future
quarters.
2003
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------------------------
Revenue $ - $ - $ - $ -
Loss from operations $ (2,277,244) $ (2,256,698) $ (2,056,258) $ (2,547,488)
Net loss $ (2,229,375) $ (2,218,750) $ (1,708,861) $ (2,461,027)
Loss per share - basic and diluted $ (0.05) $ (0.05) $ (0.04) $ (0.06)
Weighted-average common shares outstanding 42,812,897 42,814,929 42,883,762 43,028,761
2002
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------------------------
Revenue $ - $ - $ - $ -
Loss from operations $ (5,681,606) $ (3,746,500) $ (9,258,822) $ (2,180,493)
Net loss $ (5,550,895) $ (4,037,184) $ (9,150,158) $ (2,101,015)
Loss per share - basic and diluted $ (0.13) $ (0.09) $ (0.21) $ (0.05)
Weighted-average common shares outstanding 42,770,856 42,795,821 42,809,361 42,811,667
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. 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 December
31, 2003. Based upon that evaluation, they have concluded that the Company had
in place on that date controls and other procedures that are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Since the date of the evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning executive officers of the Company that responds to
this Item is incorporated by reference from Item 4A contained in Part 1 of this
Form 10-K.
Members of the current board of directors are as follows:
Name and Age Principal Occupation and Other Information
- -------------------------- ----------------------------------------------------
William E. Stanton, age 60 -- Mr. Stanton has been a director of the Company
since its formation in 1997. He served as the President and CEO of the
Company from January 1998 through December of 2001. Prior to joining
Beacon, Mr. Stanton was the Chief Operating Officer of SatCon from
September 1995 to May 1997, where he managed operations and the
strategy development to convert SatCon from a contract research and
development company to a commercial product organization. This
strategy included the formation of Beacon Power. Prior to joining
SatCon, Mr. Stanton was one of two Vice Presidents of Operations at
the Charles Stark Draper Laboratory where he managed $75,000,000 of
contract research and development annually. At Draper, he had also
served as the Vice President of Corporate Development, where he led
strategic planning, developed and managed a $25,000,000 annual
corporate research and development program, and helped create new
business units that were generating over $30,000,000 in software and
avionics products annually. Mr. Stanton received a Bachelor's Degree
in Electrical Engineering from the University of Maine, a Master's
Degree in Instrumentation and Control from the Massachusetts Institute
of Technology, and a Master's in Business Administration from the
Harvard Business School. Mr. Stanton's term of office expires in 2006.
F. William Capp, age 55 -- Mr. Capp has served as the Company's President
and Chief Executive Officer since December 1, 2001 when he joined
Beacon Power. Prior to joining Beacon Power, Mr. Capp was the
President of the Telecommunications group of Bracknell Corporation, a
company that provided infrastructure for the telecommunications
industry with annual sales of $350 million and 30 regional offices in
the US and Canada. From 1997-2000, Mr. Capp served as the President of
a division of York International where he increased aftermarket sales
by over 50% from 1997 to 1999, which were the two most profitable
years in that division's history. From 1978-1997, Mr. Capp held
numerous positions at Ingersoll Rand. From 1992-1997, he served as
Vice President and General Manager of the Compressor Division were he
was responsible for an operation with over 700 employees. He managed a
complex supply chain including over $100 million in purchases from a
variety of companies. From 1989-1992, Mr. Capp was the Vice President
of Technology for the Torrington Company, which is a $900 million
manufacturer of bearings and precision components to the automotive
and other industries worldwide. Mr. Capp assisted in the development
of new products, new manufacturing technologies and project
management. He also held numerous other engineering positions within
Ingersoll Rand. Prior to joining Ingersoll Rand in 1978, he worked for
Ford's Truck Division in such positions as project engineering,
supervisor, and product planning. Mr. Capp received his Bachelor of
Science in Aeronautical Engineering from Purdue University, a Master
of Business Administration and a Master Degree in Mechanical
Engineering from the University of Michigan. He also has his Black
Belt Training Program from the American Society for Quality. Mr. Capp
has been a member of the board since December 2001. Mr. Capp's term of
office expires in 2005.
Kenneth M. Socha, age 57 -- Mr. Socha has served as Senior Managing Director
of Perseus Capital since 1996. From January 1, 1998 to June 30, 1991
he was a partner of Dewey Ballantine in New York City. In June of
1991, he joined Rappahannock Investment Company, the predecessor of
Perseus Capital. Mr. Socha is a director of four private companies in
which Perseus has investments. He is a graduate of the University of
Notre Dame and the Duke University School of Law. Mr. Socha has served
as a director since October 1998 and serves as Chairman of the
Company's compensation committee and is a member of the audit
committee. Mr. Socha's term of office expires in 2004.
Philip J. Deutch, age 39 -- Mr. Deutch has served as a Managing Director of
Perseus since 1997. In this position, Mr. Deutch has led Perseus'
investments in numerous energy technology companies. Mr. Deutch serves
on the board of directors of Metallic Power, Evergreen Solar, and
International Marketing Concepts. Assuming the closing of the
committed financing of Evergreen Solar, Inc. Mr. Deutch will also join
the board of directors of that company. Prior to joining Perseus, Mr.
