UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 001-16171
Beacon Power Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-3372365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Ballardvale Street
Wilmington, Massachusetts 01887-1032
(Address of principal executive offices) (Zip code)
(978) 694-9121
(Registrant's telephone number, including area code)
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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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(Title of class)
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 _____
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, 2004 the market value of the voting stock of the registrant
held by non-affiliates of the registrant was $14,557,694. In determining the
market value of non-affiliated voting stock, shares of the registrant's common
stock beneficially owned by each executive officer, director and any known
person to be the beneficial owner of more than 20% of the registrant's voting
stock have been excluded. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of March 30, 2005 was 43,665,143.
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 ................................................................... 10
Item 3. Legal Proceedings ............................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders .......................... 10
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities ...................................... 11
Item 6. Selected Consolidated Financial Data ......................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .................. 33
Item 8. Financial Statements and Supplementary Data .................................. 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................................ 60
Item 9A. Controls and Procedures ...................................................... 60
Item 9B Other Information ............................................................ 60
PART III
Item 10. Directors and Executive Officers of the Registrant ........................... 61
Item 11. Executive Compensation ....................................................... 65
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ............................. 69
Item 13. Certain Relationships and Related Transactions ............................... 71
Item 14. Principal Accountant Fees and Services ....................................... 73
PART IV
Item 15. Exhibits and Financial Statement Schedules ................................... 74
Signatures .............................................................................. 77
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 Condition" and "Results of
Operations - Certain Factors Which May Affect Future Results" of this Form 10-K.
PART I
Item 1. Business
Overview
Beacon Power Corporation is a development stage company that was incorporated in
Delaware on May 8, 1997. The Company's principal offices and research and
development laboratory are located at 234 Ballardvale Street, Wilmington,
Massachusetts, 01887-1032. Beacon's telephone number is 978-694-9121. The
Company's web address is www.beaconpower.com. Investors can obtain copies of SEC
filings from this site free of charge, as well as from the SEC web site at
www.sec.gov, or by contacting Investor Relations at the Company's principal
offices.
The Corporation and its subsidiaries (collectively "Beacon" or "the Company")
design, develop, configure and offer for sale, advanced products and services to
support more reliable electricity grid operation. Its sustainable energy storage
and power conversion solutions can help provide reliable electric power for the
utility, renewable energy, and distributed generation markets. The Company's
Smart Energy Matrix is a design concept for a megawatt-level, utility-grade
flywheel-based energy storage solution that would provide sustainable power
quality services for frequency regulation, and support the demand for reliable,
distributed electrical power. The Company has the following products, which are
in varying stages of development, production readiness or low volume production:
o Smart Energy(TM) Matrix - A design concept for a high-power flywheel-based
system combining several flywheels with power electronics. The Company
believes the Smart Energy Matrix can provide frequency regulation services
for use by independent system operators and regional transmission operators
to regulate electrical power. The Company also believes that the Smart
Energy Matrix can 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. The
Company has a preliminary design for the Smart Energy Matrix and has been
awarded contracts by the California State Energy Resources Conservation and
Development Commission (CEC) and the New York State Energy Research and
Development Authority (NYSERDA) for programs demonstrating the viability of
the Company's flywheel based system for frequency regulation of electricity
on the power grid. The Company has shifted virtually all of its development
spending towards meeting the requirements of these two programs. To
successfully provide frequency regulation, the Company will need to obtain
sufficient funding to complete design of the matrix, develop the flywheel
components and power electronics, integrate and test the matrix and
establish manufacturing capability to produce commercial products.
o Smart Energy system - High-energy flywheel-based systems of 2kWh and 6kWh
that store electricity for telecommunications, cable systems, computer
networks, and Internet market applications have been produced in limited
quantities and the Company has sufficient capacity to return to production
if market demand occurs. The Company believes that, based on existing Smart
Energy technology, it could develop a higher energy 25kWh flywheel system
for renewable applications if market interest is sufficient to justify
development. The Company has been unable to successfully market its Smart
Energy 2kWh and 6kWh at commercially acceptable prices. At this time, the
Company expects to use the results of its Smart Energy Matrix demonstration
unit to assess market interest in its 25kWh design product and determine
whether there is sufficient market demand at prices that would support the
additional development activity required for the Company to bring this high
energy product to market.
o Smart Power(TM) M5 inverter system - An electronic system that converts
direct current electricity produced by photovoltaic panels into alternating
current electricity for residential and commercial use. This product is in
low volume production and the Company has sufficient capacity and resources
to ramp production if market demand increases. As a result of the increased
market interest in the Company's Smart Energy Matrix design, the Company
has redeployed virtually all of its research and development effort from
further inverter development to its Smart Energy Matrix flywheel
technologies. As a result of this change in focus and lower than
anticipated sales volumes of the Smart Power M5, the Company has also
reduced its marketing efforts on the Smart Power M5 and has established
reserves on its balance sheet for inventories and open purchase
commitments. Although it is continuing to support the product, the Company
does not believe that inverters will be a significant portion of the
Company's business going forward.
From the Company's inception through December 31, 2004, it has incurred losses
of approximately $129 million. The Company does not expect to become profitable
or obtain positive cash flow before 2008. This expectation is based on a
business plan that includes full scale development of its Smart Energy Matrix
beginning in the second quarter of 2005. If capital to fund full scale
development of the Smart Energy Matrix is constrained, the time to achieve
profitability or positive cash flow would be extended. The Company must raise
additional equity to execute its business plan and the Company will not begin
full scale development of the Smart Energy Matrix until additional equity has
been raised. Based on the Company's rate of expenditure of cash and the
additional expenditures expected in support of its business plan the Company has
sufficient cash to fund operations through approximately May, 2005. The Company
will need to obtain an equity investment as soon as practicable in 2005 to fund:
o continuing as a going concern;
o completion of the state demonstration contracts in California and New York;
o ongoing research and development of the Smart Energy Matrix;
o working capital requirements; and
o developing new business.
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."
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
the sale of frequency regulation services for the electrical power grid. In
order to maintain a constant frequency alternating current, the power grid must
continuously 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 specifically designed to address this application.
The requirements of the frequency regulation application are well matched with
the characteristics of the Smart Energy Matrix, which is designed to draw excess
energy when generated power exceeds demand and deliver 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 utilities to establish new sites and
obtain required permits for new facilities. The Smart Energy Matrix can also be
located nearly anywhere advantageous to the power grid, even within distribution
systems.
The Company has been awarded development contracts with CEC and NYSERDA for
demonstrating the viability of the Company's flywheel technologies for frequency
regulation. The demonstrations will be conducted using one-tenth-power
prototypes of Beacon's planned megawatt-level system known as the Smart Energy
Matrix. Under these contracts, the Company expects to develop and install a
system in both California and New York during 2005 to demonstrate the benefits
of using flywheel energy storage to provide frequency regulation of the grid; a
service required by all grid operators. Successful demonstrations of frequency
regulation with CEC and NYSERDA may also demonstrate the system's technical and
market feasibility in other large, important, growing markets related to the
North American grid.
From an environmental perspective, the Company's Smart Energy Matrix will reduce
fuel consumption by generators because they will be able to operate at greater
efficiency. 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 slow response characteristics of generators and thus provide stability to
these micro-grid facilities. In distributed generation, demand fluctuations are
a much higher percentage of power production than is experienced in the power
grid, which adversely affects the distributed generator's ability to match
supply and demand.
The Smart Energy Matrix is being designed to store enough energy to deliver one
megawatt for 15 minutes and can be ganged to deliver ten or more megawatts. Each
Smart Energy Matrix will consist of a container housing multiple flywheels and
the necessary power electronics to connect to the grid. The Smart Energy Matrix,
because of its container design, will be able to be quickly deployed and could
be easily relocated.
The Company has finished the preliminary designs for the Smart Energy Matrix and
believes that there is ample market interest in the product to begin full scale
development but will not begin significant design or development until
sufficient funds to complete development have been obtained. 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 will not generate revenues
from this product for approximately two to three years after development has
commenced.
Smart Power M5
The Smart Power M5 inverter system for the photovoltaic energy market converts
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. The Company's Smart Power 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. If the Company
determines that there is sufficient market demand outside of North America, the
Company could develop on and off grid inverters for use throughout the world.
The Company also could develop inverters for use in low power wind turbine
applications if there were ample market interest.
The Company has not been successful in selling a significant number of units of
its Smart Power M5 and therefore has shifted virtually all of its development
and sales activities from the Smart Power M5 to its flywheel based products. The
Company does not believe that inverters will be a significant portion of the
Company's business going forward and is uncertain as to when or at what price it
will be able to sell its inventories. In 2004, the Company established a reserve
for its Smart Power M5 inventory.
Smart Energy
The Company has offered for sale its Smart Energy flywheel 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, the Company 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 450,000 hours of operation
in customer sites without failure of mechanical system, which the Company
believes verifies the reliability of its 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 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 has obtained Underwriters Laboratory approval for its Smart Power M5
inverter system. The California Energy Commission and New York's Public Service
Commission have also approved this product for on-grid applications.
THE COMPANY'S TECHNOLOGY
Flywheel-based products
Since the Company's formation, it has been attempting to develop flywheel energy
storage products that 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 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 environment.
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 has
designed and offers employ new enabling materials 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 up to 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 delivers nearly 10 times the energy of
the best 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 need
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 systems; this is
possible because the Company's technologies result in higher amounts of stored
energy and minimal energy losses during operation.
Inverter Products
The Company began developing its Smart Power M5 inverter system for photovoltaic
applications during 2003. This product is 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 with back-up capability. The Company has developed designs to
expand its product offering to include systems for use in solar off-grid
applications as well as high voltage on-grid and off-grid domestic applications.
The Company could develop international configurations for those applications if
it believes they can be successfully marketed in sufficient volumes to be a
viable commercial product. Although it is continuing to support the Smart Power
M5, the Company does not believe that inverters will be a significant portion of
the Company's business going forward.
Research and Development
The Company believes that its research and development efforts are essential to
its ability to successfully design and deliver products, 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
$3,532,000 in 2004, $3,550,000 in 2003, and $7,130,000 in 2002. The Company
expects research and development expenses in 2005 to be somewhat higher than
those in 2004 due primarily to the costs of development for the Smart Energy
Matrix. If the Company is able to validate market opportunities for its inverter
products, it may choose to make significant levels of research and development
expenditures in order to pursue those markets. At December 31, 2004, the Company
employed 16 engineers and technicians full time and had three independent
contractors engaged in research and development. At December 31, 2003, the
Company employed 18 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.
The Company has sufficient inventories to satisfy expected unit sales for the
remainder of this year. Although the Company is continuing to support its
inverter product, the Company does not believe that inverters will be a
significant portion of the Company's business going forward and is uncertain as
to when or at what price it will be able to sell its inventories. In 2004, the
Company established a reserve for its inverter inventory as a result of lower
than anticipated sales volumes of the Smart Power M5,
The Company's facility was designed for the assembly and test of flywheel
systems and this capability continues to be available in the event that its
designs gain market acceptance and the Company begins production.
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 and inverter
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 are both single-source suppliers. The loss or interruption of supply
from either of these suppliers would adversely affect the Company's ability to
deliver these products.
Sales and Marketing
The Company's sales and marketing efforts for its flywheel-based frequency
regulation product have been focused on regional transmission operators and the
energy research organizations in California and New York. The initial concept
for the Smart Energy Matrix was developed in collaboration with the 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 has
more recently worked with the California Independent System Operator (CAISO) to
evaluate the potential of the Smart Energy Matrix, and the support from CAISO
was an important factor in the contract award from the CEC. The Company is
presenting its Smart Energy Matrix product to other regional transmission
operators and power utilities to further establish 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 flywheel 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.
Although 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. 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. During 2004, the Company also placed a 6kWh Smart Energy flywheel in
a Navy research facility for evaluation as a potential technology to be used in
the Navy's next generation electric ship program.
Backlog
At December 31, 2004, the Company did not have any firm sales commitments for
its products.
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 fossil fuel generators. 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. This market is being served by
well-known utilities and independent service providers that use conventional
generators and that have far greater resources than the Company. These utilities
and independent service providers are primarily focused on the sale of energy
and provide frequency regulation services as a secondary source of revenue.
Companies that are currently providing frequency regulation include Allegheny
Energy Supply Company, Commonwealth Chesapeake Company, Dominion Virginia Power,
Ingenco Wholesale Power, NRG Power Marketing and Reliant Energy Services.
Substantially all of the high-energy, uninterrupted power supply markets that
the Company's 2kWh and 6kWh Smart Energy 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.
The Company's 2kWh and 6kWh Smart Energy flywheel systems provide back-up power
and compete on the basis of life-cycle cost and value to the customer. Although
the Company's products offer 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 with battery
based systems. The Company plans to continue to emphasize the value proposition
of its products such as increased dependability, environmental benefits, and
their long maintenance-free lives.
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 capability 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.
There are 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.
Additional alternative energy products that are potentially competitive include
ultra capacitors and fuel cells with integrated hydrogen generation and storage.
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.
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 its product has a competitive advantage due to its reliability,
ability to continue to provide power when the grid fails, improved design and
efficiency benefits.
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 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 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
SatCon's flywheel technologies and patents for stationary terrestrial flywheel
applications. Those rights include eleven issued U.S. patents and eleven U.S.
and foreign patent applications that expire on various dates between 2012 and
2021. This license covers SatCon's technologies and patents and all improvements
made by SatCon through 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, output paralleling algorithm, metal
hub, low-loss motor, co-mingled rims and earthquake-tolerant bearings and has 16
pending U.S. and foreign patent applications, and one other application being
prepared for filing.
The intellectual property rights for the Company's Smart Power M5 inverter
systems are based on the intellectual property assets acquired from 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 including the user interface, thermal performance, general reliability
and ease of manufacture.
Government Regulation
The Company does not believe that it's Smart Energy Matrix or other flywheel
products 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.
Employees
At December 31, 2004, the Company's headcount was 24 full-time employees, one
part-time employee and four independent contractors, of which approximately 19
were engineers and technicians involved in research and development and three
were in sales, marketing and customer service. The remaining seven 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. The Company's facility was designed for the assembly and test of flywheel
systems and this capability continues to be available in the event that its
designs gain market acceptance and the Company begins production. Currently, the
facility is substantially underutilized.
Item 3. Legal Proceedings
The Company is not involved in any legal proceedings that are considered
material; however, it may from time to time be involved in legal proceedings in
the ordinary course of its business.
On August 16, 2004, Ricardo and Gladys Farnes, and TLER Associates, Ltd. a
Bahamas corporation ("TLER"), delivered a complaint to the Company, naming as
defendants, the Company, John Doherty, Richard Lane, and unidentified
individuals and corporations. The case was filed in District Court in Clark
County, Nevada on or about June 1, 2004, and later was removed to the United
States District Court for the District of Nevada, where it is pending. The
complaint alleges that in 2001, defendants (a) forged the signature of plaintiff
Ricardo Farnes (a principal of TLER) to a document purporting to extend the
performance period on a purchase order issued by TLER to the Company, and (b)
thereafter, posted on the internet defamatory and personal information
concerning the plaintiffs. The plaintiffs do not allege any specific amount of
damages, and instead assert that damages exceed $10,000. The Company has
answered the complaint, denying its material allegations, and is vigorously
defending. Although the outcome of this matter cannot yet be determined,
management does not expect that the ultimate costs to resolve this matter will
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 2004 annual meeting of shareholders on December 9, 2004. At
the meeting, the Company's stockholders voted on the following two proposals,
both of which were approved. The shareholder votes were cast as follows:
Proposal 1: To elect the following nominees as directors:
- ------------------- --------------------- -------------------
Nominee Votes for Votes withheld
- ------------------- --------------------- -------------------
Stephen P. Adik 31,910,462 110,796
- ------------------- --------------------- -------------------
Jack P. Smith 31,880,306 140,952
- ------------------- --------------------- -------------------
Kenneth M. Socha 31,508,834 512,424
- ------------------- --------------------- -------------------
Proposal 2: To ratify the appointment of Miller Wachman, LLP as independent
accountants for the Company for the year ending December 31, 2004:
- ------------- ----------------- ------------------ -------------------
Votes for Votes against Votes abstain Votes withheld
- ------------- ----------------- ------------------ -------------------
31,916,786 60,488 43,984 0
- ------------- ----------------- ------------------ -------------------
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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, 2004
Fourth quarter $1.44 $0.36
Third quarter $0.62 $0.25
Second quarter $0.90 $0.27
First quarter $1.72 $0.71
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
On March 7, 2005 the last reported sale price of the Company's common stock on
the NASDAQ SmallCap Market was $1.17 per share, and there were 314 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, if any, 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.
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, 2004.
