<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 7, 1998
REGISTRATION NO. 333-65429
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
A-55, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2869 86-0888952
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
5270 NEIL ROAD, RENO, NEVADA 89502
(702) 826-8300
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT
FOR SERVICE)
RUDOLF W. GUNNERMAN
CHIEF EXECUTIVE OFFICER
A-55, INC.
5270 NEIL ROAD, RENO, NEVADA 89502
(702) 826-8300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION -- DECEMBER 7, 1998
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PROSPECTUS
, 1998
[A-55 LOGO]
A-55, INC.
SHARES OF COMMON STOCK
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THE COMPANY:
- - We have developed a new range of fuel products that are both less expensive to
use and environmentally "cleaner" than most other fossil fuels.
- - A-55, Inc.
5270 Neil Road
Reno, Nevada 89502
(702) 826-8300
PROPOSED SYMBOL & MARKET:
- - AQVV/NASDAQ
THE OFFERING:
- - A-55, Inc. is offering all of the shares.
- - The underwriters have an option to purchase an additional shares
from A-55 to cover over-allotments.
- - This is our initial public offering, and no public market currently exists for
our shares.
- - This is a firm commitment underwriting.
- - We plan to use the proceeds from this offering for general corporate purposes
and to repay loans from A-55's Chairman and Chief Executive Officer.
- - Closing: , 1998.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price (Estimated): $ $
Underwriting fees:
Proceeds to Company:
</TABLE>
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This investment involves risk. See "Risk Factors" beginning on Page 7.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE> 3
[GRAPHICS TO BE ADDED]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 7
Forward-Looking Statements and
Definitions....................... 15
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Financial Data............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operation...................... 20
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Business............................ 25
Management.......................... 49
Certain Transactions................ 53
Principal Stockholders.............. 55
Description of Capital Stock........ 56
Shares Eligible for Future Sale..... 58
Underwriting........................ 60
Legal Matters....................... 62
Experts............................. 62
Additional Information.............. 63
Index to Financial Statements....... F-1
</TABLE>
-------------------------
A-55 owns or has exclusive rights to use the "A-55" registered trademark,
the "Powered With Water" registered service mark as well as the service mark
"Tomorrow's Fuel Working Today." All other brand names and trademarks appearing
in this prospectus are the properties of their respective holders.
-------------------------
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PROSPECTUS SUMMARY
This summary highlights information contained in this prospectus. This
summary is not complete and does not contain all of the information that you
should consider before investing in the shares of common stock of A-55. You
should read the entire prospectus carefully.
A-55
A-55 has developed, tested and begun to market and sell a new range of fuel
products known as A-55(R) Clean Fuels that are both less expensive to use and
environmentally "cleaner" than most other fossil fuels. A-55 Clean Fuels are
made by blending water and almost any petroleum product, even relatively
inexpensive petroleum residues and residue oils. A-55's primary product, A-55(R)
Additive, is the essential ingredient in A-55 Clean Fuels that allows water and
petroleum products to remain in a stable blend.
We believe that A-55 Clean Fuels can be sold at a price that is less (when
measured on the basis of dollars per unit of energy output) than the price
typically paid for natural gas and almost any refined petroleum fuel product
burned in generating electricity and in other large-scale combustion
applications.
A-55 and independent agencies (including the U.S. Environmental Protection
Agency) have performed a variety of tests that demonstrate that A-55 Clean Fuels
are effective fuels in open-flame applications, such as electricity generation
boilers, as well as in combustion turbines and internal combustion engines.
These tests have also shown that A-55 Clean Fuels can reduce emissions of NOx
(oxides of nitrogen) and harmful particulate matter compared with many other
fossil fuels.
We believe that fuel customers in many market segments will find A-55 Clean
Fuels to be attractive substitutes for many other fossil fuels based on both a
comparison of their relative costs and their relative levels of NOx emissions.