Deutch was an attorney at Williams & Connolly LLP. and worked in the
Mergers and Acquisitions Department of Morgan Stanley & Co. in New
York City. In this position, Mr. Deutch was a member of execution
teams for acquisitions, divestitures, and leveraged buyouts. Mr.
Deutch is a graduate, with distinction, of Stanford Law School and of
Amherst College where he was elected a member of Phi Beta Kappa. Mr.
Deutch is a term member of the Council of Foreign Relations and serves
on the board of directors of the City Lights School, and the
International Center for Research on Women. Mr. Deutch has served as a
director of the Company since October 1998 and is a member of the
audit committee. Mr. Deutch's term of office expires in 2005.
Jack P. Smith, age 55 -- Mr. Smith is President of More Space Place, Inc., a
leading producer and retailer of furniture system solutions. Currently
located mainly in Florida, the company has several retail locations in
other states as well. Mr. Smith is also a Partner and Director of
SilverSmith Inc., a firm producing and selling gas well metering
systems. These systems employ radio telemetry, satellite connectivity
to the internet and data management by the company, allowing customers
real time internet based access to remote gas well production and also
enabling certain remote control features. Prior to these ventures Mr.
Smith served as President and Chief Executive Officer of Holland Neway
International in Muskegon, Michigan, a leading designer and
manufacturer of suspension systems and brake actuators for the
commercial vehicle market. In 2000, this 650-person company had
worldwide sales of $200 million. During his tenure, Smith was
responsible for growing sales of Holland Neway (formerly Neway
Anchorlok International) from $70 million to the present level of $200
million. He developed a comprehensive strategic vision for growth that
has enabled the company to successfully grow despite stiff competition
and steadily declining market prices for brake and suspension
components. In 1992, Smith led the company's divestiture from Lear
Siegler to American Industrial Partners (AIP), a financial buyer. In
1995, Smith led a successful management buyout of the company with
equity partner Kohlberg Kravis Roberts. From 1992 to 1999, these
transactions generated an equity return of over $110 million. Smith
also held the positions of V.P. of Engineering and Quality Assurance
at Neway Anchorlok International and directed the engineering and
quality assurance departments. Earlier, he was Chief Engineer. From
1972 to 1982, Smith was Design Group Leader at the Ford Motor Company
- Heavy Truck Division, in Dearborn, Michigan, where he also held
positions as project engineer, and product planning analyst. Smith
also serves on the board of directors of Bissell Corporation in Grand
Rapids, Michigan, SRAM Corporation in Chicago, and Weasler
Engineering, Inc. in West Bend, Wisconsin. He is a Foundation Board
member of Grand Valley State University. A resident of Grand Rapids,
Michigan, Smith attended the University of Michigan where he earned
bachelor's (1970) and master's (1971) degrees in mechanical
engineering and an MBA (1979.) Mr. Smith has served on the board of
the Company since August 2001, is a member of the compensation
committee and is the acting chairman of the audit committee. Mr.
Smith's term of office expires in 2004.
Audit Committee.
The current Audit Committee members are Messrs. Smith, Socha and Deutch.
The members of the Audit Committee will meet the requirements of the Nasdaq's
recently adopted listing standards when the same become applicable to the
Company. Mr. Smith is the only current director that is "independent" as defined
in those new standards. No member of the Audit Committee is an Audit Committee
Financial Expert. The Company has been unable to attract a person who would
qualify as such to sit on its Board of Directors. The Board has designated Mr.
Smith as the financial expert within the meaning of SEC regulations and the
Nasdaq's listing standards. The Committee is appointed by and reports to the
Board of Directors. Its responsibilities include, but are not limited to, the
appointment, compensation and dismissal of the independent auditors, review of
the scope and results of the independent auditors' audit activities, evaluation
of the independence of the independent auditors, and review of the Company's
accounting controls and policies, financial reporting practices and the internal
audit control procedures and related reports of the Company.
Compensation Committee.
The current Compensation Committee members are Messrs. Smith and Socha. The
Compensation Committee has the authority to set the compensation of Beacon's
Chief Executive Officer and all executive officers and has the responsibility to
review the design, administration and effectiveness of all programs and policies
concerning executive compensation and establishing and reviewing general
policies relating to compensation and benefits of employees. The Committee
administers Beacon's Amended and Restated 1998 Stock Incentive Plan, Employee
Stock Purchase Plan and its Restricted Stock Unit Incentive Plan. The Committee
is composed of two non-employee directors who have no interlocking relationships
as defined by the Securities and Exchange Commission.
Code of Ethics.
In 2001, the Company updated its Code of Ethics for the Chief Executive
Officer and Chief Financial Officer, its directors and employees (the "Code"). A
copy of the Code may be found on the Internet at the Company's website,
www.beaconpower.com. The Company intends to disclose on its website any
amendments to the Code or any waiver from a provision of the Code.