- ------------------------------------- ------------------------- -------------------------- -------------------------
Number of securities to Weighted average
be issued upon exercise exercise price of Number of securities
of outstanding options, outstanding options, remaining available for
Plan category warrants and rights warrants and rights future issuance
- ------------------------------------- ------------------------- -------------------------- -------------------------
(a) (b) (c)
- ------------------------------------- ------------------------- -------------------------- -------------------------
Equity compensation plans approved - $ - -
by security holders
- ------------------------------------- ------------------------- -------------------------- -------------------------
Equity compensation plans not 6,217,575 $ 1.06 -
approved by security holders
- ------------------------------------- ------------------------- -------------------------- -------------------------
Total 6,217,575 $ 1.06 -
- ------------------------------------- ------------------------- -------------------------- -------------------------
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.
Recent Sales of Unregistered Securities
During 2004, the Company issued no unregistered securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the fourth quarter of 2004, there were no purchases made by or on behalf
of the Company or any affiliated purchaser of shares of the Company's common
stock.
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, 2004, 2003, 2002, 2001 and 2000, and for the period from May
8, 1997, the date of the Company's inception, through December 31, 2004.
Period from Date
Year ended December 31, of Inception
------------------------------------------------------------- (May 8, 1997) to
2004 2003 2002 2001 2000 December 31, 2004
--------- --------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues .................................... $ 325 $ -- $ -- $ -- $ 50 $ 876
Cost of goods sold .......................... 1,458 -- -- -- -- 1,458
--------- --------- --------- --------- --------- ---------
Gross margin ................................ (1,133) -- -- -- 50 (582)
Operating expenses:
Selling, general and administrative .... 4,196 4,936 5,637 8,940 4,631 32,255
Research and development ............... 3,532 3,550 7,130 17,628 12,715 53,876
Loss on sales commitments .............. -- -- -- -- 51 376
Depreciation and amortization .......... 187 285 1,644 1,324 401 4,138
Restructuring charges .................. -- -- 2,159 -- -- 2,159
Loss on impairment of assets ........... -- 367 4,297 -- -- 4,664
--------- --------- --------- --------- --------- ---------
Total operating expenses .................... 7,915 9,138 20,867 27,892 17,798 97,468
--------- --------- --------- --------- --------- ---------
Loss from operations ........................ (9,048) (9,138) (20,867) (27,892) (17,748) (98,050)
Interest and other income (expense), net .... 3,719 520 28 1,746 330 6,124
--------- --------- --------- --------- --------- ---------
Net loss .................................... (5,329) (8,618) (20,839) (26,146) (17,418) (91,926)
Preferred stock dividends ................... -- -- -- -- (35,797) (36,826)
Accretion of redeemable convertible preferred
stock ....................................... -- -- -- -- (64) (113)
--------- --------- --------- --------- --------- ---------
Loss to common shareholders ................. (5,329) (8,618) (20,839) (26,146) (53,279) (128,865)
========= ========= ========= ========= ========= =========
Net loss per share, basic and diluted ....... ($ 0.12) ($ 0.20) ($ 0.49) ($ 0.61) ($ 10.77)
========= ========= ========= ========= =========
Shares used in computing net loss per share, 43,453 42,886 42,797 42,551 4,946
basic and diluted
========= ========= ========= ========= =========
As of December 31,
2004 2003 2002 2001 2000
----------- ------------ ------------ ----------- ----------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $5,097 $8,909 $17,867 $34,201 $62,051
Working capital 4,213 8,838 16,865 32,383 58,778
Total assets 7,086 12,067 20,906 42,131 67,738
Total stockholders' equity $5,110 $9,692 $18,075 $38,981 $63,308
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 "Certain Factors Which May Affect Future Results " section and
contained elsewhere in this Form 10-K.
Critical accounting policies and estimates
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. On an ongoing basis, management evaluates the
Company's estimates and assumptions including but not limited to those related
to revenue recognition, asset impairments, inventory valuation, warranty
reserves and other assets and liabilities. Management bases its estimates on
historical experience and various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue Recognition. Although the Company has shipped products, and recorded
contract revenues, 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 recognizes revenues, in accordance with accounting principles
generally accepted in the United States of America. Generally, 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 to
their customers.
Government Contract Revenue Recognized on the Percentage-of-Completion Method.
The Company recognizes contract revenues using the percentage-of-completion
method, based primarily on contract costs incurred to date compared with total
estimated contract costs. Changes to total estimated contract costs or losses,
if any, are recognized in the period in which they are determined. Revenues
recognized in excess of amounts billed are classified as current assets, and
included in "Prepaid expenses and other current assets" in the Company's balance
sheets. Amounts billed to clients in excess of revenues recognized to date are
classified as current liabilities under advance billings on contracts. Changes
in project performance and conditions, estimated profitability, and final
contract settlements may result in future revisions to construction contract
costs and revenue.
Inventory Valuation. The Company values its inventory at the lower of actual
cost or the current estimated market value. It regularly reviews inventory
quantities on hand and records a provision for excess and obsolete inventory
based primarily on historical usage for the prior twelve month period and future
sales forecasts. Although the Company makes every effort to ensure the accuracy
of its forecasts of future product demand, any significant unanticipated changes
in demand or technological developments could have a significant impact on the
value of its inventory and its reported operating results.
Patent Costs. The Company will capitalize external legal costs incurred in the
defense of its patents where it believes that the future economic benefit of the
patent will be increased. The Company monitors the legal costs incurred and the
anticipated outcome of the legal action and, if changes in the anticipated
outcome occur, capitalized costs will be adjusted in the period the change is
determined. Patent costs are amortized over the remaining life of the patents.
Warranty Reserves. The Company's warranties require it to repair or replace
defective products returned to it during the applicable warranty period at no
cost to the customer. It records an estimate for warranty-related costs based on
actual historical return rates, anticipated return rates, and repair costs at
the time of sale. A significant increase in product return rates, or a
significant increase in the costs to repair products, could have a material
adverse impact on future operating results for the period or periods in which
such returns or additional costs materialize and thereafter.
Income Taxes. Deferred tax assets and liabilities are determined based on
differences between the financial reporting and income tax bases of assets and
liabilities as well as net operating loss and tax credit carryforwards and are
measured using the enacted tax rates and laws that will be in effect when the
differences reverse. Deferred tax assets are reduced by a valuation allowance to
reflect the uncertainty associated with their ultimate realization.
Significant management judgment is required in determining the provision for
income taxes, the deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. The valuation allowance is based
on the Company's estimates of taxable income and the period over which its
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates or the Company adjusts these estimates in future periods it
may need to establish an additional valuation allowance or reduce its current
valuation allowance which could materially impact its tax provision.
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 to be
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. When appropriate 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 was an impairment of long-lived assets and recognized an asset impairment
charge of $0 in 2004, $366,788 in 2003 and restructuring and asset impairment
charges of $2,159,280 and $4,297,128, respectively, in 2002.
Overview
The Company's initial product strategy was to develop high energy, composite
flywheels for back-up powering of telecommunications applications. With the
collapse of the telecommunications market, which began in 2001, the Company
recognized that its Smart Energy flywheel products as alternative backup
solutions to the telecommunications industry were not on a path to produce
meaningful revenues. With that recognition, 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. The
Company has:
(i) identified promising applications for its Smart Energy Matrix design in the
electric utility power grid marketplace. In the first quarter of 2005 the
Company was awarded development contracts by CEC and NYSERDA to demonstrate
the viability of the Company's flywheel technologies for frequency
regulation by grid operators. The demonstrations will be a one-tenth-power
prototype of the Smart Energy Matrix;
(ii) pursued additional development and design contracts for a variety of
applications by federal agencies. The Company has been successful in
obtaining two small contracts and is continuing its efforts to obtain
additional research and development funding; and
(iii)introduced its Smart Power M5 inverter system into the renewable energy
market in December of 2003. The Company has not been able to gain market
share with this product and has discontinued development of further
inverter products but is continuing to offer the product for sale through
its distributor network. Although it is continuing to support the product,
the Company does not believe that inverters will be a significant portion
of the Company's business going forward.
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 has sufficient cash to fund
operations through approximately May, 2005. The Company will need to obtain an
equity investment as soon as practicable in 2005 to fund:
o continuing as a going concern;
o completion of the state demonstration contracts in California and New York;
o ongoing research and development of the Smart Energy Matrix;
o working capital requirements; and
o developing new business.
In the event that the Company elects to begin full scale development of its
Smart Energy Matrix flywheel system, the amount of equity required would
increase substantially. The Company believes that there is ample market interest
for its Smart Energy Matrix but will not begin full scale development until it
obtains sufficient funding.
As part of the Company's new business development, it is actively evaluating
possible acquisitions of enterprises or technologies that it would consider
synergistic from a market, technology or product perspective. Efforts to
identify opportunities and perform due diligence including legal and audit fees
will continue to be a use of cash in 2005 and beyond.
From inception through December 31, 2004, the Company has incurred losses of
approximately $128.9 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 shipped commercial products and has performed
development and proof of concept work on several government contracts, 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 sells
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
will recognize revenues on its inverter products based on the sales by its
distributors to their customers. The Company has received fixed price
demonstration contracts from government agencies and is pursuing similar
contracts from other government agencies. The Company has determined that it
will recognize revenues on the percentage of completion basis for such
contracts. The Company is continuing to evaluate markets for its flywheel
systems but has not recognized revenues from these products. The Company has
placed development prototype flywheels with potential customers and shipped
pre-production units. These flywheel 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.
Cost of Goods Sold. The Company's cost of good sold for inverters consists
primarily of the cost of manufacture of its Smart Power M5 inverter system,
inventory and warranty reserves and period costs relating to production
over-capacity. Cost of goods sold on fixed price flywheel development contracts
are being recorded on the percentage of completion basis and consist of direct
labor and material, subcontracting and associated overhead costs.
In 2004, the Company established a reserve for its Smart Power M5 inventory as a
result of lower than anticipated sales volumes of the Smart Power M5, Although
the Company is continuing to support its inverter product, the Company does not
believe that inverters will be a significant portion of the Company's business
going forward and is uncertain as to when or at what price it will be able to
sell its inventories. The charge to Cost of Goods Sold was approximately
$1,025,000, which includes accrued purchase commitments of approximately
$45,000.
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 applications. In 2004 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 its selling, general and
administrative expenses to increase in 2005 over 2004 due primarily to the
implementation and reporting expenses associated with compliance with the
Sarbanes-Oxley Act of 2002, fundraising activities, and marketing and sales
expenses associated with flywheel products.
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 2005 as compared to 2004. Although the Company does not expect to incur
significant additional costs for its existing flywheel products or renewable
energy products, the Company does expect to incur higher costs for design and
development activities of the Smart Energy Matrix. The costs of development of
the Smart Energy Matrix will be significant if the Company initiates full scale
development.
Loss on Sales Commitments. The Company will establish reserves for anticipated
losses on sales commitments if, based on cost estimates to complete the
commitment, it is determined that a loss will be incurred. The Company did not
accrue such losses during 2004 or 2003. 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. On government
contracts, the Company will, on a quarterly basis, evaluate its estimated costs
to complete and establish reserves when appropriate.
Restructuring and asset impairment charges. The Company did not recognize any
asset impairment charges in 2004, but did record asset impairment charges during
2003. 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 recorded non-cash asset impairment charges of
$0.4 million in 2003, 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, metal hub, low-loss motor,
co-mingled rims and earthquake-tolerant bearings on its flywheel products, and
anti-islanding software, drawings, source code, and production know-how on its
Smart Power M5 inverter system, and expects to obtain other patents during 2005
and beyond. These costs were being amortized during 2003 and 2004, but the
Company recorded impairment charges to write down these assets to zero on the
balance sheet at December 31, 2004. These impairment charges were made due to
the uncertainty of realizing any future value from this property mainly due the
lack of substantial revenues.
Interest and Other Income/Expense, net. The Company's non-operating income and
expenses are primarily attributable to realized gains on the sale of its
available-for-sale securities and a warrant, the write-back resulting from loan
payments of a reserved loan to a former officer of the Company, interest income
resulting from cash on hand, accrued dividends receivable and the 7% conversion
premium from the conversion of the Company's holdings of Series A Preferred
Stock of Evergreen Solar, Inc., partially offset by interest expense associated
with its capital leases.
RECENT ACCOUNTING PRONOUNCEMENTS
Share-Based Payments
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" (FAS 123R) that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The statement eliminates the ability to account for share-based compensation
transactions using the intrinsic value method as prescribed by Accounting
Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to
Employees," and generally requires that such transactions be accounted for using
a fair-value-based method and recognized as expenses in the statement of
operations. The statement requires companies to assess the most appropriate
model to calculate the value of the options. The Company currently uses the
Black-Scholes option pricing model to value options and is currently assessing
whether an alternative model will be more appropriate. The use of a different
model to value options may result in a different fair value than the
Black-Scholes option pricing model. In addition, there are a number of other
requirements under the new standard that will result in differing accounting
treatment than currently required. These differences include, but are not
limited to, the accounting for the tax benefit on employee stock options and for
stock issued under the Company's employee stock purchase plan. In addition to
the appropriate fair value model to be used for valuing share-based payments,
companies will also be required to determine the transition method to be used at
date of adoption. The allowed transition methods include prospective and
retroactive adoption options. Under the retroactive options, prior periods may
be restated either as of the beginning of the year of adoption or for all
periods presented. The prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at the beginning of
the first quarter of adoption of FAS 123R, while the retroactive methods would
record compensation expense for all unvested stock options and restricted stock
beginning with the first period restated. The effective date of the new standard
is as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005.
Upon adoption, this statement may have a significant impact on the Company's
consolidated financial statements as it will be required to expense the fair
value of its stock option grants and stock purchases under its employee stock
purchase plan rather than disclose the impact on the Company's consolidated net
income within the footnotes as is the current practice (see Note 8 of the notes
of the consolidated financial statements contained herein). The amounts
disclosed within the Company's footnotes are not necessarily indicative of the
amounts that will be expensed upon the adoption of FAS 123R due to possible
changes in the fair value of the Company's common stock, changes in the number
of options granted or the terms of such options, the treatment of tax benefits
and changes in interest rates or the Company may choose to use a different
valuation model to value the compensation expense associated with employee stock
options.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material
(spoilage). Adoption of SFAS No. 151 is required in 2006 and the Company does
not expect the adoption to have a significant impact on its results of
operations or financial condition.
Results of operations.
Comparison of Year ended December 31, 2004 and 2003
Year ended December 31,
2004 2003 $ Change % Change
---------- ---------- --------- ----------
(in thousands)
Revenues ............................... $ 325 $ -- $ 325 n/a
Cost of goods sold ..................... 1,458 -- 1,458 n/a
Gross margin ........................... (1,133) -- (1,133) n/a
Selling, general and administrative .... 4,196 4,937 (741) 15%
Research and development ............... 3,532 3,550 (18) 1%
Depreciation and amortization .......... 187 285 (98) 34%
Restructuring and impairment of assets . -- 367 (367) 100%
Interest and other income (expense), net 3,719 520 3,199 615%
Net loss ............................... 5,330 8,618 (3,288) 38%
Revenue. In 2004 the Company recorded revenue from the sale of its Smart Power
M5 inverter systems and related products in the amount of approximately
$204,000. Revenue from flywheel related government contracts was approximately
$121,000. Also in 2004, the Company provided $42,000 of engineering consulting
services to third parties; these services were recorded as a reduction to
research and development expense. In 2003, the Company reported no 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
during 2003 was applied as a reduction against research and development expense.
These amounts were approximately $130,000.
Cost of Goods Sold. Cost of goods sold includes the cost of materials, labor and
overheads for inverter products sold in the amount of approximately $235,000 and
costs incurred in performance of government contracts calculated on the
percentage of completion method in the amount of approximately $170,000. The
Company established a reserve for its Smart Power M5 inventory of $1,025,000 as
a result of lower than anticipated sales volumes of the Smart Power M5 and
uncertainty as to when or at what price it will be able to sell its inventories.
In addition to this charge to Cost of Goods Sold, the Company recorded an
additional reserve for future warranty expenditures relating to the Smart Power
M5 inverter of approximately $28,000. There was no cost of goods sold during
2003.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses (in thousands)
December 31, 2003 ............................. $ 4,937
Reductions:
Directors & officers insurance premium ........ (972)
Consultants ................................... (109)
Reverse accruals .............................. (216)
Increases:
Bonus expenses based on RSU plan .............. 364
Merit increases, headcount increase ........... 50
Benefits including health ..................... 37
Legal & audit ................................. 105
-------
December 31, 2004 ............................. $ 4,196
The decrease from 2003 to 2004 of approximately $741,000 was primarily the
result of significantly reduced premiums for directors and officers insurance in
the amount of approximately $972,000, a reduction in accrued expenses for
contingencies that did not materialize of approximately $216,000, and lower
spending on subcontractors and consultants in the amount of approximately
$109,000 in 2004 compared to the prior year. These reductions were partially
offset by increases in stock compensation expense due to the Company's
restricted stock unit program of approximately $364,000, higher legal and audit
fees of approximately $105,000, increases in payroll costs as a result of 2004
merit increases and changes in headcount of approximately $50,000 and benefits
cost increases of approximately $37,000. The Company expects its selling,
general and administrative expenses to increase in 2005 over 2004 due primarily
to the implementation and reporting expenses associated with compliance with the
Sarbanes-Oxley Act of 2002, fundraising activities, and marketing and sales
expenses associated with flywheel products.