A-55 plans to focus its initial marketing efforts on the domestic electricity
generation industry, which consumed 4.8 billion gallons of refined petroleum
products and 2.7 trillion cubic feet of natural gas in 1996. A-55 has not sold
commercial quantities of A-55 Additive or A-55 Clean Fuels in this market
segment. However, as a result of its initial marketing efforts, A-55 has
received a purchase order for the delivery of enough A-55 Additive to allow
Commonwealth Edison of Illinois to burn up to 70,000 barrels (2.9 million
gallons) of A-55 Clean Fuels during the start-up phase at one of its electric
generating plants.
We intend to pursue the sale of A-55 Additive through two principal
distribution channels:
- sales to electricity generators and other large fuel consumers that elect
to blend A-55 Clean Fuels; and
- sales to approved distributors such as petroleum refiners.
We believe that petroleum refiners will play an important role in the production
and distribution of A-55 Clean Fuels. We also believe that petroleum refiners
will be an important source of the base residues, residual oils and other
refined petroleum ingredients for fuel consumers that elect to blend their own
A-55 Clean Fuels.
In 1996, the petroleum refining industry supplied approximately 4.2 billion
gallons of No. 6 fuel oil to electricity generators in the United States. No. 6
fuel oil consists of petroleum residues and residual oils that are generally
blended or "cut" with more refined petroleum products (typically called "cutter
stock") to produce a fuel that meets or
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<PAGE> 5
exceeds a variety of fuel specifications established by the industry. By using
A-55 Additive, refiners will be able to blend these residues with water, instead
of more expensive cutter stock, to produce A-55 Clean Fuels that meet the
specifications for No. 6 fuel oil. We expect that the price of A-55 Clean Fuels
made with these residues will be lower than that of No. 6 fuel oil, based on
current and historical market fuel prices.
Domestic electric utilities and other consumers of large quantities of coal
and other fossil fuels will be required to reduce NOx and other harmful
emissions under the Clean Air Act and other federal and state regulations. Faced
with these requirements and increased competition from deregulation, many U.S.
electric utilities are under pressure to evaluate cost-effective alternatives to
generate electricity. Outside of the United States demand for electricity is
projected to nearly double during the 25-year period ending 2020. Much of this
demand is expected to be supplied by burning fossil fuels. We believe that A-55
Clean Fuels will allow electricity generators and other large fossil fuel
consumers, both in the United States and abroad, to reduce harmful NOx emissions
without investing in costly equipment to control emissions.
We intend to produce A-55 Additive at a commercial facility near A-55's
executive offices, which are located at 5270 Neil Road, Reno, Nevada 89502,
where the telephone number is (702) 826-8300. In addition, we plan to build a
number of production facilities at strategic regional locations that will allow
A-55 to meet the demands of our customers.
A-55, Inc. is a Delaware corporation formed in July 1997 that has not
conducted any operations to date. All of the operations to date have been
conducted through either A-55, L.P. a Delaware limited partnership formed in
November 1992, or in its successor, a Nevada limited partnership formed in
January 1994 also under the name A-55, L.P. Prior to the closing of this
offering, A-55, L.P. (the Nevada limited partnership) will be merged with and
into A-55, Inc., which will be the surviving entity of such merger. Throughout
this prospectus, the term A-55 (without a specific reference to either A-55,
Inc. or A-55, L.P.) refers to the business and operations of A-55, L.P. prior to
the merger and of A-55, Inc. following the merger.
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THE OFFERING
Common Stock Offered.......... shares
Common Stock To Be Outstanding
After The Offering.......... shares(1)
Use of Proceeds............... A-55 will use the net proceeds of the offering
for general corporate purposes (including
working capital to support the growth of A-55's
business related to production, distribution,
sales and marketing activities, research and
development and application engineering) and to
repay approximately $21.2 million of
indebtedness to A-55's principal stockholder.
See "Use of Proceeds."
Listing....................... NASDAQ National Market
Proposed Trading Symbol....... AQVV
- ------------------------------
(1) Excludes shares of common stock to be reserved for issuance under
A-55's 1998 Stock Option Plan, none of which are currently outstanding.