Item 11. Executive Compensation
Annual Compensation Long Term Compensation
--------------------------------------------------- ----------------------------------------------
Awards Payouts
------------------------------- -------------
Restricted Securities
All Other (2) Stock Underlying LTIP
Name and Principal Position Year Salary Bonus Compensation Awards Options Payouts
- -------------------------------------------- ------------ ---------- --------------- ---------------- -------------- -------------
F. William Capp (3) 2003 $220,000 $ - $ 71,335 $ 225,217 - $ -
President and Chief Executive 2002 $220,000 $ - $ 212,685 $ - - $ -
Officer 2001 $ 12,692 $ 90,000 $ 2,765 $ - 900,000 $ -
Matthew L. Lazarewicz (4) 2003 $157,500 $ 20,000 $ 1,077 $ 108,422 - $ -
Vice President and Chief Technical 2002 $157,500 $ 32,573 $ 1,073 $ - 80,000 $ -
Officer 2001 $150,000 $ 35,000 $ 1,073 $ - - $ -
James M. Spiezio (5) 2003 $168,000 $ 25,200 $ 3,103 $ 125,183 - $ -
Vice President of Finance, Chief 2002 $168,000 $ 51,094 $ 3,094 $ - 80,000 $ -
Financial Officer,
Treasurer and Secretary 2001 $160,000 $ - $ 3,094 $ - - $ -
William J. Driscoll (6) 2003 $ 87,404 $ - $ - $ - - $ -
Former Vice President of Engineering 2002 $145,769 $ 21,839 $ - $ - 100,000 $ -
2001 $ 37,500 $ - $ - $ - 50,000 $ -
Richard L. Hockney (7) 2003 $114,400 $ 2,500 $ - $ 27,706 - $ -
Chief Engineer 2002 $ 97,223 $ - $ - $ - 25,000 $ -
2001 $ 70,548 $ - $ - $ - 3,000 $ -
- ----------------------
1) Columns required by the rules and regulations of the Securities and
Exchange Commission that contain no entries have been omitted.
2) Amounts represent term life insurance premiums paid by the executive and
reimbursed by Beacon plus an amount to reimburse the executive for taxes
paid on the amount of the premium. Mr. Capp also received other
compensation relating to realtor expenses and temporary living costs and
the related taxes on these items.
3) The Company hired Mr. Capp in December 2001.
4) The Company hired Mr. Lazarewicz in February 1999.
5) The Company hired Mr. Spiezio in May 2000.
6) Mr. Driscoll resigned from the Company in May 2003.
7) Mr. Hockney has been with the Company from its inception.
Executive Employment Agreements.
The Company has employment agreements with Messrs. Capp, Lazarewicz and
Spiezio. In addition to the benefits described below, each executive is entitled
to receive group health and dental benefits, group long and short term
disability insurance coverage, 401(k) plan and stock plan participation, paid
vacation and life insurance.
Mr. Capp
The term of the agreement is from December 1, 2003 to December 31, 2004.
During this period, Mr. Capp is entitled to salary of $240,000 and a bonus of
$240,000 if Mr. Capp achieves the performance goals set by the Board (which
bonus may be more if the goals are exceeded or less if they are not reached). In
addition, the Company will pay Mr. Capp a bonus of $45,000 related to 2002. Mr.
Capp shall move to Massachusetts and will receive a bonus of $10,000 if he does
so by May 1, 2004. The Company will reimburse him for certain out-of-pocket
expenses incurred in connection with the move. Until Mr. Capp moves to
Massachusetts (but not after May 1, 2004), the Company will reimburse him for
the reasonable cost of an apartment (not to exceed $3500 per month). If the
agreement is terminated by Mr. Capp without good reason (generally, a diminution
of his duties or title, a breach of this agreement by the Company, a change of
the Company's location, a sale of the Company or his removal from the Board) or
by the Company for cause (generally, fraud or embezzlement, failure to cure a
breach of this agreement within 30 days after notice, a material breach of a
material Company policy or willful misconduct), then Mr. Capp will be entitled
to his salary up to the date of termination. If the agreement is terminated by
the Company without cause or by Mr. Capp for good reason, then Mr. Capp will be
entitled to the remainder of his salary for the term and the portion of $225,217
equal to the percentage of the term that has elapsed (but not to exceed
$192,000). In the event of Mr. Capp's death or disability, he or his estate
shall be entitled to three months' salary. If the Company fails to offer Mr.
Capp a new employment agreement by the end of the term, or if he continues
thereafter as an employee-at-will, then he will be entitled to receive the same
amount in 2005 as he received in 2004.
Mr. Lazarewicz
The term of the agreement is from October 25, 2002 to April 25, 2004.