Research and Development Expenses.
Research and development expenses (in thousands)
December 31, 2003 ............................. $ 3,550
Reductions:
Salaries and benefits due to reduction in force (295)
R&D materials ................................. (205)
Other reductions .............................. (10)
Increases:
Stock compensation based on RSU plan .......... 356
Patent legal expenses ......................... 89
Subcontractors ................................ 47
-------
December 31, 2004 ............................. $ 3,532
The decrease from 2003 to 2004 of approximately $18,000 is primarily due to
reduction in headcount during 2003 and lower purchases of research and
development materials in 2004 and other reductions in 2004 of approximately
$295,000, $205,000 and $10,000, respectively. This was partially offset by
increases in stock compensation expenses due to the Company's restricted stock
unit program, increased legal expenses relating to patents on the Company's
flywheel systems, and increased use of subcontractors while developing the
next-generation Smart Power M5 inverter of approximately $356,000, $89,000 and
$47,000, respectively. The Company expects cost of research and development in
2005 to be somewhat higher than 2004 due to design and development activities of
the Smart Energy Matrix. The costs of research and development in 2005 will be
significantly higher if the Company begins full scale development of the Smart
Energy Matrix.
Depreciation and Amortization. The decrease from 2003 to 2004 of approximately
$98,000 is primarily attributable to the write-off of the Company's patent
technologies at December 31, 2003, and continuing reductions in the depreciable
base of the Company's assets caused by budgetary restrictions on capital
expenditures during 2004. Depreciation in 2005 will be higher than 2004 if the
Company begins full scale development of the Smart Energy Matrix.
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. The Company did not recognize any restructuring or asset
impairment charges during 2004 and does not expect to recognize any like charges
in 2005.
Interest and Other Income/ (Expense), net.
Interest and Other Income (Expense), net (in thousands)
December 31, 2003 ........................... $ 520
Reductions:
Officer loan repayments ..................... (291)
Interest from cash holdings ................. (115)
Loss on disposal of assets .................. (25)
Increases:
Gain on sale of investment .................. 3,563
Conversion of Evergreen Preferred to common . 60
Interest expense ............................ 7
-------
December 31, 2004 ........................... $ 3,719
The increase from 2003 to 2004 of approximately $3,199,000 is primarily
attributable to gains from the sale of an investment in Evergreen Solar, Inc. of
approximately $3,563,000, premium received on conversion of Evergreen Series A
Preferred Stock to common of approximately $60,000 and lower interest expense
associated with capital leases that expired during the second half of 2003 of
approximately $7,000, partially offset by lower officer loan repayments in 2004
of approximately $291,000, a decrease in interest income earned due to lower
cash balances in the amount of approximately $115,000 and a loss on the disposal
of capital assets of approximately $25,000.
Net Loss. As a result of the changes discussed above, the net loss for 2004 was
approximately $5,330,000 which compares to a net loss in 2003 of approximately
$8,618,000, a decrease of $3,288,000 or 38%.
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%
Net loss ............................... 8,618 20,839 (12,221) 59%
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.
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 significant reductions in the number of engineering and
manufacturing personnel as well as lower expenditures on development materials.
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.
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.
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, a decrease in interest income earned due to lower cash
balances, accrued dividends on the Company's investment in the Series A
Preferred Stock of Evergreen Solar, Inc., and lower interest expense associated
with smaller capital leases, which expired during the second half of 2003.
Net Loss. As a result of the changes discussed above, the net loss for 2004 was
approximately $8,618,000 compared to $20,839,000 for 2003, a decrease of
$12,221,000 or 59%.
LIQUIDITY AND CAPITAL RESOURCES
Year ended December 31,
-----------------------------------
2004 2003 2002
----------- ----------- -----------
(in thousands)
Cash and cash equivalents ............... $ 5,097 $ 8,909 $ 17,867
Working capital ......................... 4,213 8,838 16,865
Cash provided by (used in)
Operating activities ............... (8,165) (7,701) (15,541)
Investing activities ............... 4,650 (1,291) (466)
Financing activities ............... (297) 35 (327)
-------- -------- --------
Net decrease in cash and cash equivalents $ (3,812) $ (8,957) $(16,334)
======== ======== ========
Current ratio ........................... 3.1 4.7 7.0
======== ======== ========
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 products in the renewable energy market.
Net cash used in operating activities was approximately ($8,165,000) and
($7,701,000) for the twelve months ended December 31, 2004 and 2003,
respectively. The primary component to the negative cash flow from operations is
from net losses. For 2004, the Company had a net loss of approximately
($5,330,000). This included facility related cash payments charged against
restructuring reserves of approximately ($343,000), gain on the sale of
investments of approximately ($3,563,000), reductions to the asset impairment
reserve for disposed fixed assets of approximately ($10,000), a reversal of a
portion of the reserved note to its former CEO of approximately ($22,000) net of
accrued interest reserved of $4,000, offset by employee stock compensation of
approximately $701,000, compensation expense from stock options issued for
consulting services of approximately $16,000, loss on the sale or disposal of
fixed assets of approximately $25,000, a reduction in restricted cash related to
(i) the lease of the Company's facility $45,000 and (ii) the expiration of a
vendor contract of approximately $50,000, and depreciation and amortization of
approximately $187,000. Changes in operating assets and liabilities generated
approximately $75,000 of cash during 2004. For 2003, the Company had a net loss
of approximately ($8,618,000). This included a reversal of a portion of the
reserved note to its former CEO of approximately ($323,000) net of interest
reserved of approximately $15,000, facility related cash payments charged
against restructuring reserves of approximately ($344,000), an increase in
restricted cash from a vendor agreement of ($50,000), a reserve against the
Company's patent assets of approximately $367,000 and depreciation and
amortization of approximately $285,000. Changes in operating assets and
liabilities generated approximately $967,000 of cash during 2003.
Net cash generated/(used) in investing activities was approximately $4,650,000
and $(1,291,000) for 2004 and 2003, respectively. The principal source of cash
during 2004 was proceeds from the sale of the Company's investment in Evergreen
Solar, Inc. of approximately $4,753,000 and the sale of capital equipment of
approximately $18,000, partially offset by the receipt of dividends from the
Evergreen investment, paid in stock, of approximately $(90,000) and the purchase
of capital equipment of approximately ($31,000). The principal uses of cash
during 2003 were primarily related to an investment in Evergreen of
($1,100,000), increases in other assets totaling approximately ($236,000),
purchase of capital equipment of approximately ($8,000) and the principal
sources of cash were from the sale of certain impaired machinery and equipment
of the Company in the amount of approximately $53,000.
Net cash generated/(used) by financing activities was approximately ($297,000)
and $35,000 for 2004 and 2003, respectively. For 2004, the cash used by
financing activities included prepaid financing costs related to the Company's
financing activities of approximately $(328,000), offset by cash generated of
approximately $27,000 related to the exercise of stock options and approximately
$4,000 for shares issued under the employee stock purchase plan. For 2003, the
cash used in financing activities related to repayment of capital leases of
approximately ($200,000), offset by cash proceeds from the exercise of employee
stock options of approximately $234,000 and the issuance of stock under the
employee stock purchase plan of approximately $1,000.
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 has sufficient cash to
fund operations through approximately May, 2005. The Company will need to obtain
an equity investment as soon as practicable in 2005 to fund:
o continuing as a going concern;
o completion of the state demonstration contracts in California and New York;
o ongoing research and development of the Smart Energy Matrix;
o working capital requirements; and
o developing new business
In the event that the Company elects to begin full scale development of its
Smart Energy Matrix flywheel systems, the amount of equity required would
increase substantially.
As part of the Company's new business development, it is actively evaluating
possible acquisitions of enterprises or technologies that it would consider
synergistic from a market, technology or product perspective. Efforts to
identify opportunities and perform due diligence including legal and audit fees
on acquisition possibilities will continue to be a use of cash in 2005 and
beyond.
Inasmuch as the Company is not expecting to become profitable or cash flow
positive until at least 2008, its ability to continue as a going concern will
depend on its ability 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.
Cash Payments Due During the Year Ended December 31,
----------------------------------------------------------------
Description of Commitment 2005 2006 2007 Thereafter Total
- --------------------------- ------------- ------------- ------------- -------------- -----------
Operating leases .......... 500,359 529,413 397,059 - 1,426,831
Purchase obligations ...... 252,275 - - - 252,275
------------- ------------- ------------- -------------- -----------
Total Commitments 752,634 529,413 397,059 - 1,679,106
============= ============= ============= ============== ===========
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
$310,011. A cash deposit secures this letter of credit. The Company also has
non-cancelable purchase obligations that include firm orders with vendors for
materials relating to its inverter products.
Investments
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'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 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. During 2004, the
Company sold its Evergreen Solar, Inc. investment for approximately $4,753,000.
Messrs. Deutch and Socha disclosed their possible conflict relating to these
transactions and abstained from voting on the purchase or sale of Evergreen's
securities. In addition, Mr. Deutch has not taken part in any discussions
concerning the purchase or sale of the Evergreen 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.
Investments such as those made in Evergreen 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.
Certain Factors Which May Affect Future Results
THE COMPANY HAS A HISTORY OF LOSSES AND ANTICIPATES FUTURE LOSSES.
As shown in the consolidated financial statements, the Company incurred
significant losses from operations of $5,330,000, $8,618,000, and $20,839,000
and cash decreases of $3,812,000, $8,957,000, and $16,379,000, during the years
ended December 31, 2004, 2003, and 2002, respectively. The Company has incurred
net losses in each year since its inception in 1997. The Company is unsure if or
when it will become profitable. The size of its net losses will depend, in part,
on the growth rate of its revenues and the level of its expenses.
The Company expects future revenues to come from services related to its Smart
Energy Matrix, for which it has no revenues to date. The timing of future
revenues, if any, is uncertain.
The Company expects that it will be several years, if ever, before it will
recognize significant revenues from the products it intends to offer and the
services it intends to provide. A large portion of its expenses are fixed,
including expenses related to facilities, equipment and personnel. In addition,
the Company expects to spend significant amounts to fund product development
based on its core technologies. The Company also expects to incur substantial
expenses to manufacture its Smart Energy Matrix product in the future. As a
result, operating expenses may increase significantly over the next several
years and, consequently, it may need to generate significant additional revenue
to achieve profitability. Even if the Company does achieve profitability, it may
not be able to sustain or increase profitability on a consistent basis.
THE COMPANY WILL HAVE LIMITED REVENUES IN THE NEAR TERM. UNLESS IT RAISES
ADDITIONAL CAPITAL TO OPERATE ITS BUSINESS, IT MAY NOT BE ABLE TO CONTINUE AS A
GOING CONCERN, AS ITS CASH BALANCES ARE SUFFICIENT TO FUND OPERATIONS ONLY
THROUGH APPROXIMATELY MAY 2005.
The Company intends to focus on further development of the Smart Energy Matrix
to provide frequency regulation services and this product will not be available
for revenues in the near-term. For the foreseeable future, the Company will have
limited revenues, if any, since the Company has not generated any revenue from
the Smart Energy Matrix. The Company has incurred significant losses from
operations since its inception. The Company had approximately $5,097,000 of cash
and cash equivalents on hand at December 31, 2004, which the Company believes
will be sufficient to meet its working capital and capital expenditure needs
only through May 2005.
Thereafter, the Company will require substantial funds to conduct research and
development activities, market its products and services, and increase its
sales. The Company anticipates that such funds will be obtained from external
sources and intends to seek additional equity or debt to fund future operations.
However, the Company's actual capital requirements will depend on many factors.
If the Company experiences unanticipated cash requirements, it may need to seek
additional sources of funding, which may not be available on favorable terms, if
at all. Such additional funding may only be available on terms that may, for
example, cause dilution to common stockholders, and/or have liquidation
preferences and/or pre-emptive rights. If the Company does not succeed in
raising additional funds on acceptable terms, it may be unable to complete
planned development for its products and services. In addition, the Company
could be forced to take unattractive steps, such as discontinuing product
development, limiting the services it can offer, reducing or foregoing sales and
marketing efforts and attractive business opportunities, or discontinuing
operations entirely.
Miller Wachman, 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, 2004, 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'S ABILITY TO CONTINUE AS A GOING CONCERN MAY NEGATIVELY IMPACT THE
COMPANY'S ABILITY TO OBTAIN CUSTOMERS.
The uncertainty of the Company's ability to continue as a going concern may
negatively impact the Company's ability to successfully attract customers for
its products. Even if customers find the Company's products attractive from a
performance and price analysis, the warranty and support activities that the
Company's long-life products feature may prevent customers from making purchases
in sufficient quantities for the Company to be able to function as a going
concern.
THE COMPANY'S STOCK MAY BE REMOVED FROM THE SMALLCAP MARKET SYSTEM OF NASDAQ.
Their can be no assurance that the Company will continue to meet Nasdaq's
SmallCap listing requirements in the future and therefore would no longer be
eligible for quotation on the Nasdaq SmallCap Market. Should the Company's stock
lose its eligibility to be quoted on the SmallCap Market, it will seek to have
its stock quoted on the OTCBB. While the Company knows of no reason that its
stock will not be accepted for quotation on OTCBB, it cannot guarantee that
acceptance. If the Company's stock is not accepted for listing on the OTCBB, it
will be listed on the pink sheets.
THE COMPANY IS A DEVELOPMENT STAGE COMPANY WITH A LIMITED OPERATING HISTORY, AND
IS DEPLOYING UNPROVEN TECHNOLOGIES. IT MAY NEVER BE ABLE TO DEVELOP ANY OF ITS
PRODUCTS OR SERVICES.
The Company has no history of being able to complete development of designs into
economically competitive commercially viable products. Examples of the Company's
challenges in developing its technologies into commercial products are the
following:
o it may take longer than anticipated to develop these services and products;
o as there is a cost associated with the development of these technically
challenging products, the economic return may not be adequate to pay for
these costs;
o it must reduce manufacturing costs for its products to increase the
Company's chances of achieving profitability;
o it must use design, quality control and careful management of its suppliers
to ensure that warranty expenses are kept to a minimum; and
o it will not be able to develop its services and products if it cannot raise
the necessary financing.
There can be no assurance that the Company will be successful to allow it to
offer its products at prices that will be considered competitive by its
potential customers which may prevent widespread market acceptance of its
products or services and thereby not generate sufficient margins to cover its
cost of operations.
THE COMPANY MAY FAIL TO DEVELOP ITS 25KWH GENERATION FLYWHEEL SYSTEM WHICH IS A
CRITICAL REQUIREMENT FOR THE DEVELOPMENT OF THE SMART ENERGY MATRIX.
Although the Company has successfully developed two high energy systems (the
2kWH and 6kWH) that had similar technical challenges, there can be no assurance
that the Company will be able to successfully develop the 25kWH system. The
successful development of the Company's new 25kWh flywheel system, which is the
flywheel system that will be used in the Smart Energy Matrix, involves
significant technological and cost challenges, including:
o it may take longer to develop the software and key hardware components such
as the rim, motor, and bearing system;
o the Company is relying on single-source suppliers to supply key components
to meet the Company's engineering requirements, cost objectives and
development and production schedules. Specifically:
o the composite rim, which has four times more volume than the rim in
the 6kWh flywheel product;
o a high speed, vacuum friendly, permanent magnet, high power motor with
overall dimensions that will not adversely affect rotor dynamics; and
o an active magnetic bearing system that supports the rotor over the
entire speed range.
o the Company's ability to develop cost effective designs on schedule for:
o rotor-cooling scheme to abate overheating during operation.
o cost effective balance procedure to ensure acceptable vibration levels
at all speeds.
o touchdown bearing system to stabilize the rotor during abnormal
conditions such as an earthquake.
o the ability to ramp up and maintain production rates.
o the cost of developing key components that have significant technical risk.
o the quality and cost control from key suppliers.
o the manufacturing costs for the flywheel's rotor assembly (shaft, hub, and
rim), bearing system, and related control electronics must be cost reduced
to increase the Company's chance of profitability.
There can be no assurance that the Company will be successful. If the Company is
not successful it will not be able to develop its Smart Energy Matrix.
THE COMPANY MAY FAIL TO DEVELOP THE SMART ENERGY MATRIX.
The Company's Smart Energy Matrix will integrate up to ten 25kWh flywheels into
a common 40 foot shipping container. This effort will pose significant
technological and cost challenges. Major risks include:
o locating a suitable supplier to modify the structure of a standard ocean
shipping container to the Company's engineering requirements;
o locating contract manufacturing capability to install the flywheels,
control electronics, and ancillary equipment, then perform final test and
deliver completed Smart Energy Matrix to the end user;
o containing the cost of modifying the ocean container and assembly and test
of components;
o resolving flywheel vibration transference from one flywheel to another;
o transporting the Smart Energy Matrix safely over the open road to customer
locations;
o meeting the technical requirements for interconnection to the utility grid;
o developing a communication and control system adequate to meet the
performance standards of the grid managers;
o ensuring consistent quality from key suppliers;
o designing flywheel accessibility in the Smart Energy Matrix for repair and
cost of field service; and
o reducing the cost of transportation to customer site.