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<PAGE> 7
SUMMARY FINANCIAL DATA
You should read the following summary historical and pro forma financial
data in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the financial statements and related notes
of A-55 and its predecessor, a Nevada limited partnership, and the unaudited pro
forma combined financial statements and related notes included in this
prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ----- ----- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
General and administrative........ $ 1,769 $ 465 $ 534 $ 989 $ 2,082 $ 1,748 $ 2,992
Research and development.......... 291 214 20 185 1,927 836 1,075
Sales and marketing............... 6 94 1 560 624 344 469
Legal............................. 13 -- 244 152 852 128 307
Depreciation and amortization..... 177 110 37 261 1,362 1,035 998
------- ----- ----- ------- ------- ------- -------
Total operating expenses..... 2,256 883 835 2,147 6,847 4,091 5,841
------- ----- ----- ------- ------- ------- -------
Operating loss...................... (2,256) (883) (835) (2,147) (6,847) (4,091) (5,841)
Other income (expense), net......... (25) 776 (44) (558) (692) (492) (892)
------- ----- ----- ------- ------- ------- -------
Net income (loss)................... $(2,281) $(107) $(879) $(2,705) $(7,539) $(4,583) $(6,733)
======= ===== ===== ======= ======= ======= =======
Pro forma net income (loss), as
adjusted(1)....................... $(6,782) $(5,825)
Pro forma net income (loss) per
share.............................
Pro forma weighted average common
shares outstanding(2).............
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1998
----------------------------------------------- -------------------------------------
PRO FORMA
AS FURTHER
1993 1994 1995 1996 1997 ACTUAL PRO FORMA(3) ADJUSTED(4)
------- ------ ------- ------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 1,085 $ 77 $ 6 $ 796 $ 784 $ 1,744 $ 1,744
Working capital
(deficit)............. (1,503) (625) (1,460) (9,655) (13,549) (19,981) (22,570)
Total assets..... 2,455 1,235 1,204 5,651 4,677 5,585 5,585
Advances from R. W.
Gunnerman and related
accrued interest...... 0 80 151 8,523 11,387 19,027 21,173
Total partners' capital
(deficit)/
stockholders' equity
(deficit)............. (156) 518 (351) (4,806) (12,344) (19,077) (21,223)
</TABLE>
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(1) Pro forma net loss, as adjusted, reflects the combined historical net loss
of A-55, Inc. and A-55, L.P., adjusted for the reduction in interest expense
resulting from the application of $ million of estimated proceeds
of the offering to repay advances from Rudolf W. Gunnerman, the Chairman and
Chief Executive Officer of A-55. See "Use of Proceeds."
(2) See unaudited pro forma combined financial statements included in this
prospectus.
(3) Gives effect to the reorganization of A-55, L.P. into A-55, Inc., a Delaware
corporation, and to the partnership distribution to be completed in
connection with that reorganization which will be financed with additional
advances from Rudolf W. Gunnerman. See "Forward-Looking Statements and
Definitions."
(4) Further adjusted to reflect the sale of shares of common stock
offered hereby and the application of the estimated net proceeds from the
offering. See "Use of Proceeds."
6
<PAGE> 8
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding to invest in the common stock.
A-55 IS A DEVELOPMENT STAGE COMPANY WITH NO REVENUES
A-55 began operations in November 1992 and has a limited operating history.
A-55 has primarily focused on research and development and as a result has not
had any revenues, and has had net losses from operations, since it was formed.
A-55 has recently added senior officers and management level employees in the
sales, production, finance and other areas. Its success will depend on
management being able to address the risks encountered by development stage
companies and to implement A-55's business plan. A-55 may not be successful in
implementing its business plan, and if it is not its financial results will not
improve. Even if it is successful in implementing its business plan, its
financial position may not improve. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
A-55'S SUCCESS DEPENDS UPON BROAD MARKET ACCEPTANCE OF A-55 CLEAN FUELS
Market acceptance of A-55 Clean Fuels has not yet been demonstrated on a
large scale and is uncertain. Moreover, because A-55 Clean Fuels are new,
potential customers may hesitate to rely on them before A-55 has demonstrated
their long-term effectiveness in commercial usage. A-55 Clean Fuels may not
achieve significant market acceptance, and even if they do, they may be rendered
obsolete or inferior as a result of technological change, changing governmental
regulation, changing customer needs or new product introductions. If its
products are not broadly accepted by its target markets, A-55 will not be
successful. See "Business--Target Markets."