During this period Mr. Lazarewicz is entitled to salary of $167,000 per year
and, at the discretion of the Board, a bonus. If the agreement is terminated by
Mr. Lazarewicz without good reason (generally, a diminution of his duties or
title, a breach of this agreement by the Company, a change of the Company's
location, a sale of the Company or his removal from the Board) or by the Company
for cause (generally, fraud or embezzlement, failure to cure a breach of this
agreement within 30 days after notice, a material breach of a material Company
policy or willful misconduct), then Mr. Lazarewicz will be entitled to his
salary up to the date of termination. If the agreement is terminated by the
Company without cause or by Mr. Lazarewicz for good reason, then Mr. Lazarewicz
will be entitled to one years' salary and the portion of $108,422 equal to the
percentage of the term that has elapsed (but not to exceed $78,750). In the
event of Mr. Lazarewicz 's death or disability, he or his estate shall be
entitled to three months' salary. In addition, in the event of Mr. Lazarewicz's
death or disability or the termination by the Company without cause or by Mr.
Lazarewicz for good reason, he is entitled to accelerated vesting of stock
options. If the Company fails to offer Mr. Lazarewicz a new employment agreement
by the end of the term, or if he continues thereafter as an employee-at-will,
then he will be entitled to receive the same amount in 2005 as he received in
2004.
Mr. Spiezio
The term of the agreement began on October 25, 2002 and continues until it
is terminated. During this period Mr. Spiezio is entitled to salary of $178,500
per year and, at the discretion of the Board, a bonus. If the agreement is
terminated by Mr. Spiezio without good reason (generally, the Company's material
breach of the agreement or a change of the Company's location) or by the Company
for cause (having the same meaning as in Mr. Capp's agreement) then Mr. Spiezio
will be entitled to his salary up to the date of termination. If the agreement
is terminated by the Company without cause or by Mr. Spiezio for good reason,
then Mr. Spiezio will be entitled to 48 weeks' salary. In the event of Mr.
Spiezio's death or disability, he or his estate shall be entitled to three
months' salary.
Option Grants in Last Fiscal Year.
There were no options granted to executive officers of the Company during
the last fiscal year ending December 31, 2003.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Shares Number of Securities Underlying Value of Unexercised in-the-money
Acquired on Value Unexercised Options at Year End Options at Year End
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- -------------- ------------ ---------------- ----------------- ---------------------- ---------------
F. William Capp - $ - 900,000 - $ 180,000 $ -
Matthew L. Lazarewicz - $ - 269,999 26,667 $ 54,133 $ 10,400
James M. Spiezio - $ - 206,666 26,667 $ 20,800 $ 10,400
William J. Driscoll - $ - - - $ - $ -
Richard L. Hockney - $ - 18,667 9,333 $ 6,500 $ 3,250
Total value of exercisable and unexercisable options is derived from the
difference between the fair market value ($1.09 as of December 31, 2003) of the
Company's stock and the exercise price of the options at fiscal year-end.
Long-Term Incentive Plans -- Awards in Last Fiscal Year
Performance or Estimated Future Payouts
Number Period Until Under Non-Stock Price Based Plans*
----------------------------------------
of Units Payout Threshold Target Maximum
--------------- --------------------------- ----------------------------------------
F. William Capp 206,621 Quarterly during 2004 100% 100% 100%
Matthew L. Lazarewicz 99,470 Quarterly during 2004 100% 100% 100%
James M. Spiezio 114,847 Quarterly during 2004 100% 100% 100%
William J. Driscoll - N/A 0% 0% 0%
Richard L. Hockney 25,418 Quarterly during 2004 100% 100% 100%
See note 16 to the financial statements for a full description of the
Company's long-term incentive plan.
Director Compensation.
The Company has adopted a compensation package that consists of stock
options and cash designed to compensate board members who are not employees
("non-employee directors"). All non-employee directors serving on the board of
directors receive options to purchase 10,000 shares of the Company's common
stock that vest monthly over a 12-month period and an exercise price equal to
the fair market value of the common stock on the date of grant. On the
anniversary date of each particular non-employee director's appointment to the
Company's board, each non-employee director will receive additional options to
purchase 10,000 shares of the Company's common stock that vest monthly over a
12-month period and have an exercise price equal to the fair market value of the
common stock on the date of grant.
Non-employee directors also receive an annual retainer of $10,000, payable
quarterly, plus $2,000 for each board of directors meeting attended in person
and $500 for each meeting attended by telephone. Audit committee members receive
an annual retainer of $50,000 for 2003 and $30,000 for 2004 payable quarterly
plus $500 per meeting. The board of directors will establish audit committee
retainers for years subsequent to 2004 during 2004. All other committee members
receive $500 per meeting. Directors are reimbursed for reasonable out-of-pocket
expenses incurred in the performance of their duties.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 2004, certain information
concerning the ownership of shares of Common Stock by (i) each person or group
that the Company knows owns beneficially more than five percent of the issued
and outstanding shares of Common Stock, (ii) each director and nominee for
director, (iii) each named executive officer described in "Compensation of
Executive Officers" below, and (iv) all directors and executive officers as a
group. Except as otherwise indicated, each person named has sole investment and
voting power with respect to his or its shares of Common Stock shown.