ALTHOUGH THE MARKET FOR FREQUENCY REGULATION SERVICES IS LARGE AND GROWING THE
COMPANY HAS NOT DEMONSTRATED ITS ABILITY TO SELL INTO THAT MARKET.
The Company believes that the use of its Smart Energy Matrix will be successful
in the frequency regulation market. However, this market is being served by
well-known utilities and independent service providers that use conventional
generators and that have far greater resources than the Company. These utilities
and independent service providers are primarily focused on the sale of energy
and provide frequency regulation services as a secondary source of revenue.
Companies that are currently providing frequency regulation include Allegheny
Energy Supply Company, Commonwealth Chesapeake Company, Dominion Virginia Power,
Ingenco Wholesale Power, NRG Power Marketing and Reliant Energy Services.
Although the Company believes that the products and services it plans to provide
by using its products offer greater effectiveness than generators and could
produce positive investment returns for the Company and perhaps other
independent service providers, there can be no assurance that the Company will
be able to establish its products or services in that market. To date, the
Company has not completed any services or product sales of the Smart Energy
Matrix.
THERE MAY BE ONLY A MODEST NUMBER OF POTENTIAL CUSTOMERS FOR THE COMPANY'S
PRODUCTS AND SERVICES.
There may only be a limited number of potential customers for the Company's
products and services, 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.
THE COMPANY MAY NOT BE ABLE TO REDUCE ITS PRODUCT AND SERVICE COST ENOUGH TO
MAKE ITS PRICES COMPETITIVE AND MAY NOT BE ABLE TO REALIZE NEEDED VOLUMES WITH
SUFFICIENT MARGINS TO COVER ITS COSTS OF OPERATIONS.
There can be no assurance that the Company will be successful in lowering its
production costs through improved product designs or volume discounts to allow
it to offer its products at prices that will be considered competitive by its
potential customers. If the Company is not able to offer its products or
services at competitive prices this may prevent widespread market acceptance of
its products or services and thereby not generate sufficient margins to cover
its cost of operations.
THE COMPANY'S STOCKHOLDERS MAY BE ADVERSELY AFFECTED IF THE COMPANY ISSUES
ADDITIONAL EQUITY SECURITIES 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.
IF THE COMPANY IS UNABLE TO INCREASE ITS SALES OF INVERTER PRODUCTS, IT MAY NOT
RECOVER THE CAPITAL THAT IT HAS INVESTED IN DEVELOPING THESE PRODUCTS.
The Company has invested considerable capital in the development of its inverter
products, including the Smart Power M5. To date, the Company has generated
limited revenue based on low volume sales of these products. If the Company is
unable to increase sales of its inverter products in the near future, it may be
forced to abandon these products, and may consequently not be able to recover
the full amount of capital it has invested in developing inverter products.
THE COMPANY HAS LIMITED EXPERIENCE MANUFACTURING 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 products or
services, 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 limited experience in the manufacture
of flywheel or inverter 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 halting capital
build-out. The Company will not achieve profitability if it cannot develop or
obtain efficient, low-cost manufacturing capabilities and processes, and locate
suppliers that will enable the Company to meet the quality, price, engineering,
design and production standards or 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 is a development stage entity and has a limited operating history.
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."
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 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 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.
Competition for skilled sales people is intense and the Company may not be
successful in attracting and retaining the sales talent necessary to develop
markets and achieve sufficient sales volume to operate profitably.
THE COMPANY'S FINANCIAL PERFORMANCE COULD BE ADVERSELY AFFECTED IF IT IS UNABLE
TO RETAIN KEY EXECUTIVE OFFICERS.
Because the Company's future success depends to a large degree on the management
provided by the executive officers, the Company's competitiveness will depend
significantly on whether it can retain members of its executive team. The
Company has employment agreements with Messrs. Spiezio, Vice President of
Finance, Chief Financial Officer, Treasurer and Secretary; and Lazarewicz, Vice
President and Chief Technical Officer. The employment agreement between the
Company and Mr. Capp, CEO and President, expired on December 31, 2004.
Negotiations between Mr. Capp and the Company are ongoing. There can be no
assurance that an agreement will be reached with Mr. Capp.
The Company's ability to effectively implement its business plan depends, to a
significant extent, on its ability to retain its executive officers. There can
be no assurance that the Company will be successful in retaining its other
executive officers.
If the Company cannot reach agreement with Mr. Capp and he elects to leave the
Company, pursuant to the terms of the expired employment agreement, if he ceases
to be an employee following December 31, 2004, the Company is obligated to pay
him a monthly amount until December 31, 2005, equal to the sum of one-twelfth of
his base salary at the time of expiration plus one-twelfth of his bonus for the
most recent fiscal year. No monthly payment is required after December 31, 2005.
If the at-will employment continues after December 31, 2005 but then terminates,
no such monthly amount will be paid. As of December 31, 2004, Mr. Capp's base
salary was $240,000 annually. Based on the closing bid price of the Company's
common stock as of December 31, 2004 as reported on The NASDAQ SmallCap Market,
Mr. Capp received a bonus in the amount of $236,800, paid in the form of a grant
of 251,391 restricted stock units, pursuant to the Company's Second Amended and
Restated 1998 Stock Incentive Plan.
THE COMPANY'S FINANCIAL PERFORMANCE COULD BE ADVERSELY AFFECTED BY ITS NEED TO
RETAIN AND ATTRACT TECHNICAL PERSONNEL.
The Company's future success depends to a large degree on the technical skills
of its engineering staff and its ability to attract technical personnel.
Competition for skilled technical professionals is intense and the Company may
not be successful in attracting and retaining the talent necessary to design,
develop and manufacture its flywheel products.
FAILURE TO PROTECT THE COMPANY'S INTELLECTUAL PROPERTY COULD 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 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 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.
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 a number of technology companies in various stages of development,
there may be emerging technologies that the Company is unaware of and there may
be combinations of technologies in the future. The Company cannot give assurance
that some or all of its target markets and pricing plans will not be displaced
by these emerging technologies.
THE COMPANY MAY INVEST CASH IN OTHER COMPANIES IN ITS SECTOR TO INCREASE
SHAREHOLDER VALUE THROUGH STRATEGIC ALLIANCES OR RETURN ON INVESTMENT WHICH DO
NOT CREATE GAINS AND THEREFORE REDUCE SHAREHOLDER VALUE.
Given the Company's financial position, its ability to make cash investments in
other companies is very limited at this time. However, in the future, the
Company may make cash 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 investments may decrease and reduce
shareholder value.
THE COMPANY MAY MAKE ACQUISITIONS OR MERGERS THAT DO NOT PRODUCE REVENUES AND
CASH FLOW AS EXPECTED AND MAY THEREFORE FURTHER THE COMPANY'S NEED FOR ADDITION
CASH TO SUSTAIN ITS OPERATIONS.
The Company may identify acquisitions or mergers that it believes will provide
revenues and cash flow. There can be no assurance that these acquisitions or
mergers will be completed and if completed be successful.
THE COMPANY MAY MAKE ACQUISITIONS OR MERGERS THAT REDUCE THE COMPANY'S ABILITY
TO OBTAIN ADDITIONAL CAPITAL TO SUSTAIN THE COMBINED OPERATIONS.
The Company may make acquisitions or mergers that it believes will provide
improved ability to obtain additional capital to sustain the combined
operations. There can be no assurance that these acquisitions or mergers will be
perceived as positive by investors and therefore investments necessary to
sustain operations may not be realized.
THE COMPANY HAS LIMITED EXPERIENCE IN ACQUISITIONS AND MERGERS AND MAY NOT BE
SUCCESSFUL IN IDENTIFYING APPROPRIATE ACQUISITIONS OR MERGERS OR BE UNSUCCESSFUL
IN INTEGRATING THESE ENTITIES.
The Company and its management have limited experience in evaluating,
integrating and coordinating the acquisition or merger of companies and
therefore may not be successful in this effort.
ANY WEAKNESSES IDENTIFIED IN THE COMPANY'S INTERNAL CONTROLS AS PART OF THE
EVALUATION BEING UNDERTAKEN BY THE COMPANY AND ITS INDEPENDENT PUBLIC ACCOUNTANT
PURSUANT TO SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE AN ADVERSE
EFFECT ON THE COMPANY'S BUSINESS.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate
and report on their systems of internal control over financial reporting. In
addition, the independent accountants must report on management's evaluation.
The Company is in the process of documenting and testing its system of internal
control over financial reporting to provide the basis for its report. At this
time, the Company is aware that its financial reporting information systems and
point-of-sale information systems require a significant level of manual controls
to ensure the accurate reporting of its results of operations and financial
position. Upon the completion of its review, certain deficiencies may be
discovered that will require remediation. This remediation may require the
implementation of certain information systems operating protocols and/or
additional manual controls, the costs of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Due to the ongoing evaluation and testing of The Company's internal controls,
there can be no assurance that there may not be significant deficiencies or
material weaknesses that would be required to be reported. In addition, the
Company expects the evaluation process and any required remediation, if
applicable, to increase its accounting, legal and other costs and divert
management resources from core business operations.
ONGOING COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002 MAY REQUIRE ADDITIONAL
PERSONNEL OR SYSTEMS CHANGES.
The Company's business plan may not have sufficient resources identified to
insure ongoing compliance with the Sarbanes-Oxley Act of 2002. Given the limited
size of the Company and its cash position the Company may not have sufficient
resources to satisfy the segregation of duties required for compliance with
Section 404 of the Sarbanes-Oxley Act of 2002 or to be compliant the Company may
need to obtain additional funding and cash flow positive timing may need to be
extended.
GOVERNMENT REGULATION MAY IMPAIR THE COMPANY'S ABILITY TO MARKET ITS 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 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.
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 The Company. 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.
PRODUCT LIABILITY CLAIMS AGAINST THE COMPANY COULD RESULT IN SUBSTANTIAL
EXPENSES AND NEGATIVE PUBLICITY THAT COULD IMPAIR SUCCESSFUL MARKETING OF
PRODUCTS.
The Company's business exposes it to potential product liability claims that are
inherent in the manufacture, 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 ITS COMPETITORS
COULD REDUCE MARKET DEMAND OR ACCEPTANCE FOR FLYWHEEL SERVICES OR PRODUCTS IN
GENERAL.
A serious accident involving either the Company's flywheels or competitors'
similar products could be a significant deterrent to market 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, its
flywheel will fail in a more benign manner.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's cash equivalents and investments, all of which have maturities of
less than one year, could expose the Company to interest rate risk. At December
31, 2004, the Company had approximately $60,000 of cash equivalents that were
held in a non-interest bearing checking account. Also at December 31, 2004, the
Company had approximately $5,037,000 of cash equivalents that were held in
interest-bearing money market accounts at high-quality financial institutions.
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 $5,000, which the Company does not believe is material.
Item 8. Financial Statements and Supplementary Data
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm ................... 35
Report of Independent Registered Public Accounting Firm ................... 36
Consolidated Balance Sheets at December 31, 2004 and 2003 ................. 37
Consolidated Statements of Operations for the years ended December 31,
2004, 2003 and 2002 and for the period May 8, 1997 (date of
inception) to December 31, 2004 ......................................... 38
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2004, 2003 and 2002 and for the period
May 8, 1997 (date of inception) to December 31, 2004 .................... 39
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002 and for the period May 8, 1997 (date of
inception) to December 31, 2004 ......................................... 43
Notes to Consolidated Financial Statements ................................ 45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
of Beacon Power Corporation:
We have audited the accompanying consolidated balance sheet of Beacon Power
Corporation and Subsidiaries (the "Company") (a development stage company) as of
December 31, 2004, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended and the cumulative
statements of operation, stockholders' equity and cash flows from May 8, 1997
(date of inception) through December 31, 2004. 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 audit. We did not audit the Company's financial
statements before 2004. Those statements were audited by other auditors whose
report has been furnished to us and, our opinion, insofar as it relates to the
cumulative amounts included from May 8, 1997 (the date of inception), through
December 31, 2003 is based solely on the report of other auditors.