CHANGING TECHNOLOGIES AND DEMANDS MAY RENDER A-55 CLEAN FUELS OBSOLETE OR
UNMARKETABLE; A-55 CLEAN FUELS HAVE HAD LIMITED COMMERCIAL USE AND MAY HAVE
UNDISCOVERED DEFICIENCIES
The market for clean fuels is characterized by rapidly changing technology,
evolving industry standards, frequent new products and changing consumer
demands. In this type of market, existing products and services can become
obsolete and unmarketable or require unanticipated investments in research and
development. In order to be successful, A-55 will have to adapt to rapidly
changing technologies and improve its products in response to changing customer
and industry demands.
A-55 products have not been exposed to broad, long-term commercial usage
that may illuminate deficiencies that have not been identified in A-55's
testing. In addition, many of the potential applications for which A-55 Clean
Fuels have been tested have not been evaluated over prolonged periods to
demonstrate their long-term effectiveness. A-55 is continuing to develop
information on the effects of prolonged use of A-55 Clean Fuels in large
boilers, combustion turbines and internal combustion engines. Deficiencies in
A-55's technology may be discovered as a result of further testing and extensive
commercial usage, and A-55 may not be able to cure these deficiencies. See
"Business--Testing and Performance."
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A-55 MUST INCREASE DEMAND FOR A-55 CLEAN FUELS
A-55 has virtually no experience in marketing, sales and distribution. A
key factor to A-55's success will be its ability to increase demand for its
products by educating target customers on the benefits of A-55 Clean Fuels in
comparison with more traditional fossil fuels and other alternative emissions
control technologies. A-55 has received only one significant purchase order. To
be successful in its commercialization efforts, A-55 believes that it will be
important to enter into agreements with influential fuel users and suppliers
whose acceptance of A-55 Clean Fuels will assist both in validating its
commercial effectiveness and increasing the likelihood of demand for A-55 Clean
Fuels by other customers. A-55 may not be successful in doing so. See
"Business--Sales and Marketing."
RAPID GROWTH MAY STRAIN A-55'S RESOURCES
Having largely been focused to date primarily on technology development and
product testing, A-55 is not experienced in managing rapid growth into an
integrated marketing, sales, production and distribution business. Rapid growth
or expansion could place a significant strain on A-55's managerial, operating,
financial and other resources. A-55's systems, management, procedures or
controls may not be adequate to support its expanding operations. If A-55 cannot
manage successfully the expansion of its business, its business and results of
operations would be adversely affected. See "Management."
LIMITED PROTECTION OF A-55'S INTELLECTUAL PROPERTY
The patent rights embodying a portion of A-55's technology are licensed
exclusively to A-55 from the inventor, Rudolf W. Gunnennan, who is the Chairman
and Chief Executive Officer of A-55. These patent rights consist of one issued
U.S. patent, four pending U.S. patent applications, and several granted patents
and pending patent applications in foreign countries. The current U.S. patent
covers the combustion of a water and hydrocarbon blend in internal combustion
engines. A pending U.S. patent application covers the use of such blends as
fuels to be burned in electricity generating plants, which is the primary focus
of A-55's sales and marketing efforts. As is common in the patent application
process, the U.S. Patent and Trademark Office has raised certain challenges with
respect to these pending applications, and A-55 cannot predict the likelihood
that any of the pending applications will be approved.
Others may have filed, or may in the future file, patent applications with
claims that overlap with elements of A-55's intellectual property. Patents may
be issued covering all or part of the claims of other persons that compete with
A-55's technologies. It is also possible that infringement claims will be
asserted against A-55 in the future that could adversely affect A-55.
See "Business--Patents and Intellectual Property Protection."