Number of Percentage of
Shares Common Stock
Beneficially Beneficially
Name and Address of Beneficial Owner (1) Owned (2) (3) Owned (2) (3)
- ----------------------------------------------- ----------------------------- -----------------------------
F. William Capp 900,000 2.0%
Matthew L. Lazarewicz (4) 410,813 *
James M. Spiezio 233,333 *
Philip J. Deutch 10,000 *
Jack P. Smith (5) 27,333 *
Kenneth M. Socha 10,000 *
William E. Stanton (6) 11,000 *
Perseus Capital, L.L.C. (7) 12,014,944 25.2%
The Beacon Group Energy Investment Fund II,
L.P. (8) 3,055,856 6.9%
All directors and executive officers as a
group (8 persons) 1,601,479 3.6%
- --------------
* Less than 1%.
(1) The address for all executive officers and directors is c/o Beacon Power
Corporation, 234 Ballardvale Street, Wilmington, MA 01887. Messrs. Capp,
Lazarewicz, and Spiezio are executive officers of Beacon. Messrs. Capp,
Deutch, Smith, Socha and Stanton are directors of Beacon.
(2) The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission and includes
voting or investment power with respect to those securities. Under these
rules, beneficial ownership includes any shares as to which the individual
or entity has sole or shared voting power or investment power and includes
any shares as to which the individual or entity has the right to acquire
beneficial ownership within 60 days after March 31, 2004 through the
exercise of any warrant, stock option or other right. The inclusion in this
proxy statement of these shares, however, does not constitute an admission
that the named stockholder is a direct or indirect beneficial owner of
those shares. The number of shares of common stock outstanding used in
calculating the percentage for each listed person includes the shares of
common stock underlying warrants or options held by that person that are
exercisable or convertible within 60 days of March 31, 2004, but excludes
shares of common stock underlying warrants or options held by any other
person.
(3) Includes the following number of shares of common stock issuable upon the
exercise of stock options which may be exercised on or before May 30, 2004:
Mr. Capp, 900,000; Mr. Spiezio, 233,333; Mr. Lazarewicz, 269,999; Mr.
Deutch, 10,000; Mr. Smith, 25,833; Mr. Socha, 10,000; and Mr. Stanton,
10,000.
(4) Includes 2,500 shares of common stock held in trust for Mr. Lazarewicz'
wife and sister-in-law, for which Mr. Lazarewicz acts as sole trustee. Mr.
Lazarewicz disclaims beneficial ownership over these shares.
(5) Includes 500 shares of common stock held by Mr. Smith's son. Mr. Smith
disclaims beneficial ownership over these shares.
(6) Includes 1,000 shares of common stock held by Mr. Stanton's wife. Mr.
Stanton disclaims beneficial ownership over these shares.
(7) Includes shares of common stock issuable upon exercise of warrants to
purchase 4,512,593 shares of common stock. Perseus Capital's address is
2099 Pennsylvania Avenue, N.W., Suite 900, Washington, DC 20006. Mr. Philip
J. Deutch and Mr. Kenneth M. Socha, members of the Board of Directors of
the Company, are also Managing Director and Senior Managing Director,
respectively, of Perseus, L.L.C.,
(8) Includes shares of common stock issuable upon exercise of warrants to
purchase 1,018,000 shares of common stock. Beacon Group's address is 399
Park Avenue, New York, NY 10022.
Equity compensation plan information
The following table gives information about equity awards under the
Company's stock option plan and employee stock purchase plan, as of December 31,
2003.
- ----------------------------------------------------------------------------------------------------------------
Number of securities to be Weighted average exercise
issued upon exercise of price of outstanding Number of securities
outstanding options, options, warrants and remaining available for
Plan category warrants and rights rights future issuance
- ----------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------
Equity compensation plans - $ - -
approved by security holders
- ----------------------------------------------------------------------------------------------------------------
Equity compensation plans not 2,815,929 $ 1.84 5,681,891
approved by security holders
- ----------------------------------------------------------------------------------------------------------------
Total 2,815,929 $ 1.84 5,681,891
- ----------------------------------------------------------------------------------------------------------------
For additional information concerning the Company's equity compensation
plans, see discussion in footnotes 8, 9 and 10 to the Company's consolidated
financial statements, Stock Options, Employee Stock Purchase Plan and Restricted
Stock Units.
Item 13. Certain Relationships and Related Transactions
Strategic Investment
On May 15, 2003, the Company invested $1,000,000 in Series A Preferred
Stock of Evergreen Solar, Inc., a public company that specializes in renewable
energy sources, in order to develop a strategic relationship with that company.
This investment was part of a larger financing provided by several investors.
The Company made its investment on the same terms as the other investors in this
financing. The Company purchased 892,857 shares of Series A Preferred Stock of
Evergreen, for $1.12 per share. In addition the Company also purchased a
three-year warrant exercisable for 2,400,000 shares of Evergreen's common stock.