We conducted our audit in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit 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 audit provides 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 subsidiaries as of December 31, 2004 and the results of their
operations and their cash flows for the year ended December 31, 2004 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/ Miller Wachman LLP
Boston, Massachusetts
February 18, 2005
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 the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the two 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 the results of their
operations and their cash flows for each of the two 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 described in Note
2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
As discussed in Note 15, the accompanying 2003 and 2002 financial statements
have been restated.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 25, 2004
(May 12, 2004 as to Note 15)
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
December 31,
2004 2003
------------- -------------
Assets
Current assets:
Cash and cash equivalents ............................. $ 5,097,188 $ 8,909,261
Accounts receivable, trade ............................ 52,105 128,133
Inventory ............................................. 222,593 238,684
Prepaid expenses and other current assets ............. 817,396 773,226
Investments in available-for-sale securities .......... -- 1,163,758
------------- -------------
Total current assets .............................. 6,189,282 11,213,062
Property and equipment, net ................................ 258,647 357,180
Restricted cash ............................................ 310,011 405,232
Other assets and deferred financing costs .................. 327,646 91,325
------------- -------------
Total assets ............................................... $ 7,085,586 $ 12,066,799
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ...................................... $ 389,189 $ 148,075
Accrued compensation and benefits ..................... 130,609 156,000
Other accrued expenses ................................ 393,569 664,527
Restructuring reserve ................................. 1,062,644 1,406,191
------------- -------------
Total current liabilities ......................... 1,976,011 2,374,793
------------- -------------
Commitments and contingent liabilities (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; 43,788,810 and 43,107,526 shares issued and
outstanding at December 31, 2004 and 2003, respectively 437,888 431,075
Deferred stock compensation ........................... (707,167) (832,639)
Additional paid-in-capital ............................ 134,411,911 133,796,667
Deficit accumulated during the development stage ...... (128,933,397) (123,603,437)
Treasury stock, 132,000 shares, at cost ............... (99,660) (99,660)
------------- -------------
Total stockholders' equity ........................ 5,109,575 9,692,006
------------- -------------
Total liabilities and stockholders' equity ................. $ 7,085,586 $ 12,066,799
============= =============
See notes to consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative from
May 8, 1997
(date of inception)
through December 31,
2004 2003 2002 2004
------------- ------------- ------------- -------------
Revenue .................................. $ 324,694 $ -- $ -- $ 875,878
Cost of goods sold ....................... 1,457,869 -- -- 1,457,869
------------- ------------- ------------- -------------
Gross profit ............................. (1,133,175) -- -- (581,991)
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative . 4,196,371 4,936,575 5,636,903 32,255,974
Research and development ............ 3,532,059 3,549,592 7,129,880 53,875,545
Loss on sales commitments ........... -- -- -- 375,974
Depreciation and amortization ....... 187,230 284,733 1,644,230 4,137,966
Restructuring charges ............... -- 366,788 2,159,280 2,159,280
Loss on impairment of assets ........ -- -- 4,297,128 4,663,916
------------- ------------- ------------- -------------
Total operating expenses ...... 7,915,660 9,137,688 20,867,421 97,468,655
------------- ------------- ------------- -------------
Loss from operations ..................... (9,048,835) (9,137,688) (20,867,421) (98,050,646)
------------- ------------- ------------- -------------
Other income:
Interest income .......................... 102,908 217,964 504,034 3,882,875
Interest expense ......................... -- (6,713) (41,932) (1,093,703)
Gain on sale of investment ............... 3,562,582 -- -- 3,562,582
Other income (expense) ................... 53,385 308,424 (433,933) (228,311)
------------- ------------- ------------- -------------
Total other income (expense), net ... 3,718,875 519,675 28,169 6,123,443
------------- ------------- ------------- -------------
Net loss ................................. (5,329,960) (8,618,013) (20,839,252) (91,927,203)
Preferred stock dividends ................ -- -- -- (36,825,680)
Accretion of convertible preferred stock . -- -- -- (113,014)
------------- ------------- ------------- -------------
Loss to common shareholders .............. $ (5,329,960) $ (8,618,013) $ (20,839,252) $(128,865,897)
============= ============= ============= =============
Loss per share, basic and diluted ........ $ (0.12) $ (0.20) $ (0.49)
============= ============= =============
Weighted-average common shares outstanding 43,452,727 42,885,675 42,797,072
============= ============= =============
See notes to consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
Class A Class C Deferred
Preferred Stock Preferred Stock Common Stock Consulting
Shares Amount Shares Amount Shares Amount Expense
------------ ----------- -------- ----------- ------------ ----------- --------------
BALANCE AT MAY 8, 1997 (DATE OF
INCEPTION) ............................ - $ - - $ - - $ - $ -
Issuance of Founder's Shares .......... - - - - 6,750,000 67,500 -
Issuance of Class A preferred stock ... 1,390,000 5,662,500 - - - - (275,000)
Recapitalization ...................... 3,373,313 67,466 - - (6,746,626) (67,466) -
Rounding for fractional shares ........ - - - - (2) - -
Issuance of Class C preferred and
common stock .......................... - - 6 29,866 13,476 134 -
Deferred Consulting ................... - - - - - - 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 preferred stock ........... - - - - - - -
Accretion of redeemable preferred stock
to redemption value ................... - - - - - - -
Deferred Stock Compensation ........... - - - - - - -
Issuance of stock options for
consulting services ................... - - - - - - -
Issuance of Stock Options to settle
lawsuit ............................... - - - - - - -
Amortization of Deferred Stock
Compensation .......................... - - - - - - -
Issuance of warrants .................. - - - - - - -
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 -
Payment of accrued dividend ........... - - - - 859,330 8,593 -
Cashless Warrant exercise ............. - - - - 1,982,876 19,829 -
Exercise of Stock Options ............. - - - - 1,162,852 11,629 -
Shares issued through ESPP ............ - - - - 54,956 550 -
Option extension for CEO .............. - - - - - - -
Option extension for severed employees - - - - - - -
Net loss .............................. - - - - - - -
------------ ----------- -------- ----------- ------------ ----------- --------------
Balance, December 31, 2001 ............ - $ - - $ - 42,770,856 $ 427,709 $ -
Deferred Stock Compensation revaluation - - - - - - -
Amortization of Deferred Stock
Compensation .......................... - - - - - - -
Shares issued through ESPP ............ - - - - 42,041 420 -
Purchase of Treasury Stock ............ - - - - - - -
Net loss .............................. - - - - - - -
------------ ----------- -------- ----------- ------------ ----------- --------------
Balance, December 31, 2002 ............ - $ - - $ - 42,812,897 $ 428,129 $ -
Deferred Stock Compensation revaluation - - - - - - -
Issuance of restricted stock units for
bonus ................................. - - - - - - -
Shares issued through ESPP ............ - - - - 5,494 54 -
Exercise of Stock Options ............. - - - - 289,135 2,892 -
Net loss .............................. - - - - - - -
------------ ----------- -------- ----------- ------------ ----------- --------------
Balance, December 31, 2003 ............ - $ - - $ - 43,107,526 $ 431,075 $ -
Deferred Stock Compensation revaluation - - - - - - -
Issuance of restricted stock units for
bonus ................................. - - - - - - -
Amortize deferred stock compensation .. - - - - 643,160 6,431 -
Shares issued through ESPP ............ - - - - 8,124 82 -
Issuance of non-employee stock options - - - - - - -
Exercise of Stock Options ............. - - - - 30,000 300 -
Net loss .............................. - - - - - - -
------------ ----------- -------- ----------- ------------ ----------- --------------
Balance, December 31, 2004 ............ - $ - - $ - 43,788,810 $ 437,888 $ -
============ =========== ======== =========== ============ =========== ==============
Deferred Additional Stock
Stock Paid-in Subscription Retained Treasury Stock
Compensation Capital Receivable Deficit Shares Amount
----------------- -------------- ---------------- --------------- --------- -----------
BALANCE AT MAY 8, 1997 (DATE OF
INCEPTION) $ - $ - $ - $ - - $ -
Issuance of Founder's Shares .......... - - - (67,500) - -
Issuance of Class A preferred stock ... - - (5,000,000) - - -
Recapitalization ...................... - - - - - -
Rounding for fractional shares ........ - - - - - -
Issuance of Class C preferred and
common stock .......................... - - - - - -
Deferred Consulting ................... - - - - - -
Series A Issuance for Consulting ...... - 496,939 - - - -
Repayment of subscription receivable .. - - 5,000,000 - - -
Issuance of Series A preferred stock
for services and interest on loans ... - - - - - -
Dividend on preferred stock ........... - - - (2,245,680) - -
Accretion of redeemable preferred stock
to redemption value ................. - - - (113,014) - -
Deferred Stock Compensation ........... (1,443,061) 1,443,061 - - - -
Issuance of stock options for
consulting services ................. (47,892) 47,892 - - - -
Issuance of Stock Options to settle
lawsuit ............................. - 303,160 - - - -
Amortization of Deferred Stock
Compensation ........................ 1,279,389 - - - - -
Issuance of warrants .................. - 36,520,366 - (34,580,000) - -
Proceeds from stock offering, net of
related expenses .................... - 49,249,537 - - - -
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 - - - -
Payment of accrued dividend ........... - 1,077,714 - - - -
Cashless Warrant exercise ............. - (19,829) - - - -
Exercise of Stock Options ............. - 1,164,041 - - - -
Shares issued through ESPP ............ - 109,394 - - - -
Option extension for CEO .............. - 315,394 - - - -
Option extension for severed employees - 31,197 - - - -
Net loss .............................. - - - (57,139,978) - -
----------------- -------------- ---------------- --------------- --------- -----------
Balance, December 31, 2001 ............ $ (211,564) $ 132,911,256 $ - $(94,146,172) - $ -
Deferred Stock Compensation revaluation 173,616 (173,616) - - - -
Amortization of Deferred Stock
Compensation ........................ 19,535 - - - - -
Shares issued through ESPP ............ - 12,885 - - - -
Purchase of Treasury Stock ............ - - - - 132,000 (99,660)
Net loss .............................. - - - (20,839,252) - -
----------------- -------------- ---------------- --------------- --------- -----------
Balance, December 31, 2002 ............ $ (18,413) $132,750,525 $ - $(114,985,424) 132,000 $(99,660)
Deferred Stock Compensation revaluation (87,031) 87,031 - - - -
Issuance of restricted stock units for
bonus ............................... (727,195) 727,195 - - - -
Shares issued through ESPP ............ - 911 - - - -
Exercise of Stock Options ............. - 231,005 - - - -
Net loss .............................. - - - (8,618,013) - -
----------------- -------------- ---------------- --------------- --------- -----------
Balance, December 31, 2003 ............ $ (832,639) $133,796,667 $ - $(123,603,437) 132,000 $(99,660)
Deferred Stock Compensation revaluation 78,083 (78,083) - - - -
Issuance of restricted stock units for
bonus ............................... (679,807) 679,807 - - - -
Amortize deferred stock compensation .. 727,196 (33,022) - - - -
Shares issued through ESPP ............ - 3,854 - - - -
Issuance of non-employee stock options - 16,288 - - - -
Exercise of Stock Options ............. - 26,400 - - - -
Net loss .............................. - - - (5,329,960) - -
----------------- -------------- ---------------- --------------- --------- -----------
Balance, December 31, 2004 ............ $ (707,167) $134,411,911 $ - $(128,933,397) 132,000 $(99,660)
================= ============== ================ =============== ========= ===========
Total
Stockholders'
Equity
----------------
BALANCE AT MAY 8, 1997 (DATE OF
INCEPTION) $ -
Issuance of Founder's Shares .......... -
Issuance of Class A preferred stock ... 387,500
Recapitalization ...................... -
Rounding for fractional shares ........ -
Issuance of Class C preferred and
common stock .......................... 30,000
Deferred Consulting ................... 773,284
Series A Issuance for Consulting ...... -
Repayment of subscription receivable .. 5,000,000
Issuance of Series A preferred stock
for services and interest on loans ... 11,485
Dividend on preferred stock ........... (2,245,680)
Accretion of redeemable preferred stock
to redemption value ................. (113,014)
Deferred Stock Compensation ........... -
Issuance of stock options for
consulting services ................. -
Issuance of Stock Options to settle
lawsuit ............................. 303,160
Amortization of Deferred Stock
Compensation ........................ 1,279,389
Issuance of warrants .................. 1,940,366
Proceeds from stock offering, net of
related expenses .................... 49,341,537
Conversion of Series A preferred stock -
Conversion of Series C preferred stock -
Conversion of convertible preferred
stock ............................... 36,694,668
Payment of accrued dividend ........... 1,086,307
Cashless Warrant exercise ............. -
Exercise of Stock Options ............. 1,175,670
Shares issued through ESPP ............ 109,944
Option extension for CEO .............. 315,394
Option extension for severed employees 31,197
Net loss .............................. (57,139,978)
----------------
Balance, December 31, 2001 ............ $ 38,981,229
Deferred Stock Compensation revaluation -
Amortization of Deferred Stock
Compensation ........................ 19,535
Shares issued through ESPP ............ 13,305
Purchase of Treasury Stock ............ (99,660)
Net loss .............................. (20,839,252)
----------------
Balance, December 31, 2002 ............ $ 18,075,157
Deferred Stock Compensation revaluation -
Issuance of restricted stock units for
bonus ............................... -
Shares issued through ESPP ............ 965
Exercise of Stock Options ............. 233,897
Net loss .............................. (8,618,013)
----------------
Balance, December 31, 2003 ............ $ 9,692,006
Deferred Stock Compensation revaluation -
Issuance of restricted stock units for
bonus ............................... -
Amortize deferred stock compensation .. 700,605
Shares issued through ESPP ............ 3,936
Issuance of non-employee stock options 16,288
Exercise of Stock Options ............. 26,700
Net loss .............................. (5,329,960)
----------------
Balance, December 31, 2004 ............ $ 5,109,575
================
See notes to consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statement of Cash Flows
Cumulative from
May 8, 1997
(date of inception)
through December
2004 2003 2002 31, 2004
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net (loss) ................................................. $ (5,329,960) $ (8,618,013) $(20,839,252) $(91,927,203)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 187,230 284,734 1,644,230 4,137,967
Loss on sale of fixed assets ............................ 25,301 -- 14,481 196,169
Impairment of assets .................................... (9,703) 366,788 4,297,128 4,654,213
Restricted cash ......................................... 95,221 (50,000) 45,222 (310,011)
(Expenses paid) restructuring charge .................... (343,547) (343,547) 1,749,738 1,062,644
Reserve for officers note ............................... (17,931) (308,423) 428,398 102,044
Interest expense relating to issuance of warrants ....... -- -- -- 371,000
Non-cash charge for change in option terms .............. -- -- -- 346,591
Non-cash charge for settlement of lawsuit ............... -- -- -- 303,160
Amortization of deferred consulting expense, net ........ -- -- -- 1,160,784
Amortization of deferred stock compensation ............. 700,605 -- 19,534 1,990,858
Options and warrants issued for consulting services ..... 16,288 -- -- 1,585,654
Services and interest expense paid in preferred
stock ................................................... -- -- -- 11,485
Gain on sale of investments ............................. (3,562,582) -- -- (3,562,582)
Changes in operating assets and liabilities:
Accounts receivable ..................................... 76,028 (128,133) -- (52,105)
Inventory ............................................... 16,091 (238,684) -- (222,593)
Prepaid expenses and other current assets ............... (26,239) 1,310,652 (1,172,448) (1,019,100)
Accounts payable ........................................ 241,114 70,749 (834,139) 389,189
Accrued compensation and benefits ....................... (25,391) (70,623) (494,507) 130,609
Accrued interest ........................................ -- -- -- 275,560
Dividend receivable ..................................... 63,758 (63,758) -- --
Due to related party .................................... -- -- (35,532) --
Other accrued expenses and current liabilities .......... (270,958) 87,646 (364,219) 402,239
------------ ------------ ------------ ------------
Net cash used in operating activities ................... (8,164,675) (7,700,612) (15,541,366) (79,973,428)
Cash flows from investing activities:
Purchase of investments .................................... (90,352) (1,100,000) -- (1,190,352)
Sale of investments ........................................ 4,752,934 -- -- 4,752,934
Increase in other assets ................................... -- (236,854) -- (412,072)
Purchases of property and equipment ........................ (30,845) (7,993) (466,081) (8,452,553)
Sale of property and equipment ............................. 17,875 53,365 -- 71,240
------------ ------------ ------------ ------------
Net cash used in investing activities ................... 4,649,612 (1,291,482) (466,081) (5,230,803)
Cash flows from financing activities:
Initial public stock offering, net of expenses ............. -- -- -- 49,341,537
Payment of dividends ....................................... -- -- -- (1,159,373)
Shares issued under employee stock purchase plan ........... 3,936 965 13,305 128,150
Exercise of employee stock options ......................... 26,700 233,897 -- 1,436,267
Issuance of preferred stock ................................ -- -- -- 32,868,028
Repayment of subscription receivable ....................... -- -- -- 5,000,000
Proceeds from capital leases ............................... -- -- -- 495,851
Repayment of capital leases ................................ -- (200,041) (340,455) (1,031,395)
Prepaid financing costs .................................... (327,646) -- -- (327,646)
Proceeds from notes payable issued to investors ............ -- -- -- 3,550,000
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities ..... (297,010) 34,821 (327,150) 90,301,419
(Decrease)increase in cash and cash equivalents ................. (3,812,073) (8,957,273) (16,334,597) 5,097,188
Cash and cash equivalents, beginning of period .................. 8,909,261 17,866,534 34,201,131 --
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ........................ $ 5,097,188 $ 8,909,261 $ 17,866,534 $ 5,097,188
============ ============ ============ ============
Supplemental disclosure of non--cash transactions:
Cash paid for interest ..................................... $ -- $ 6,700 $ 48,926 $ 488,126
============ ============ ============ ============
Cash paid for taxes ........................................ $ 1,500 $ 4,700 $ 17,000 $ 32,000
============ ============ ============ ============
Assets acquired through capital lease ...................... $ -- $ -- $ -- $ 535,445
============ ============ ============ ============
See notes to consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARIES
(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 primarily 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.
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, developing alternative power sources. The Company's
organizational structure has no divisions or subsidiaries dictated by product
lines, geography or customer type.
The Company does not expect to become profitable or cash flow positive until at
least 2008 and 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 plan, the Company has only
enough cash to fund operations through approximately May 2005. The Company will
need to obtain an equity investment as soon as practicable in 2005 to cover
expenses relating to continuing operations, working capital, flywheel prototype
development and new business development. 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.
Operations. The Company has experienced net losses since its inception and, as
of December 31, 2004, had an accumulated deficit of approximately $128.9
million. The Company is currently facing the challenge of identifying potential
applications, and the ongoing development and refinement of its products. This
ongoing research and development will require substantial 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 has continued. Expenditures under
two state government contracts for the development of a one-tenth-power
prototype of the Company's Smart Energy Matrix have begun, but further
expenditures for full scale development and ramping production capabilities will
not be made until sufficient funding to ensure that it can complete development
of the matrix and continue as a going concern is obtained. The Company has
continued, on a reduced level, production of its inverter product for solar
energy applications. Although it is continuing to support the product, the
Company does not believe that inverters will be a significant portion of the
Company's business going forward. Inverter inventory valuation write-downs were
recorded during 2004 in the amount of approximately $1,025,000, and a provision
for future inverter warranty expenditures of approximately $28,000 was also
recorded.
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 had minimal revenues, and
incurred significant losses from operations of approximately $5,330,000,
$8,618,000 and $20,839,000 and cash decreases of approximately $3,812,000,
$8,957,000 and $16,335,000, during the years ended December 31, 2004, 2003 and
2002, respectively. The Company has approximately $5,097,000 of cash and cash
equivalents on hand at December 31, 2004 which is adequate to fund operations
through approximately May 2005. 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.
The Company recognizes that its continuation as a going concern is dependent
upon its ability to generate sufficient cash flow to allow it to satisfy its
obligations on a timely basis. The generation of sufficient cash flow is
dependent, in the short term, on the Company's ability to obtain adequate equity
investments, and in the long term, on the successful expansion of the Company's
share of the market for its current products and the establishment of new
markets for products under development. The Company believes that the successful
achievement of these initiatives should provide it with sufficient resources to
meet its cash requirements. In addition, the Company is also considering a
number of other strategic financing alternatives, and has incurred substantial
costs in these efforts; however, no assurance can be made with respect to the
success of these efforts or the 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.
Its other subsidiary is inactive. 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.
Accounts Receivable and Allowance for Doubtful Accounts. The Company evaluates
the collectibility of its open receivables on an ongoing basis. General reserves
are established at the time an invoice is generated. In addition, specific
reserves for bad debt are recorded based on the age of receivables, and when the
Company is notified of a customer's inability to satisfy its debt obligations,
such as in the event of a bankruptcy filing. The Company provides an allowance
for doubtful accounts equal to the estimated uncollectible amounts due from its
customers. The Company's estimate is based on limited historical collection
experience and a review of the current status of trade accounts receivable.
Accounts receivable are presented in the Company's balance sheets net of an
allowance for doubtful accounts of $22,850 and $0 at December 31, 2004 and 2003,
respectively.
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, 2004 and 2003:
2004 2003
Raw materials .......................... $176,349 $104,362
Work in progress ....................... 46,244 26,001
Finished goods ......................... -- 108,321
-------- --------
Inventories ............................ $222,593 $238,684
======== ========
Investments. The Company sold its entire investment in Evergreen Solar, Inc.
(see Note 13) during 2004 providing gross proceeds of approximately $4,753,000
and a net gain of approximately $3,563,000, and currently holds no investments.