A-55 IS DEPENDENT UPON PETROLEUM REFINERS; A-55 HAS NOT PRODUCED A-55 ADDITIVE
OR
A-55 CLEAN FUELS IN COMMERCIAL QUANTITIES
A-55 has no experience in producing A-55 Additive or A-55 Clean Fuels in
significant commercial quantities. To date, A-55 has produced A-55 Additive and
A-55 Clean Fuels in limited quantities for research and development, testing and
limited commercial sales, primarily for demonstration projects. Companies often
encounter difficulties in scaling-up production of new products, including
problems involving production yields, quality control
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and assurance, raw material supply and shortages of qualified personnel. A-55
may not be able to produce A-55 Additive in commercial quantities at a
competitive cost. If A-55 encounters difficulties in producing sufficient
quantities of A-55 Additive to meet commercial demand, its business and results
of operations would be adversely affected. See "Business--Production and
Distribution."
A-55 expects that the primary producers of A-55 Clean Fuels will be
petroleum refiners, due to their experience in producing petroleum fuel
products, and large fuel consumers that elect to blend their own A-55 Clean
Fuels. A-55 has not received any commitment from any refiners or others to
produce A-55 Clean Fuels. A-55 may not be able to convince refiners that they
should purchase A-55 Additive, and expend the capital necessary to permit the
blending of A-55 Clean Fuels, until A-55 can demonstrate substantial demand for
those fuels. At the same time, it may be difficult for A-55 to create such
demand until it can demonstrate to electricity generators and other fossil fuel
consumers that a stable source of supply exists for such fuels. See
"Business--Target Markets" and "Business--Production and Distribution."
A-55 REQUIRES CERTAIN REGULATORY APPROVALS
A-55's primary target market, the U.S. electricity generating industry, is
regulated by federal, state and local governments. However, in recent years a
number of states have adopted legislation or regulatory changes intended to
promote greater competition in the generation of electricity. We cannot predict
either the specific direction or pace of such "deregulatory" initiatives in any
jurisdiction.
Under many state regulatory frameworks, it is likely that a substantial
number of our customers will require some form of regulatory approval in order
to use A-55 Clean Fuels. To the extent these companies are delayed in receiving
or fail to receive such approvals, A-55's business and results of operations
will be adversely affected.
Prior to any sale of A-55 Clean Fuels or A-55 Additive for domestic
transportation applications, A-55 expects to be required to register these
products, as well as the engine modifications required for the use of these
products, under a number of regulatory regimes with the Environmental Protection
Agency. In order to satisfy the EPA's requirements for introducing a new
transportation fuel, A-55 expects that it would be required to submit extensive
research and test data. A-55 Clean Fuels and Additive may also be subject to
regulation by various states, including California.
A-55 intends to apply for any certificates and/or approvals that are needed
to introduce its products into markets that it believes are promising. The fuel
and vehicle-emissions certification and approval process involves the
development and submission to government entities of a large quantity of
information. This process may take a long time and be very expensive. Delays in
obtaining needed approvals could inhibit marketing of A-55's products and cause
the loss of competitive opportunities. A-55 has limited experience in conducting
testing and in pursuing applications necessary to gain regulatory approvals.
Regulatory approval may not be obtained for A-55 products, or once obtained
could be withdrawn. See "Business--Government Regulation."
TEST RESULTS DESCRIBED IN THIS PROSPECTUS MAY VARY
A-55 test results described in this prospectus were performed using certain
equipment, fuel, conditions and test protocols. All testing is subject to
potentially significant variability,
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and A-55's test results may not be replicated with other equipment, fuel,
conditions, test methods, or under official certification test conditions. Any
such significant change or variability could limit A-55's ability to achieve and
retain required approvals from government agencies and from customers. See
"Business--Testing and Performance."
DEMAND FOR A-55 CLEAN FUELS MAY BE ADVERSELY AFFECTED BY FUEL PRICE VOLATILITY
BASED UPON MARKET PRICES FOR FOSSIL FUELS
A-55 Clean Fuels typically contain approximately 65% to 70% petroleum
products by volume. A-55 anticipates demand for A-55 Clean Fuels will be
affected by changes in the market prices for various fossil fuels since such
changes will impact the relative cost-effectiveness of A-55 Clean Fuels. In
particular, if the price for the petroleum products on which A-55 Clean Fuels
are based increases relative to the price of natural gas or coal or other fuels
not based on similar petroleum products, the demand for A-55's products would be
adversely affected. Competitive fuel products, such as No. 6 fuel oil and
natural gas, are commodities and, as such, their prices are subject to volatile
changes in response to factors affecting supply and demand for such products.