The warrant has a purchase price of $100,000 and a cash exercise price of $3.37
per share Evergreen's financing was a private placement of $29.475 million of
its Series A Preferred Stock and the above warrant. Perseus 2000, L.L.C., an
affiliate of one of the Company's stockholders, Perseus Capital, L.L.C.,
invested $3 million in Evergreen's Series A Preferred Stock, and led the
investor group in this financing. Mr. Philip J. Deutch and Mr. Kenneth M. Socha,
members of the Board of Directors of the Company, are Managing Director and
Senior Managing Director, respectively, of Perseus, L.L.C. Mr. Deutch led the
Evergreen Solar Series A Preferred financing and is one of four individuals from
the Evergreen investor group to be added to the Board of Directors of Evergreen.
.. Messrs. Deutch and Socha disclosed their possible conflict relating to this
transaction, and abstained from voting on the matter. Beacon's participation in
the transaction was evaluated, debated and approved by all the disinterested
directors of the Company, after full disclosure of relevant facts and
circumstances. Mr. Deutch does not participate in discussions concerning this
strategic investment.
Advances to Certain 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 Beacon Power Corporation common stock and options and were provided
to the officers to allow them to exercise stock options and in one case, to pay
the related taxes. Through December 31, 2003, the Company had collected
approximately $667,000 in principal payments on these advances. In June 2002,
due to the current market value of the pledged securities and the uncertainty of
collection of the advance, the Company took a charge in the amount of $426,000
to reserve the remaining balance of the advance to Mr. William Stanton, its
former CEO and president. During 2003, a portion of this reserve was reversed
due to a partial payment of $323,000 from the proceeds of the sale of the Beacon
stock that secured the loan. This balance of this loan of $118,000and is still
reserved, however, it has not been cancelled. Mr. Stanton continues to be a
director of the Company. This charge is included in other expenses in the
accompanying consolidated statement of operations. All other officers have paid
their respective loan balances in full as of December 31, 2003.
Agreement with GE Corporation Research and Development
As a result of the investment in Beacon by GE Capital Equity Investments,
Inc., the Company has entered into an agreement with GE Corporate Research and
Development ("GE CR&D"), under which GE CR&D will provide the Company with
technical expertise in controls and materials. Under the terms of that
agreement, GE CR&D has agreed to make available to Beacon up to $2,000,000 of
its services at cost and the Company has issued GE Equity a warrant to purchase
240,000 shares of its common stock at an exercise price of $2.10 per share. Of
these warrants, 120,000 vested immediately and 120,000 will vest ratably to the
extent to which Beacon uses GE CR&D's services. This agreement terminates, and
any unvested options are forfeited, on October 24, 2005. Beacon did not engage
GE CR&D for any services during 2003; thus no other warrants were vested during
2003.
Item 14. Principal Accounting Fees and Services
2003 2002
------------- -------------
Audit Fees $122,960 $123,920
Audit-Related Fees - -
Tax Fees 78,480 41,760
All Other Fees - -
------------- -------------
Total Fees $ 185,940 $ 167,680
============= =============
The Company has engaged Deloitte and Touche, LLP as its principal auditors
since before its initial public offering in November 2000.
Audit Fees
The aggregate audit fees billed by Deloitte and Touche for the fiscal years
ended December 31, 2003 and 2002 were $122,960 and $123,920, respectively. These
fees include amounts for the audit of the Company's consolidated annual
financial statements and the reviews of the consolidated financial statements
included in the Company's Quarterly Reports on Form 10-Q, including services
related thereto such as attest services and consents.
Audit-Related Fees
There were no audit-related fees billed during the fiscal years ended
December 31, 2003 and December 31, 2002.
Tax Fees
The aggregate fees billed by Deloitte and Touche for tax services rendered
for the fiscal years 2003 and 2002 were $78,480 and $41,760, respectively. These
fees were for the preparation and filing of the 2001 and 2002 income tax return,
developing estimated payments for 2003 income taxes, and tax advice related to
the Company's restricted stock unit bonus program.
All Other Fees
Other than the services performed above, there were no other fees billed
for 2003 and 2002.
Audit Committee Pre-Approval Requirements
The Audit Committee's charter provides that it has the sole authority to
review in advance and grant any pre-approvals of (i) all auditing services to be
provided by the independent auditor, (ii) all significant non-audit services to
be provided by the independent auditors as permitted by Section 10A of the
Securities Exchange Act of 1934, and (iii) all fees and the terms of engagement
with respect to such services. All audit and non-audit services performed by
Deloitte & Touche during fiscal 2003 were pre-approved pursuant to the
procedures outlined above.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements are listed under Part II, Item 8 of this Report.
2. Financial Statement Schedules
Schedules for which provision is made in the applicable regulations of the
Securities and Exchange Commission have been omitted because the information is
disclosed in the Consolidated Financial Statements or because such schedules are
not required or not applicable.
3. Exhibits
The exhibits are listed below under Part IV, Item 14(c) of this report.
(b) Reports on Form 8-K
(c ) Exhibits
Exhibit
Number Description of Document
3.1 Sixth Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit No. 3.1 to the Registration Statement on Form S-1 of
Beacon Power Corporation No. 333-43386 filed on November 16, 2000).