Prepaid Expenses and Other Current Assets. Included in prepaid expenses at
December 31, 2004 and 2003 are prepaid insurance premiums of approximately
$681,000 and $699,000, respectively, primarily relating to directors and
officers liability insurance.
During 2001, the Company advanced approximately $565,000 to an officer of the
Company, Mr. William Stanton, its former CEO and President and currently a
consultant to the Company. This advance is interest bearing and secured by Mr.
Stanton's holdings of Beacon common stock and was provided to him to allow the
exercise of stock options and the payment of related taxes. In 2004, Mr. Stanton
was paid approximately $80,000 of consulting fees by the Company, of which, Mr.
Stanton paid the Company $20,000 to reduce his outstanding loan balance. Through
December 31, 2004, the Company collected approximately $464,000 in principal
payments on this advance. The balance of this loan as of December 31, 2004 is
$101,000 including current year interest of $4,008 and is fully reserved;
however, it has not been cancelled. Mr. Stanton continues to serve as a director
of the Company.
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 primarily of deferred financing costs
relating to the Company's equity raising activities and due diligence of
possible acquisitions and includes expenditures for legal, business valuation
and consulting services. Intellectual property relating to the Company's Smart
Power M5 inverter system purchased from Advanced Energy Systems, Inc., was fully
amortized at December 31, 2004
Loss on Sales Commitments. At December 31, 2004 the Company determined that it
had no sales commitments that required establishing a loss on sales commitment
reserve. 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. 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 was an impairment of
long-lived assets and recognized an asset impairment charge of $0 in 2004,
$366,788 in 2003 and $4,297,128 in 2002.
Other assets and deferred financing costs. The Company will capitalize its
direct costs incurred to raise capital or to acquire an entity in a business
combination. Direct costs include only "out-of-pocket" or incremental costs
directly related to the effort, such as a finder's fee and fees paid to outside
consultants for accounting, legal, or engineering investigations or for
appraisals. The Company has incurred approximately $328,000 of costs associated
with potential sources of capital or acquisitions, which are deferred at
December 31, 2004. These costs will be capitalized if the efforts are
successful, or expensed when unsuccessful. Indirect costs are expensed as
incurred.
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 were
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 were idled, including
machinery and equipment, tooling, office furniture and fixtures, and equipment
and leasehold improvements. The Company 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, in 2002,
incurred 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 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:
December 31,
--------------------------
2004 2003
----------- -----------
Beginning balance .......................... $ 1,406,191 $ 1,749,738
Payments of rent ........................... (343,547) (343,547)
----------- -----------
Ending balance ............................. $ 1,062,644 $ 1,406,191
=========== ===========
Revenue Recognition. Although the Company has shipped products, and recorded
contract revenues, 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 recognizes revenues, in accordance with accounting principles
generally accepted in the United States of America. Generally, 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 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 introduced that may have enhanced
functionality to product in distributor inventory.
Government Contract Revenue Recognized on the Percentage-of-Completion Method.
The Company recognizes contract revenues using the percentage-of-completion
method, based primarily on contract costs incurred to date compared with total
estimated contract costs. Changes to total estimated contract costs or losses,
if any, are recognized in the period in which they are determined. Revenues
recognized in excess of amounts billed are classified as current assets, and
included in "Prepaid expenses and other current assets" in the Company's balance
sheets. Amounts billed to clients in excess of revenues recognized to date are
classified as current liabilities under advance billings on contracts. Changes
in project performance and conditions, estimated profitability, and final
contract settlements may result in future revisions to construction contract
costs and revenue.
Cost of Goods Sold. The Company costs its products at the lower of cost or
market. Costs in excess of this measurement are expensed in the period in which
they are incurred. In addition, the Company continuously evaluates inventory and
purchase commitments to insure that levels do not exceed the expected deliveries
for the next twelve months. As the Company is in the early stages of production,
its actual manufacturing costs incurred currently exceed the fair market value
of its products. The Company provides a five-year limited product warranty for
its Smart Power M5 product line and accrues for estimated future warranty costs
in the period in which the revenue is recognized. In 2004, the Company
established a reserve for its Smart Power M5 inventory as a result of lower than
anticipated sales volumes., Although the Company is continuing to support its
inverter product, the Company does not believe that inverters will be a
significant portion of the Company's business going forward and is uncertain as
to when or at what price it will be able to sell its inventories. The charge to
Cost of Goods Sold was approximately $1,025,000, which includes accrued purchase
commitments of approximately $45,000.
Stock-Based Compensation. The Company accounts for stock based employee
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (Accounting for Stock Issued to Employees) and
related interpretations. 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 the Company has not adopted at this time.
Deferred compensation expense associated with stock awards to non-employees is
measured using the fair-value method and is amortized over the vesting period
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 stock 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,
2004 2003 2002
------------ ------------ ------------
Net loss to common shareholders as reported $ (5,329,960) $ (8,618,013) $(20,839,251)
Pro-Forma compensation expense ............ $ 2,541,263 $ 400,148 $ 2,998,612
Net loss--pro forma ....................... $ (7,871,223) $ (9,018,161) $(23,837,863)
Loss per share--as reported ............... $ (0.12) $ (0.20) $ (0.49)
Loss per share--pro forma ................. $ (0.18) $ (0.21) $ (0.56)
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:
2004 2003 2002
------------------------------------------------------
Risk-free interest rate 4.32% - 4.49% 1.22% - 3.56% 2.48% - 3.56%
Expected life of option 10 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 95% - 115% 109% - 137% 130% - 137%
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).
The Company granted Restricted Stock Units to employees for service performed in
2004 and 2003 that vest quarterly during the subsequent year. The Company's
Restricted Stock Unit Deferred Compensation Plan is described in more detail in
Note 10.
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 has been provided because realization
of deferred tax assets is not considered more likely than not (see Note 11).
Advertising. Advertising expense was approximately $15,000, $3,000 and $13,000
in 2004, 2003 and 2002 respectively, and is expensed as incurred.
Research and Development. Research and development costs are expensed as
incurred.
Fair Value of Financial Instruments. The carrying amount of cash and cash
equivalents, accounts receivable, inventory, accounts payable, accrued expenses,
and other current assets and liabilities 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. The Company keeps its cash investments with
high-credit-quality financial institutions. At December 31, 2004 substantially
all of its cash and cash equivalents were held in interest bearing accounts at
financial institutions earning interest at varying rates. At December 31, 2004
and 2003, the Company had cash balances at a financial institution in excess of
federally insured limits. However, the Company does not believe that it is
subject to unusual credit risk beyond the normal credit risk associated with
commercial banking relationships.
Comprehensive Loss. Comprehensive loss is the same as net loss for all periods
presented.
Loss Per Share - Basic and Diluted. Basic loss per share has been computed using
the weighted-average number of shares of common stock outstanding during each
period. Diluted loss per share was computed in the same manner. The calculation
of diluted net loss per common share for the years ended December 31, 2004, 2003
and 2002 does not include 10,779,498, 9,732,929 and 14,326,571 of potential
shares of common stock equivalents outstanding at December 31, 2004, 2003 and
2002, respectively, as their inclusion would be antidilutive or their exercise
price exceeded the average market price of the Company's common stock.
3. Property and Equipment
Property and equipment consisted of the following at December 31:
Estimated
Useful
Lives 2004 2003
------------- ----------- -----------
Machinery and equipment ...................... 5 years $ 571,198 $ 627,406
Service vehicles ............................. 5 years 16,762 62,327
Furniture and fixtures ....................... 7 years 296,652 279,190
Office equipment ............................. 3 years 1,396,562 1,398,835
Leasehold improvements ....................... Lease term 533,352 524,347
Equipment under capital lease obligations .... Lease term 918,285 918,284
----------- -----------
Total ................................... $ 3,732,811 $ 3,810,389
Less accumulated depreciation and amortization (3,474,164) (3,453,209)
----------- -----------
Property and equipment, net ............. $ 258,647 $ 357,180
=========== ===========
4. Commitments and Contingencies
The Company leases office and light manufacturing space under an operating lease
through September 30, 2007. At December 31, 2004, the Company has provided the
lessor with an irrevocable letter of credit with a balance of $310,011 which is
reduced annually during the lease term. This letter of credit is secured by a
cash deposit, which is included in restricted cash in the accompanying
consolidated balance sheets.
Future minimum annual lease payments under non-cancelable operating leases as of
December 31, 2004 are as follows:
2005 500,359
2006 529,413
2007 397,059
Rent expense was $223,031, $215,415 and $436,083, during 2004, 2003 and 2002,
respectively net of restructuring reserves applied of $315,474, $315,474, and
$78,868, respectively.
The Company has firm non-cancelable purchase commitments with its suppliers to
fulfill its Smart Power M5 production requirements and to satisfy contractual
obligations for its research and development programs for 2005 in the amount of
approximately $252,000.
Legal Proceedings. The Company may be subject to various legal proceedings, many
involving routine litigation incidental to its business. The outcome of any
legal proceeding is not within the complete control of the Company, is often
difficult to predict and is resolved over very long periods of time. Estimating
probable losses associated with any legal proceedings or other loss
contingencies are very complex and require the analysis of many factors
including assumptions about potential actions by third parties. Loss
contingencies are recorded as liabilities in the consolidated financial
statements when it is both (1) probable or known that a liability has been
incurred and (2) the amount of the loss is reasonably estimable. If the
reasonable estimate of the loss is a range and no amount within the range is a
better estimate, the minimum amount of the range is recorded as a liability. If
a loss contingency is not probable or not reasonably estimable, a liability is
not recorded in the consolidated financial statements.
On August 16, 2004, Ricardo and Gladys Farnes, and TLER Associates, Ltd. a
Bahamas corporation ("TLER"), delivered a complaint to the Company, naming as
defendants, the Company, John Doherty, Richard Lane, and unidentified
individuals and corporations. The case was filed in District Court in Clark
County, Nevada on or about June 1, 2004, and later was removed to the United
States District Court for the District of Nevada, where it is pending. The
complaint alleges that in 2001, defendants (a) forged the signature of plaintiff
Ricardo Farnes (a principal of TLER) to a document purporting to extend the
performance period on a purchase order issued by TLER to the Company, and (b)
thereafter, posted on the internet defamatory and personal information
concerning the plaintiffs. The plaintiffs do not allege any specific amount of
damages, and instead assert that damages exceed $10,000. The Company has
answered the complaint, denying its material allegations, and is vigorously
defending. Although the outcome of this matter cannot yet be determined,
management does not expect that the ultimate costs to resolve this matter will
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows and accordingly, no liability has been
recorded.
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, 2004 and 2003, there are 10 million
shares of $.01 par value 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 Agreement. In September 2002, and amended as of December 27,
2002,the Company's Board of Directors approved a Rights Agreement, under which,
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, 2004, 11,601,803 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
Warrants outstanding as of December 31, 2004:
Expiration Strike Issued and
Grant Date Date Price Outstanding
- --------------------------- ------------ ------------- ----- ---------
Class E ................... 4/7/2000 4/7/2005 $ 1.25 510,672
Class F ................... 5/23/2000 5/23/2005 $ 2.25 4,555,554
F Financing (Bridge) ...... 4/21/2000 4/21/2005 $ 2.10 58,000
Consultants ............... 8/2/2000 8/2/2005 $ 6.00 20,000
GE (CR&D) ................. 10/24/2000 10/24/2005 $ 2.10 120,000
- --------------------------- ------------ ------------- ----- ---------
Total Warrants 5,264,226
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 expired 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. The
remaining outstanding warrants are 510,672 at December 31, 2004, and are to
expire on April 7, 2005.
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 its 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. In 2000, the Company issued warrants to a consultant that
are exercisable for 20,000 shares of its common stock at an exercise price of
$6.00 per share. The holder may exercise its warrant at any time prior to August
2, 2005. These warrants were fully vested upon the issuance.
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 $27,360 and $105,000 at December 31, 2004 and 2003,
respectively. 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 ................................ 8,118,695 2.39 1.35
Exercised .............................. (1,162,852) 0.98
Canceled, forfeited or expired ......... (2,105,942) 3.53
---------- -----
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
Granted ................................ 3,772,139 0.72 1.60
Exercised .............................. (30,000) 0.89
Canceled, forfeited or expired ......... (340,493) 1.58
---------- -----
Outstanding, December 31, 2004 .............. 6,217,575 $ 1.06
==========
The following table summarizes information about stock options outstanding at
December 31, 2004:
Vested
Weighted- ------------------------------
Average Weighted- Weighted-
Number Remaining Average Average
of Options Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price of Options Price
- ---------------- --------------- ------------- ------------- -------------- -------------
$.255-$.74 4,341,743 9.49 $0.70 4,112,573 $0.71
$.89 - $1.05 1,172,228 6.42 $0.89 1,172,228 $0.89
$1.78 - $2.50 339,104 5.35 $2.22 339,104 $2.22
$3.00 - $4.10 190,000 5.50 $3.94 190,000 $3.94
$5.10 - $6.10 154,500 5.88 $5.67 154,500 $5.67
$6.90 - $9.31 20,000 7.00 $8.16 20,000 $8.16
Included in the above schedules are grants of 25,000, 0, 45,000 and 0 options
made to non-employee consultants in 2004, 2003, 2002 and 2001 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 2004, 2003 and 2002 totaled 8,124, 5,494 and 42,041,
respectively and the weighted average grant date fair value of the shares
purchased was $0.48 in 2004, $0.18 in 2003 and $0.28 in 2002. There are 889,385
shares available under the Plan at December 31, 2004.
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 need to
conserve cash and the desire to retain its professional staff, the Company
determined that it would be in the best interest of it, its employees, and its
stockholders to implement a stock-based 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 738,921 and 667,151
RSUs for the fiscal years ended December 31, 2004 and 2003, respectively, which
are not available for exercise until satisfaction of the quarterly vesting
period during the following calendar year. 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. Accordingly, no compensation expense has been
recorded for 2003. Compensation expense recorded during the vesting period in
2004 for the 2003 RSU program was $700,605.
11. Income Taxes
The components of the provision (benefit) for income taxes consisted of the
following:
Cumulative from
May 8, 1997
(Date of
Year ended Year ended Year ended Inception) to
December 31, December 31, December 31, December 31,
2004 2003 2002 2004
----------------- ------------------ ------------------ -------------------
State - current .............. $ 750 $ 1,956 $ - $ 19,862
Federal--deferred ............ (1,974,627) (5,807,539) (7,377,177) (34,822,401)
State--deferred .............. (325,553) (1,169,696) (824,557) (5,809,036)
Increase in valuation
allowance .................... 2,300,179 6,977,235 8,201,734 40,631,436
----------------- ------------------ ------------------ -------------------
Provision (benefit) for
income taxes ................. $ 750 $ 1,956 $ - $ 19,861
================= ================== ================== ===================
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:
2004 2003
------------ ------------
Long-term assets:
Net operating loss carryforwards ................. $ 31,862,096 $ 29,965,300
Research and development credits ................. 2,701,000 2,577,524
Restructuring reserves ........................... 2,232,298 2,373,598
Other ............................................ 557,174 135,966
------------ ------------
Net deferred tax assets before valuation allowance 37,352,568 35,052,388
Less valuation allowance ......................... (37,352,568) (35,052,388)
------------ ------------
Net deferred tax assets .......................... $ -- $ --
============ ============
The valuation allowance increased by $2,300,179 in 2004 and $6,977,235 in 2003,
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 $80,532,923 and $77,631,443,
respectively, as of December 31, 2004. In addition, the Company has business
credits of approximately $1,804,111 and $896,889 for federal and state purposes,
respectively as of December 31, 2004. 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, 2004.
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 and tax credits 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. Retirement Savings Plan
In 1998, the Company created a 401(k) Retirement Savings 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 matching contributions were $61,213,
$63,671 and $113,257 during 2004, 2003 and 2002 respectively. The Company has
not made any profit sharing contributions since the plan's inception.
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. The Series A
Preferred Stock is convertible into common stock on a one to one basis and
accrues dividends at a rate of 10%. The common stock market value on an as
converted basis at December 31, 2003 was $1,595,637. 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. The Company sold its holdings in Evergreen, including
the warrant, during 2004 in order to help finance its operations and received
cash proceeds of approximately $4,753,000, representing a gain on this
investment of $3,562,582.
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. Messrs. Deutch and Socha disclosed their
possible conflict relating to this transaction, and abstained from voting on the
matter. In addition, Mr. Deutch did 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.
Loan to Officer. During 2001, the Company advanced approximately $565,000 to an
officer of the Company, Mr. William Stanton, its former CEO and President and
currently a consultant to the Company. This advance is interest bearing and
secured by Mr. Stanton's holdings of Beacon common stock and was provided to him
to allow the exercise of stock options and the payment of related taxes. In
2004, Mr. Stanton was paid approximately $80,000 of consulting fees by the
Company, of which, Mr. Stanton paid the Company $20,000 to reduce his
outstanding loan balance. Through December 31, 2004, the Company collected
approximately $464,000 in principal payments on this advance. The balance of
this loan as of December 31, 2004 is $101,000 including current year interest of
$4,008 and is fully reserved; however, it has not been cancelled. Mr. Stanton
continues to serve as a director of the Company.