Such factors include seasonal weather patterns, the national and international
economy, market demand, regulatory changes, the price of crude oil and other
petroleum feedstocks, the capacity of regional refiners to provide adequate
supplies of refined products and unexpected national and international events.
Large changes in the market prices for these products could have an adverse
effect on A-55's business and results of operations. See "Business--Industry
Overview--Increasing Environmental Regulation."
A-55 MAY BE UNABLE TO SECURE ADEQUATE SUPPLIES OF FOSSIL FUELS
A-55 does not currently have any arrangements with refiners, marketers or
others for supplies of significant volumes of refined or unrefined petroleum
products for blending of A-55 Clean Fuels. Although A-55 believes that for the
foreseeable future adequate supplies of such petroleum products are available
from numerous sources, to the extent that A-55 or its customers are unable to
procure adequate supplies on favorable terms, A-55's business and results of
operations would be adversely affected.
A-55 IS RELIANT UPON ENFORCEMENT OF EXISTING ENVIRONMENTAL AND ENERGY POLICY
REGULATIONS
A-55's success in the United States and other countries will depend in part
on effective enforcement of existing environmental and energy policy
regulations. Many potential consumers of A-55 Clean Fuels are unlikely to switch
from the use of conventional fuels unless compliance with applicable regulatory
requirements provokes, directly or indirectly, the use of A-55 Clean Fuels. Both
additional regulation and enforcement of such regulatory provisions are likely
to be vigorously opposed by the entities affected by such requirements. If
existing emissions-reducing standards are weakened, or if governments are not
active and effective in enforcing such standards, A-55's business and results of
operations could be adversely affected. Even if the current trend toward more
stringent emissions standards continues, A-55 will depend on the ability of A-55
Clean Fuels to satisfy such emissions standards more efficiently than other
alternative technologies. Certain standards imposed by regulatory programs may
limit or preclude the use of A-55's products to comply with environmental or
energy requirements.
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A-55 CLEAN FUELS POTENTIAL IMPACT ON EQUIPMENT WARRANTIES AND INSURANCE
A-55 Clean Fuels are used in mechanical applications such as boilers,
combustion turbines and internal combustion engines. These are expensive
machines designed to operate on precise tolerances, including specifications as
to the fuel to be used in their operation. A-55 may face resistance from
potential customers if its products have not been certified for use by the
manufacturer. In addition, potential customers may also hesitate to use A-55's
products due to concerns that the modifications necessary to permit the use of
these products, or the use of the products at all, might negatively impact the
manufacturer's warranty coverage on their machines. Potential customers may also
be concerned about the impact on existing insurance coverage of using a novel
fuel. If A-55 encounters resistance from potential customers to use A-55 Clean
Fuels in their existing equipment or to modify their equipment to permit the use
of these fuels, A-55's business and results of operations could be adversely
affected.
REBURNING MAY NOT BECOME A WIDELY ACCEPTED METHOD FOR CONTROLLING NOX EMISSIONS
As part of its sales and marketing efforts, A-55 intends to target owners
and operators of electricity generating facilities that currently burn
significant amounts of coal and are confronting regulatory requirements to
reduce NOx emissions. A-55's success in penetrating this market will largely
depend on these coal-fired generators adopting a reburn strategy to meet
emissions specifications. Reburning is a technique that has not been widely
adopted in the United States to date and may not become a widely accepted method
for controlling NOx emissions. Further, even if coal-fired generators adopt
reburning as an emission control method, A-55 Clean Fuels may not be used as a
reburn fuel. See "Business--Target Markets--Electricity Generation
Industry--Coal."