3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit No. 3.2
to the Registration Statement on Form S-1 of Beacon Power Corporation No.
333-43386 filed on November 16, 2000).
4.1 Shareholder Rights Agreement dated as of September 25, 2002. (Incorporated
by reference to Exhibit No. 99.1 to the Current Report on Form 8-K of
Beacon Power Corporation filed on October 4, 2002).
4.2 Amendment to Shareholder Rights Agreement dated as of December 27, 2002.
(Incorporated by reference to Exhibit 12.2 to the Annual Report on Form
10-K of Beacon Power Corporation No. 333-43386 filed on March 31, 2003).
10.1.1 Securities Purchase Agreement by and among SatCon Technology Corporation,
Duquesne Enterprises (n/k/a DQE Enterprises, Inc.) and Beacon Power
Corporation dated May 28, 1997 (Incorporated by reference to Exhibit No.
10.1.1 to the Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.2 Securities Purchase Agreement by and among Beacon Power Corporation,
Perseus Capital, L.L.C., Duquesne Enterprises (n/k/a DQE Enterprises,
Inc.), Micro-Generation Technology Fund, L.L.C. and SatCon Technology
Corporation dated October 23, 1998 (Incorporated by reference to Exhibit
No. 10.1.2 to the Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.3 Securities Purchase Agreement by and among Beacon Power Corporation,
Perseus Capital, L.L.C., Duquesne Enterprises (n/k/a DQE Enterprises,
Inc.), Micro-Generation Technology Fund, L.L.C. and SatCon Technology dated
April 7, 2000 (Incorporated by reference to Exhibit No. 10.1.3 to the
Registration Statement on Form S-1 of Beacon Power Corporation No.
333-43386 filed on November 16, 2000).
10.1.4 Securities Purchase Agreement by and among Beacon Power Corporation,
Perseus Capital, L.L.C., Micro-Generation Technology Fund, L.L.C.,
Mechanical Technology Incorporated, The Beacon Group Energy Investment Fund
II, L.P. and Penske Corporation dated April 21, 2000 (Incorporated by
reference to Exhibit No. 10.1.4 to the Registration Statement on Form S-1
of Beacon Power Corporation No. 333-43386 filed on November 16, 2000).
10.1.5 Securities Purchase Agreement by and among Beacon Power Corporation,
Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro-Generation Technology
Fund, L.L.C., Mechanical Technology Incorporated, GE Capital Equity
Investments, Inc., The Beacon Group Energy Investment Fund II, L.P. and
Penske Corporation dated May 23, 2000 (Incorporated by reference to Exhibit
No. 10.1.5 to the Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.6 Investor Rights Agreement by and among Beacon Power Corporation, Perseus
Capital, L.L.C., DQE Enterprises, Inc., Micro-Generation Technology Fund,
L.L.C., Mechanical Technology Incorporated, GE Capital Equity Investments,
Inc., The Beacon Group Energy Investment Fund II, L.P., Penske Corporation,
SatCon Technology Corporation, James S. Bezreh, Russel S. Jackson, Russell
A. Kelley, Stephen J. O'Connor, Jane E. O'Sullivan and Robert G. Wilkinson
dated May 23, 2000 (Incorporated by reference to Exhibit No. 10.1.6 to the
Registration Statement on Form S-1 of Beacon Power Corporation No.
333-43386 filed on November 16, 2000).
10.1.7 Form of Warrant of Beacon Power Corporation issued pursuant to class D
financing and list of holders thereof (Incorporated by reference to Exhibit
No. 10.1.7 to the Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.8 Form of Warrant of Beacon Power Corporation issued pursuant to class E
financing and list of holders thereof (Incorporated by reference to Exhibit
No. 10.1.8 to the Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000).
10.1.9 Form of Warrant of Beacon Power Corporation issued pursuant to class F
bridge financing and list of holders thereof (Incorporated by reference to
Exhibit No. 10.1.9 to the Registration Statement on Form S-1 of Beacon
Power Corporation No. 33-43386 filed on November 16, 2000).
10.1.10 Form of Warrant of Beacon Power Corporation issued pursuant to class F
financing and list of holders thereof (Incorporated by reference to Exhibit
No. 10.1.10 to the Registration Statement on Form S-1 of Beacon Power
Corporation No. 333-43386 filed on November 16, 2000))
10.1.11 Warrant of Beacon Power Corporation issued to Cox Communications, Inc.
dated August 2, 2000 (Incorporated by reference to Exhibit No. 10.1.11 to
the Registration Statement on Form S-1 of Beacon Power Corporation No.
333-43386 filed on November 16, 2000).
10.1.12 Warrant of Beacon Power Corporation issued to Kaufman-Peters dated
August 2, 2000 (Incorporated by reference to Exhibit No. 10.1.12 to the
Registration Statement on Form S-1 of Beacon Power Corporation No.
333-43386 filed on November 16, 2000).