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.
2004
---------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
Revenue ................................... $ 57,408 $ 126,484 $ 80,902 $ 59,900
Gross profit (loss) ....................... $ (18,371) $ (181,604) $ (898,802) $ (34,398)
Loss from operations ...................... $ (2,189,460) $ (2,358,497) $ (2,751,782) $ (1,749,096)
Net (loss) income ......................... $ (2,148,727) $ (2,266,205) $ (1,854,795) $ 939,767
Income (loss) per share - basic and diluted $ (0.05) $ (0.05) $ (0.04) $ 0.02
Weighted-average common shares outstanding 43,121,702 43,273,817 43,538,541 43,702,485
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
15. Restatement
Subsequent to the issuance of the Company's 2003 financial statements, the
Company's management determined that its liabilities had been overstated and
additional paid in capital understated due to a bookkeeping error in recording
the Restricted Stock Units (Note 10). As a result, the balance sheet and
statement of changes in equity have been restated from the amounts previously
reported to correct the error. Additionally, the Company has reclassified
certain cash deposits securing letters of credit from cash and cash equivalents,
as previously reported, into restricted cash as of December 31, 2003 and 2002.
Furthermore, the Company determined that the investment in Evergreen Solar
should have been recorded at cost (see Note 13). The Company had previously
recorded its investment in Evergreen as available-for-sale with the unrealized
gain recorded as a separate component of accumulated other comprehensive income,
net of tax.
A summary of the effects of the restatements on previously reported financial
position as of December 31, 2003 and 2002 is as follows:
As previously
At December 31, 2003 reported As restated
- -------------------- ------------ ------------
Cash ............................................ $ 9,314,493 $ 8,909,261
Restricted cash ................................. -- 405,232
Investments ..................................... 1,695,638 1,163,758
Accrued compensation and benefits ............... 883,195 156,000
Other comprehensive income ...................... 531,880 --
Additional paid in capital ...................... 133,069,472 133,796,667
As previously
At December 31, 2002 ............................ reported As restated
----------- -----------
Cash ............................................ $18,221,766 $17,866,534
Restricted cash ................................. -- 355,232
The Company has also restated the disclosures in Note 3 Property and Equipment,
to reflect the adjusted cost basis net of impairment by asset class.
16. Subsequent Event
California Energy Commission contract
On February 14, 2005 the Company executed a contract with the California State
Energy Resources Conservation and Development Commission ("CEC") entitled
"Flywheel Energy Storage System for Grid Frequency Regulation," to demonstrate a
one-tenth power prototype version of its Smart Energy Matrix advanced energy
storage solution for frequency regulation and grid stability. Under the
contract, the Company will develop and install a one-tenth scale prototype of
the Company's megawatt-level system to demonstrate the potential benefits of
using flywheel energy storage to provide frequency regulation of the grid. A
successful demonstration of frequency regulation will also serve to demonstrate
the system's technical and market feasibility in the grid stabilization market.
The contract requires the system to be delivered and installed during the second
half of 2005. The contract is expected to produce approximately $1.2 million of
revenue, with the majority of it in 2005.
New York State Energy Research and Development Authority contract.
On February 10, 2005 the Company received a research and development contract
from the New York State Energy Research and Development Authority (NYSERDA)
under a joint initiative between the U.S. Department of Energy (DOE) Energy
Storage Research Program and NYSERDA, entitled "Grid Frequency Regulation by
Recycling Energy in Flywheels," to demonstrate an advanced energy storage
solution for frequency regulation and grid stability in New York State. The
contract requires the system to be delivered and installed during the second
half of 2005. The contract is expected to produce approximately $645,000 of
revenue, nearly all of it in 2005. Under the contract, the Company will
demonstrate a one-tenth-power prototype of the Company's planned megawatt-level
system, known as the Smart Energy Matrix. The demonstration will integrate the
Company's flywheels and associated power electronics into the distribution power
grid.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective August 27, 2004, the Company's former independent registered public
accounting firm, Deloitte & Touche LLP ("Deloitte"), resigned as the independent
registered public accounting firm Deloitte performed the review and audit of the
Company's books and accounts for the fiscal years ending December 31, 2003 and
2002 and the interim quarterly reviews through the quarter ended June 30, 2004.
The resignation was the decision of Deloitte. There were no disagreements during
the past two fiscal years and the subsequent interim periods ending June 30,
2004 and through August 27, 2004 between Deloitte and management on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Deloitte, would have caused it to make reference thereto in its
reports on the financial statements for such years.
On October 29, 2004, the audit committee of the board of directors of the
Registrant approved the engagement of Miller Wachman LLP ("Miller Wachman") as
the Registrant's new independent registered public accounting firm.
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, 2004.
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. During the quarter ended on the date of the evaluation,
there was no change in the Company's internal control over financial reporting
that materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9B. Other Information
Not applicable.
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:
Stephen P. Adik, age 61 (director since 2004)
Audit committee
Compensation committee
Nominating committee
Mr. Adik served as Vice Chairman at NiSource Inc., (NYSE: NI), a Fortune 500
electric, natural gas and pipeline company, from December 2000 until his
retirement in December 2003. He joined NiSource in 1987 as Vice President and
general manager, Corporate Support Group, and later held positions of Senior
Executive Vice President and Chief Financial Officer. At NiSource, he helped
grow the company's market capitalization from $600 million to the current value
of approximately $5.6 billion. Before joining the energy industry in 1983, Mr.
Adik also had more than 20 years of operating and financial experience in the
transportation industry. His industry affiliations have included the American
Gas Association, Edison Electric Institute and the Midwest Gas Association. He
is currently a member of the boards of NiSource, and the Chicago SouthShore and
South Bend Railroad. He was also recently nominated to the board of North
Western Corp, an electric and natural gas company serving Montana, South Dakota
and Nebraska. Mr. Adik holds a degree in mechanical engineering from the Stevens
Institute of Technology, and an MBA degree in finance from Northwestern
University. Mr. Adik's term of office expires in 2007.
F. William Capp, age 56 (director since 2001)
Mr. Capp has served as the Company's President, Chief Executive Officer and
Board member since December 1, 2001 when he joined the Company. 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. From 1978-1997, Mr. Capp held numerous
positions at Ingersoll Rand including Vice President and General Manager of its
Compressor Division, Vice President of Technology for a wholly owned subsidiary,
the Torrington Company. as well as numerous 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's term of
office expires in 2005.
Philip J. Deutch, age 40 (director since 1998)
Mr. Deutch has served as a Managing Director of Perseus L.L.C. since 1997. In
this position, Mr. Deutch has led Perseus' investments in numerous energy
technology companies. 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
serves on the board of directors of Evergreen Solar, Inc.(NASDAQ-ESLR). Mr.
Deutch's term of office expires in 2005.
Jack P. Smith, age 56 (director since 2001)
Audit committee
Compensation committee
Mr. Smith is Chairman, Director and co-owner of SilverSmith Inc, a producer of
natural gas well metering and automated data reporting systems. With partner,
Mr. David Silvers, Smith founded SilverSmith Inc. in 2003. Prior to his current
connection with SilverSmith, Smith was President and CEO 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. Prior to More Space Place, Inc., 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 $200 million. In 1995, Smith led a successful management buyout
of the company with equity partner Kohlberg Kravis Roberts. From 1992 to 1999,
this and an earlier buyout transaction generated an equity return of over $110
million. Smith also held the positions of Vice President 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 in Wisconsin. He is a Trustee of Grand Valley
State University Foundation. 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's
term of office expires in 2007.
Kenneth M. Socha, age 58 (director since 1998)
Audit Committee
Compensation Committee
Nominating committee
Mr. Socha has served as Senior Managing Director of Perseus L.L.C. since 1996.
From 1985 to June 1988, he practiced law as a Partner in the New York office of
Lane & Edson. He became a partner of Dewey Ballantine in New York City in 1988.
Mr. Socha left Dewey Ballantine in February 1992 to join Rappahannock Investment
Company, the predecessor of Perseus L.L.C. on a full-time basis. Mr. Socha is a
director of five 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's term of office expires in 2007.
William E. Stanton, age 61 (director since 1997)
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 Technology Corporation ("SatCon") from September 1995 to May
1997, where he managed operations and the strategy development to shift 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, in his 26 years at the Charles Stark Draper
Laboratory, held the positions of Vice President of Operations, Vice President
of Corporate Development , Director of New Programs, Director of Avionics
Programs, Avionics Program Manager, Director of Electronics Engineering,
Principal Engineer, and Electronics Engineer. Mr. Stanton is on the board of his
home owners association, was a founder and director of an in-school child-care
center, and owned and operated residential rental property. He 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.
There are no family relationships among any of the Company's directors or
executive officers. The Board has determined that Messrs. Capp and Stanton are
the only members of the Board that are not independent under Nasdaq Rule 4200.
Audit Committee. The Audit Committee members are Messrs. Adik, Smith and Socha.
Under NASDAQ audit committee rules and SEC rules for Small Business filers,
Beacon's audit committee must have at least three members, of which two must be
"independent." These rules applicable to audit committees are more difficult to
satisfy than the rules related to the Board as a whole and its other committees.
Both, Messrs. Smith and Adik qualify as "independent" as defined in the Nasdaq
and SEC standards. Mr. Socha is an affiliated person and therefore does not meet
the "independent" requirement. Beginning July 31, 2005, all three members of the
audit committee must be "independent." No present board members other than
Messrs. Smith and Adik qualify as "independent." Mr. Adik is qualified as an
Audit Committee Financial Expert. 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. During
the last fiscal year, the Audit Committee held seven meetings that were not part
of a full meeting of the board of directors. The Company's audit committee
charter can be found on its website at www.beaconpower.com.
Compensation Committee. The current Compensation Committee members are Messrs.
Adik, 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 Second Amended and Restated 1998 Stock
Incentive Plan, Employee Stock Purchase Plan and Restricted Stock Unit Incentive
Plan. Messrs. Adik, Smith and Socha are non-employee directors who have no
interlocking relationships as defined by the Securities and Exchange Commission.
They are all independent pursuant to the Nasdaq rules applicable to members of
this committee. The Compensation Committee held no formal meetings during the
last fiscal year that were not part of a full meeting of the board of directors.
Nominating Committee. The members of the Nominating Committee are responsible
for recommending nominee directors to the Company's board of directors. The
board as a whole then reviews the qualifications of nominee directors and
recommends to the stockholders the election of its directors. A stockholder may
nominate a person for election as a director by complying with Section 2.2 of
the Company's By-Laws, which provides that advance notice of a nomination must
be delivered to Beacon and must contain the name and certain information
concerning the nominee and the stockholders who support the nominee's election.
A copy of this By-Law provision may be obtained by writing to Beacon Power
Corporation, Attn: James M. Spiezio, Secretary, 234 Ballardvale Street,
Wilmington, MA 01887. Director nominees submitted by shareholders will be
considered on the same terms as other nominees. The current members of the
nominating committee are Messrs. Adik and Socha. The Nominating Committee held
no meetings during the last fiscal year that were not part of a full meeting of
the board of directors. The charter for the nominating committee can be found on
the Company's web site at www.beaconpower.com.
Executive Officers of the Company
The Company's executive officers, positions and their ages as of February 28,
2005, are as follows:
Name Age Position
F. William Capp 56 President and Chief Executive Officer, Director
Matthew L. Lazarewicz 54 Vice President and Chief Technical Officer
James M. Spiezio 57 Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary
F. William Capp. Mr. Capp has served as the Company's President, Chief Executive
Officer and Board member since December 1, 2001 when he joined the Company.
Prior to joining the Company, 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. From 1978-1997, Mr.
Capp held numerous positions at Ingersoll Rand including Vice President and
General Manager of its Compressor Division, Vice President of Technology for a
wholly owned subsidiary, the Torrington Company. as well as numerous 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 had a 25-year
career with General Electric Company and served as 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
which included development through production phases, in addition he progressed
through a variety of positions in design, manufacturing, quality, marketing, and
product support in both military and commercial applications. 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 has over twenty-five years of diversified
manufacturing and financial management experience. Mr. Spiezio served as Chief
Financial Officer at Starmet Corporation, a diversified metallurgical
manufacturing company engaged in both the commercial and government sectors,
from 1993 to 1999. While at Starmet he also served as President of a wholly
owned chemical and manufacturing facility for five years and held several
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.
Code of Ethics. A copy of the Company's corporate code of conduct 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities ("Insiders"), to file reports of ownership and
changes in ownership with the SEC. Insiders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on review of the copies of such forms furnished to the Company and on
written representations from its Insiders, the Company believes that during 2004
all of its Insiders met their Section 16(a) filing requirements.
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) 2004 $240,000 $ 55,000 $ 68,032 $ 236,800 600,000 $ 78,053
President and Chief 2003 $220,000 $ - $ 71,335 $ 225,217 - $ -
Executive Officer 2002 $220,000 $ - $ 212,685 $ - - $ -
Matthew L. Lazarewicz (4) 2004 $167,000 $ - $ 18,783 $ 98,716 350,000 $ 37,580
Vice President and Chief 2003 $157,500 $ 20,000 $ 1,077 $ 108,422 - $ -
Technical Officer 2002 $157,500 $ 32,573 $ 1,073 $ - 80,000 $ -
James M. Spiezio (5) 2004 $178,400 $ - $ 24,908 $ 108,588 450,000 $ 43,406
Vice President of Finance, 2003 $168,000 $ 25,200 $ 3,103 $ 125,183 - $ -
Chief Financial Officer, 2002 $168,000 $ 51,094 $ 3,094 $ - 80,000 $ -
Treasurer and Secretary
James Arseneaux (6) 2004 $110,024 $ - $ 1,170 $ 28,060 200,000 $ 8,346
Program Manager 2003 $103,824 $ 5,000 $ - $ 24,100 - $ -
2002 $103,824 $ - $ - $ - 25,000 $ -
Richard L. Hockney (7) 2004 $121,500 $ - $ 1,347 $ 25,254 125,000 $ 9,604
Chief Engineer 2003 $114,400 $ 2,500 $ - $ 27,706 - $ -
2002 $ 97,223 $ - $ - $ - 25,000 $ -
(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 executives and
reimbursed by Beacon plus an amount to reimburse the executive for taxes
paid on the amount of the premium and payment of employee's taxes related
to Restricted Stock Unit grants during 2004. Mr. Capp also received other
compensation relating to realtor expenses and temporary living costs and
the related taxes on these items. For 2004, Mr. Capp's temporary living and
relocation expenses were $29,939, Company paid life insurance premiums were
$2,480, RSU taxes of $11,658, and the related taxes were $23,955. For 2003
Mr. Capp's temporary living and relocation expenses were $40,499, Company
paid life insurance premiums were $2,480, and the related taxes were
$28,356. For 2002 Mr. Capp's temporary living and relocation expenses were
$32,361, realtor expenses were $83,763, life insurance premiums were $2,480
and the related taxes were $94,081.
(3) The Company hired Mr. Capp in December 2001. At the time of his employment,
Mr. Capp received 900,000 stock options with a strike price of $.89.
One-third of these options vested immediately with the remainder vesting
over a two year period. These options expire ten years from the date of
issuance. On October 13, 2004, Mr. Capp received 600,000 options with a
strike price of $.74 vesting over an 80 day period. These options expire
ten years from date of issuance.
(4) The Company hired Mr. Lazarewicz in February 1999. On March 15, 2002 Mr.
Lazarewicz received 80,000 stock options with a strike price of $.70.
One-third of these options vested immediately with the remainder vesting
over a two year period. These options expire ten years from the date of
issuance. On October 13, 2004, Mr. Lazarewicz received 350,000 options with
a strike price of $.74 vesting over an 80 day period. These options expire
ten years from date of issuance.
(5) The Company hired Mr. Spiezio in May 2000. On March 15, 2002 Mr. Spiezio
received 80,000 stock options with a strike price of $.70. One-third of
these options vested immediately with the remainder vesting over a two year
period. On October 13, 2004, Mr. Spiezio received 450,000 options with a
strike price of $.74 vesting over an 80 day period. Both option grants
expire ten years from the date of issuance.
(6) Mr. Arseneaux has been an employee of Beacon since August 30, 2000. On
March 15, 2002 Mr. Arseneaux received 25,000 stock options with a strike
price of $.70. One-third of these options vested immediately with the
remainder vesting over a two year period. On October 13, 2004, Mr.
Arseneaux received 200,000 options with a strike price of $.74 vesting over
an 80 day period. All option grants expire ten years from the date of
issuance.
(7) Mr. Hockney has been an employee of the Company from its incorporation. On
March 15, 2002 Mr. Hockney received 25,000 stock options with a strike
price of $.70. One-third of these options vested immediately with the
remainder vesting over a two year period. On October 13, 2004, Mr. Hockney
received 125,000 options with a strike price of $.74 vesting over an 80 day
period. Both option grants expire ten years from the date of issuance.