A-55 WILL FACE COMPETITION FROM FOSSIL FUEL COMPANIES AND ALTERNATIVE FUEL
PRODUCERS
The combustible fuels market is intensely competitive. Large natural gas,
coal and oil companies have substantial resources and well established modes of
production, distribution and sales of their products. These companies are also
known to have significant political influence to help in the advancement of
their causes in local, state and national governments. To the extent that these
companies regard A-55 as a competitor, they are likely to use these resources to
compete vigorously with A-55. These competitive activities might include efforts
to develop more effective emissions control technologies, to impede the
recognition of A-55 Clean Fuels as an accepted fuel or to establish competing
products.
A-55 also will face competition from producers of alternative fuels,
potentially including water and petroleum blends similar to those developed by
A-55, and from manufacturers of emissions control technologies. Many of these
producers may have significantly greater financial, political and other
resources than A-55. Considerable governmental and private efforts have been
devoted to promoting commercialization of alternative energy resources, such as
natural gas or other fuels and NOx emissions control technologies. Certain of
these products and technologies have been promoted not only by their direct and
indirect producers but also by legislators and other government officials and
environmental groups. A-55's success may depend in part on its ability to
convince some of these third parties that its products offer a more effective
alternative to the use of traditional fuels than do competing alternative fuels
and technologies. A-55 may not be successful in this regard. Furthermore, A-55's
competitors may devote substantial financial
11
<PAGE> 13
resources to market existing competitive products, develop new competitive
products or otherwise compete with A-55's products, and such efforts could
adversely affect A-55's business and results of operations. See
"Business--Competition."
A-55 COULD POTENTIALLY INCUR COSTS AND LIABILITY ASSOCIATED WITH ENVIRONMENTAL
MATTERS
A-55 must conduct its operations in accordance with a variety of federal,
state and local laws and regulations governing the release or discharge of
pollutants into the air and the water (including ground water), product
specifications, and the generation, handling, treatment, storage, transportation
and disposal of solid and hazardous waste and materials with hazardous or toxic
constituents. Consequently, A-55 faces exposure from claims and lawsuits
involving environmental matters, including soil and water contamination, air
pollution and personal injuries or property damage allegedly caused by
substances produced, handled, transported, used, released or disposed of by it.
As its business grows, A-55 will have to develop and implement more extensive
procedures for the proper handling, storage, and transportation of finished
products and materials used in the production process and for the disposal of
waste products. In addition, state or local requirements may also restrict
A-55's production and distribution operations. A-55 could incur significant
costs to comply with the laws and regulations described above as production and
distribution activity increases. See "Business--Government Regulation."
R. W. GUNNERMAN WILL RETAIN CONTROL OF A-55
Upon completion of the offering, Rudolf W. Gunnerman will hold
approximately % of the outstanding common stock of A-55, Inc. ( % if
the Underwriters' over-allotment option is exercised in full). Accordingly, Mr.
Gunnerman will continue to hold sufficient voting power to enable him to elect
all of the directors and to control the outcome of all issues submitted to a
vote of the stockholders. In addition, all of the officers and directors of
A-55, Inc. as a group will hold or will be regarded as beneficially owning
approximately % of the outstanding common stock ( % if the
Underwriters' over-allotment option is exercised in full). This concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of A-55, including transactions in which the holders of common stock
might receive a premium for their shares over prevailing market prices. See
"Principal Stockholders."
POSSIBLE STOCK PRICE VOLATILITY
There has not been a public market for the common stock. A-55 is applying
to list the common stock for trading on the Nasdaq National Market. A-55 does
not know the extent to which investor interest in it will lead to the
development of a trading market or how liquid that market might be. The initial
public offering price for the common stock will be determined through
negotiations between the Underwriters and A-55. Investors may not be able to
resell their shares at or above the initial public offering price. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price of the common stock. Many factors, including
future announcements concerning A-55 or its competitors, variations in fossil
fuel prices, variations in operating results, announcements of technological
innovations, amendment, adoption or repeal of governmental regulations,
introduction of new products or changes in product pricing policies by A-55 or
its competitors, and changes in earnings estimates by securities analysts, could
cause the market price of the common stock to fluctuate substantially. In
12
<PAGE> 14
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of affected companies. These fluctuations, as well as
general economic, political and market conditions, may have a material adverse
effect on the market price of the common stock.