10.1.13 Warrant of Beacon Power Corporation issued to GE Capital Equity
Investments, Inc. dated October 24, 2000 (Incorporated by reference to
Exhibit No. 10.1.13 to the Registration Statement on Form S-1 of Beacon
Power Corporation No. 333-43386 filed on November 16, 2000).
10.1.14 Second Amended and Restated 1998 Stock Incentive Plan of Beacon Power
Corporation (Incorporated by reference to Exhibit No. 10.1.14 to the
Registration Statement on Form S-1 of Beacon Power Corporation No.
333-43386 filed on November 16, 2000).
10.1.15 Form of Incentive Stock Option Agreement of Beacon Power Corporation
(Incorporated by reference to Exhibit No. 10.1.15 to the Registration
Statement on Form S-1 of Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.16 Form of Non-Qualified Stock Option Agreement of Beacon Power Corporation
(Incorporated by reference to Exhibit No. 10.1.16 to the Registration
Statement on Form S-1 of Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.17 Form of Non-Qualified Stock Option Agreement of Beacon Power Corporation
issued to certain consultants on July 24, 2000 and list of holders thereof
(Incorporated by reference to Exhibit No. 10.1.17 to the Registration
Statement on Form S-1 of Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.18 Amended and Restated License Agreement by and between Beacon Power
Corporation and SatCon Technology Corporation dated October 23, 1998
(Incorporated by reference to Exhibit No. 10.1.18 to the Registration
Statement on Form S-1 of Beacon Power Corporation No. 333-43386 filed on
November 16, 2000).
10.1.19 Lease between Beacon Power Corporation and BCIA New England Holdings LLC
dated July 14, 2000 (Incorporated by reference to Exhibit No. 10.1.20 to
the Registration Statement on Form S-1 of Beacon Power Corporation No.
333-43386 filed on November 16, 2000).
10.1.20 Letter Agreement among Beacon Power Corporation, GE Capital Equity
Investments, Inc. and GE Corporate Research and Development dated October
24, 2000 (Incorporated by reference to Exhibit No. 10.1.24 to the
Registration Statement on Form S-1 of Beacon Power Corporation No.
333-43386 filed on November 16, 2000).
10.1.21 Form of Director and Officer Indemnification Agreement (Incorporated by
reference to Exhibit No. 10.1.25 to the Registration Statement on Form S-1
of Beacon Power Corporation No. 333-43386 filed on November 16, 2000).
10.1.22 Employment agreement dated December 1, 2001 between F. William Capp and
Beacon Power Corporation. (Incorporated by reference to Exhibit No. 10.1.22
to the Annual Report on Form 10-K of Beacon Power Corporation No. 333-43386
filed on March 31, 2003).
10.1.23 Employment agreement dated October 25, 2002 between Matthew L.
Lazarewicz and Beacon Power Corporation. (Incorporated by reference to
Exhibit No. 10.1.23 to the Annual Report on Form 10-K of Beacon Power
Corporation No. 333-43386 filed on March 31, 2003).
10.1.24 Employment agreement dated October 25, 2002 between William J. Driscoll
and Beacon Power Corporation. (Incorporated by reference to Exhibit No.
10.1.24 to the Annual Report on Form 10-K of Beacon Power Corporation No.
333-43386 filed on March 31, 2003).
10.1.25 Employment agreement dated October 25, 2002 between James M. Spiezio and
Beacon Power Corporation. (Incorporated by reference to Exhibit No. 10.1.25
to the Annual Report on Form 10-K of Beacon Power Corporation No. 333-43386
filed on March 31, 2003).
10.1.26 Employment agreement amendment dated October 25, 2003 between Matthew L.
Lazarewicz and Beacon Power Corporation.
10.1.27 Employment agreement dated March 11, 2004 between F. William Capp and
Beacon Power Corporation.
10.1.28 Form of Restricted Stock Unit Agreement of Beacon Power Corporation.
11.1 Statement of Computation of Earnings per Share. (This exhibit has been
omitted because the information is shown in the financial statements or
notes thereto.)
23.1 Consent of Deloitte & Touche LLP
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act and Rules 13a-14 and 15d-14 of the Exchange Act
31.2 Certification of Principal Financial and Accounting Officer pursuant to
Section 302 of the Sarbanes-Oxley Act and Rules 13a-14 and 15d-14 of the
Exchange Act
32.1 Certification of CEO pursuant to 18 U.S.C.ss.135 as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of CFO
pursuant to 18 U.S.C.ss.135 as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
BEACON POWER CORPORATION
By: /s/ F. William Capp
F. William Capp
President and Chief Executive Officer
Date: March 30, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ F. William Capp President and Chief Executive Officer,
and Director
F. William Capp (Principal Executive Officer) March 30, 2004
/s/ James M. Spiezio Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary
James M. Spiezio (Principal Financial Officer) March 30, 2004
/s/ Philip J. Deutch
Philip J. Deutch Director March 30, 2004
/s/ Jack P. Smith
Jack P. Smith Director March 30, 2004
/s/ Kenneth M. Socha
Kenneth M. Socha Director March 30, 2004
/s/ William E. Stanton
William E. Stanton Director March 30, 2004