- -----------------------
Option grants in last fiscal year:
Individual Grants
-------------------------------------------------------------
Number of Percent of Potential Realizable Value
Securities Total Options at Assumed Annual Rates
Underlying Granted to Exercise of Stock Price Appreciation
Options Employees in Price for Option Term (1)
---------------------------------
Name Granted Fiscal Year ($/Share) Expiration Date 5% ($) 10% ($)
- ----------------------- ------------- --------------- ----------- ------------------ ----------------- ---------------
F. William Capp ....... 600,000 20.0% $ 0.74 10/12/2014 $ 269,454 $ 692,041
Matthew L. Lazarewicz . 350,000 11.7% $ 0.74 10/12/2014 $ 157,181 $ 403,690
James M. Spiezio ...... 450,000 15.0% $ 0.74 10/12/2014 $ 202,090 $ 519,030
James Arseneaux ....... 200,000 6.7% $ 0.74 10/12/2014 $ 89,818 $ 230,680
Richard L. Hockney .... 125,000 4.2% $ 0.74 10/12/2014 $ 56,136 $ 144,175
Aggregated Option Exercises in Last Fiscal Year and FY End Option 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 ........ -- $ -- 1,500,000 -- $ 135,000 $ --
Matthew L. Lazarewicz .. -- $ -- 646,666 -- $ 85,600 $ --
James M. Spiezio ....... -- $ -- 683,333 -- $ 98,600 $ --
James Arseneaux ........ -- $ -- 266,250 -- $ 41,500 $ --
Richard L. Hockney ..... -- $ -- 153,000 -- $ 28,000 $ --
Long-Term Incentive Plans - Awards in Last Fiscal Year
Performance or Estimated Future Payouts
Period Until Under Non-Stock Price Based Plans
Number ---------------------------------
Name of Units Payout Threshold Target Maximum
- --------------------- ------- --------------------- -------- -------- --------
F. William Capp ..... 257,391 Quarterly during 2005 100% 100% 100%
Matthew L. Lazarewicz 107,300 Quarterly during 2005 100% 100% 100%
James M. Spiezio .... 118,030 Quarterly during 2005 100% 100% 100%
James Arseneaux ..... 30,500 Quarterly during 2005 100% 100% 100%
Richard L. Hockney .. 27,450 Quarterly during 2005 100% 100% 100%
See Note 10 to the financial statements for a full description of the Company's
long-term incentive plan.
Executive Employment Agreements.
The Company has employment arrangements with Messrs. Capp, Lazarewicz, Spiezio,
Arseneaux and Hockney as described below. In addition to the arrangements
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 Company's written agreement with Mr. Capp expired on December 31, 2004.
Following such expiration, Mr. Capp has been an "at-will" employee of the
Company and is currently paid a salary at an annual rate of $240,000.
Mr. Lazarewicz
The Company's written agreement with Mr. Lazarewicz will terminate on December
31, 2005, unless the parties agree to extend the term. In 2004 Mr. Lazarewicz
was paid a salary at an annual rate of $167,000 and was entitled to receive a
bonus at the discretion of the Board. Mr. Lazarewicz received a bonus for 2004,
paid in the form of a grant of 107,300 restricted stock units, pursuant to the
Company's Second Amended and Restated 1998 Stock Incentive Plan. If the
employment 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 or a sale of the Company) 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 a bonus amount
equal to his bonus for the prior year on a pro-rata basis with a maximum
termination amount of 50% of his prior year's base salary. 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, the vesting of his stock options accelerates. 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 2006 as he received in 2005.
Mr. Spiezio
The term of the agreement began on October 25, 2002 and continues until it is
terminated. In 2004 Mr. Spiezio was entitled to salary of $178,400 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.
Mr. Arseneaux
Mr. Arseneaux is an "at-will" employee of the Company and was paid a salary at
an annual rate of $110,024 in 2004.
Mr. Hockney
Mr. Hockey is an "at-will" employee of the Company and was paid a salary at an
annual rate of $121,500 in 2004.
Director Compensation.
The Company's directors are compensated with a package that consists of both,
stock options and cash, designed for board members who are not employees
("non-employee directors"). All non-employee directors serving on the board of
directors received a one-time grant of options to purchase 100,000 shares of the
Company's common stock that vested daily over an 80 day period with an exercise
price equal to the fair market value of the common stock on the date of grant.
Options under this program were granted on October 13, 2004 and November 2,
2004. On a yearly basis each non-employee director will receive additional
options to purchase 50,000 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. Prior to September 2004,
all non-employee directors serving on the board of directors received, yearly,
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.
For 2004 and 2005, non-employee directors 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 additional annual retainer of $30,000 payable quarterly, plus $500
per meeting. The board of directors will establish audit committee retainers for
years subsequent to 2005 during 2005. All other committee members receive $500
per meeting. Directors are reimbursed for reasonable out-of-pocket expenses
incurred in the performance of their duties. Messrs. Socha and Deutch have
elected not to accept retainers or meeting fees for their participation as board
and committee members.
One of the Company's directors, Mr. Stanton, also serves as a consultant to the
Company for services relating to the Company's acquisition due diligence. The
aggregate compensation paid to Mr. Stanton in 2004 was approximately $80,000, of
which, Mr. Stanton paid the Company $20,000 to reduce his outstanding loan
balance.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth, as of February 18, 2005, certain information
concerning the ownership of shares of the Company's common stock by (i) each
person or group that it knows owns beneficially more than five percent of the
issued and outstanding shares of the Company's common stock, (ii) each director,
(iii) certain named 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
Name and Address of Beneficially Beneficially
Beneficial Owner (1) Owned (2) (3) Owned (2) (3)
- ----------------------------------------- ------------ --------------
F. William Capp ......................... 1,686,265 3.7%
James Arseneaux ......................... 285,775 *
Richard Hockney ......................... 282,991 *
Matthew L. Lazarewicz ................... 857,861 1.9%
James M. Spiezio ........................ 789,819 1.8%
Stephen P. Adik ......................... 116,667 *
Philip J. Deutch (8) .................... 126,667 *
Jack P. Smith (4) ....................... 151,473 *
Kenneth M. Socha (8) .................... 126,667 *
William E. Stanton (5) .................. 137,667 *
Perseus Capital, L.L.C. (6) ............. 8,859,684 19.6%
The Beacon Group Energy Investment Fund
II, L.P. (7) ............................ 3,055,856 6.8%
All directors and executive officers as a
group (8 persons) ....................... 3,993,086 8.4%
(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,
Adik, 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 February 18, 2005 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 February 18, 2005, 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 February 18,
2005: Mr. Capp, 1,500,000; Mr. Spiezio, 683,333; Mr. Lazarewicz, 646,666;
Mr. Hockney, 153,000; Mr. Arseneaux, 266,250; Mr. Adik, 116,667; Mr.
Deutch, 126,667; Mr. Smith, 149,973; Mr. Stanton, 136,667; and Mr. Socha,
126,667.
(4) Includes 500 shares of common stock held by Mr. Smith's son. Mr. Smith
disclaims beneficial ownership over these shares.
(5) Includes 1,000 shares of common stock held by Mr. Stanton's wife. Mr.
Stanton disclaims beneficial ownership over these shares.
(6) Perseus L.L.C.'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 Company's Board of Directors, are also Managing Director and
Senior Managing Director, respectively, of Perseus L.L.C. Messrs. Deutch
and Socha disclaim beneficial ownership of all the shares of common stock
held by Perseus L.L.C. other than shares in which they may have a pecuniary
interest.
(7) 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.
(8) Includes 126,667 shares of common stock issuable upon the exercise of
options held by Perseus L.L.C. Messrs. Deutch and Socha disclaim beneficial
ownership of all the shares of common stock held by Perseus, L.L.C., other
than shares in which both have a pecuniary interest.
- ------------------
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, 2004.
- ------------------------------------- ------------------------- -------------------------- -------------------------
Number of securities to Weighted average
be issued upon exercise exercise price of Number of securities
of outstanding options, outstanding options, remaining available for
Plan category warrants and rights warrants and rights future issuance
- ------------------------------------- ------------------------- -------------------------- -------------------------
(a) (b) (c)
- ------------------------------------- ------------------------- -------------------------- -------------------------
Equity compensation plans approved - $ - -
by security holders
- ------------------------------------- ------------------------- -------------------------- -------------------------
Equity compensation plans not 6,217,575 $ 1.06 -
approved by security holders
- ------------------------------------- ------------------------- -------------------------- -------------------------
Total 6,217,575 $ 1.06 -
- ------------------------------------- ------------------------- -------------------------- -------------------------
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. The Company sold its holdings in Evergreen
during 2004 in order to help finance its ongoing operations and received cash
proceeds of approximately $4,753,000, representing a gain on this investment of
approximately $3,563,000.
Advance to Officer - During 2001, the Company advanced approximately $565,000 to
an officer of the Company, Mr. William Stanton, its former CEO and President.
This advance is interest bearing and secured by Mr. Stanton's holdings of Beacon
common stock and was paid to him to allow the exercise of stock options and the
payment of related taxes. Through December 31, 2004, the Company collected
approximately $464,000 in principal payments on this advance. The balance of
this loan as of December 31, 2004 is $101,000 including current year interest of
$4,008 and is fully reserved; however, it has not been cancelled. Mr. Stanton
continues to serve as a director of the Company. Mr. Stanton also serves as a
consultant to the Company for services relating to the Company's acquisition due
diligence. The aggregate compensation paid to Mr. Stanton in 2004 was
approximately $80,000, of which, Mr. Stanton paid the Company $20,000 to reduce
his outstanding loan balance.
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 Accountant Fees and Services
The Company has engaged Miller Wachman, LLP ("Miller Wachman") as its
independent registered public accounting firm since October 29, 2004, and had
engaged Deloitte & Touche, LLP ("Deloitte") since before its initial public
offering in November 2000 through the date of their resignation, August 27,
2004. All work on the Company's most recent fiscal audit was performed by
members of each respective firm's staff.
Principal accounting fees billed during 2004 and 2003 are as follows:
Miller Wachman Deloitte Total
----------------- ------------------- --------------------
2004 2003 2004 2003 2004 2003
-------- ----- -------- -------- -------- --------
Audit Fees ................................ $ 20,000 $-- $136,040 $145,460 $156,040 $145,460
Audit-Related Fees ........................ -- -- -- -- -- --
Tax Fees .................................. -- -- 25,980 69,000 25,980 69,000
All Other Fees ............................ -- -- -- -- -- --
-------- ----- -------- -------- -------- --------
Total Fees ................................ $ 20,000 $-- $162,020 $214,460 $182,020 $214,460
======== ===== ======== ======== ======== ========
Audit Fees
The aggregate audit fees billed by Deloitte and Miller Wachman for the fiscal
years ended December 31, 2004 and 2003 were $156,040 and $145,460, 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, consents and review of publicly filed
documents.
Audit-Related Fees
There were no audit-related fees billed during the fiscal years ended December
31, 2004 and 2003.
Tax Fees
The aggregate fees billed by Deloitte for tax services rendered for the fiscal
years 2004 and 2003 were $25,980 and $69,000, respectively. These fees were for
the preparation and filing of the 2002 and 2003 income tax return, developing
estimated payments for 2004 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
2004 and 2003.
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
Miller Wachman and Deloitte during fiscal 2004 were pre-approved pursuant to the
procedures outlined above.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(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 15(c) of this report.
(c ) Exhibits
Exhibit
Number Description of Document
------------ -------------------------
3.1(1) Sixth Amended and Restated Certificate of Incorporation of the
Company.
3.2(1) Amended and Restated Bylaws of the Company.
4.1(2) Rights Agreement dated September 25, 2002 between the Company
and EquiServe Trust Company, N.A.
4.2(3) Amendment No. 1 to Rights Agreement dated December 27, 2002
between the Company and EquiServe Trust Company, N.A.
10.1.1(1) Securities Purchase Agreement dated May 28, 1997 among the
Company, SatCon Technology Corporation and Duquesne Enterprises
(n/k/a DQE Enterprises, Inc.).
10.1.2(1) Securities Purchase Agreement dated April 7, 2000 among the
Company, Perseus Capital, L.L.C., Duquesne Enterprises (n/k/a
DQE Enterprises, Inc.), Micro-Generation Technology Fund,
L.L.C. and SatCon Technology Corporation.
10.1.3(1) Securities Purchase Agreement dated April 21, 2000 among the
Company, 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.
10.1.4(1) Securities Purchase Agreement dated May 23, 2000 among the
Company, 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.
10.1.5(1) Investor Rights Agreement dated May 23, 2000 among the Company,
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.
10.1.6(1) Form of Warrant of the Company issued pursuant to Class E
financing and list of holders thereof.
10.1.7(1) Form of Warrant of the Company issued pursuant to Class F
bridge financing and list of holders thereof.
10.1.8(1) Form of Warrant of the Company issued pursuant to Class F
financing and list of holders thereof.
10.1.9(1) Warrant of the Company dated August 2, 2000 issued to
Kaufman-Peters Company.
10.1.10(1) Warrant of the Company dated October 24, 2000 issued to GE
Capital Equity Investments, Inc.
10.1.11(1) Second Amended and Restated 1998 Stock Incentive Plan of the
Company.
10.1.12(1) Form of Incentive Stock Option Agreement of the Company.
10.1.13(1) Form of Non-Qualified Stock Option Agreement of the Company.
10.1.14(1) Form of Non-Qualified Stock Option Agreement of the Company
issued to certain consultants on July 24, 2000 and list of
holders thereof.
10.1.15(1) Amended and Restated License Agreement dated October 23, 1998
between the Company and SatCon Technology Corporation.
10.1.16(1) Lease dated July 14, 2000 between the Company and BCIA New
England Holdings LLC.
10.1.17(1) Letter Agreement dated October 24, 2000 among the Company, GE
Capital Equity Investments, Inc. and GE Corporate Research and
Development.
10.1.18(1) Form of Director and Officer Indemnification Agreement of the
Company.
10.1.19(4) Employment Agreement dated December 1, 2003 between the Company
and F. William Capp.
10.1.20+ Employment Agreement dated April 25, 2004 between the Company
and Matthew L. Lazarewicz.
10.1.21(3) Employment Agreement dated October 25, 2002 between the Company
and James M. Spiezio.
10.1.22(4) Form of Restricted Stock Unit Agreement of the Company.
10.1.23(5) Assignment dated December 27, 2004 between the Company and CRT
Capital Group LLC.
10.1.24(6) Agreement dated January 31, 2005 between the Company and the
New York State Energy Research and Development Authority.
10.1.25(7) Agreement dated January 31, 2005 between the Company and
California State Energy Resources Conservation and Development
Commission.
10.1.26+ Amendment to employment agreement between the Company and
Matthew L. Lazarewicz.
14.1+ Corporate Code of Conduct of the Company.
16.1(8) Letter dated October 20, 2004 from Deloitte & Touche LLP to the
Company.
21.1+ Subsidiaries of the Company.
23.1+ Consent of Miller Wachman LLP
23.2+ Consent of Deloitte & Touche LLP
31.1+ Principal Executive Officer--Certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2+ Principal Financial Officer--Certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1+ Principal Executive Officer--Certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2+ Principal Financial Officer--Certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
- --------------------
(1) Incorporated by reference from the Form S-1 filed on November 16, 2000
(File No. 333-43386).
(2) Incorporated by reference from the Form 8-K filed on October 4, 2002 (File
No. 001-16171).
(3) Incorporated by reference from the Form 10-K filed on March 31, 2003 (File
No. 001-16171).
(4) Incorporated by reference from the Form 10-K/A filed on May 17, 2004 (File
No. 001-16171).
(5) Incorporated by reference from the Form 8-K filed on December 30, 2004
(File No. 001-16171).
(6) Incorporated by reference from the Form 8-K filed on February 14, 2005
(File No. 001-16171).
(7) Incorporated by reference from the Form 8-K filed on February 16, 2005
(File No. 001-16171).
(8) Incorporated by reference from the Form 8-K/A filed on November 2, 2004
(File No. 001-16171).
+ Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 31, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ F. William Capp President and Chief Executive
- -------------------- Officer, and Director
F. William Capp (Principal Executive Officer) March 31, 2005
/s/ James M. Spiezio Vice President of Finance, Chief
- -------------------- Financial Officer, Treasurer and
James M. Spiezio Secretary (Principal Financial March 31, 2005
Officer)
/s/ Stephen P. Adik
- -----------------------
Stephen P. Adik Director March 31, 2005
/s/ Philip J. Deutch
- -----------------------
Philip J. Deutch Director March 31, 2005
/s/ Jack P. Smith
- -----------------------
Jack P. Smith Director March 31, 2005
/s/ Kenneth M. Socha
- -----------------------
Kenneth M. Socha Director March 31, 2005
/s/ William E. Stanton
- -----------------------
William E. Stanton Director March 31, 2005