A-55'S SUCCESS IN FOREIGN MARKETS DEPENDS UPON ITS LICENSEES AND STRATEGIC
PARTNERS
A-55 expects to market and distribute A-55 Clean Fuels outside the United
States through licenses or other strategic relationships. The benefit A-55
receives from these relationships will depend on the abilities of local
companies to raise capital, initiate operations and achieve market acceptance of
A-55's products. This may include the effectiveness of these companies in
persuading the applicable local government to grant necessary regulatory
approvals for the use of A-55 Clean Fuels. A-55's success in a particular
foreign market will also depend on the local company's successful operation of
an integrated business dedicated to the sale of A-55's products. A-55's existing
licensees are required to secure financing to fund their required initial
payments to A-55 and to develop their businesses. Two of the licensees have
failed to make, collectively, $12.0 million in payments due to A-55. Over time,
a limited number of international relationships may account for a substantial
portion of A-55's revenues, and A-55's operating results would be significantly
affected by events that affect such relationships and the results of operations
of foreign licensees. Under such circumstances, the loss, or significant
reduction in sales volume by, one or more of the local companies could have an
adverse effect on A-55's business and results of operations. See
"Business--Sales and Marketing--International Markets."
A-55'S CERTIFICATE OF INCORPORATION CONTAINS CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of A-55's certificate of incorporation could make it
more difficult for a third party to acquire control of A-55 without the consent
of the A-55 board of directors, even if such change in control were favored by
the stockholders. The certificate of incorporation also allows A-55 to issue
preferred stock without stockholder approval. Such issuance could make it more
difficult for a third party to acquire A-55. See "Description of Capital Stock."
THE MARKET PRICE OF THE COMMON STOCK MAY BE AFFECTED BY SHARES WHICH ARE
ELIGIBLE FOR FUTURE SALE
The market price of the common stock could drop as a result of sales of a
large number of shares of common stock in the market after the offering, or the
perception that such sales could occur. These factors also could make it more
difficult for A-55 to raise funds through future offerings of common stock.
There will be shares of common stock outstanding immediately
after the offering. Of these shares, the shares sold in the offering will be
freely transferable without restriction or further registration under the
Securities Act, except for any shares purchased by "affiliates" of A-55, as
defined in Rule 144 under the Securities Act. The remaining shares of
common stock outstanding will be "restricted securities" as defined in Rule 144.
These shares may be sold in the future without registration under the Securities
Act to the extent permitted by Rule 144 or an exemption under the Securities
Act.
13
<PAGE> 15
In connection with the offering, A-55, Inc., its executive officers and
directors and certain of its stockholders have agreed that, with certain
exceptions, they will not sell any shares of common stock without the consent of
Donaldson, Lufkin & Jenrette Securities Corporation for 180 days after the date
of this prospectus. See "Description of Capital Stock," "Shares Eligible for
Future Sale" and "Underwriting."
14
<PAGE> 16
FORWARD-LOOKING STATEMENTS AND DEFINITIONS
This prospectus contains certain statements that are "forward-looking"
statements. All statements other than statements of historical facts included in
this prospectus, including without limitation statements that use terminology
such as "estimate," "expect," "intend," "anticipate," "believe," "may," "will,"
"continue" and similar expressions, are forward-looking statements. These
forward-looking statements include, among other things, the discussions of
A-55's business strategy and expectations concerning A-55's market position,
future sales, profitability, liquidity and capital resources, attempts to reduce
costs, the costs of its products and A-55 Clean Fuels relative to competing
products and technologies, and ability to protect its patents and trade secrets.
Although A-55 believes that the assumptions upon which the forward-looking
statements contained in this prospectus are based are reasonable, any of the
assumptions could prove to be inaccurate and, as a result, the forward-looking
statements based on those assumptions also could be incorrect. All phases of the
operations of A-55 involve risks and uncertainties, many of which are outside
the control of A-55 and any one of which, or a combination of which, could
materially affect the results of A-55's operations and whether the
forward-looking statements ultimately prove to be correct. Important factors
that could cause actual results to differ materially from A-55's expectations
include, but are not limited to those that are discussed in this prospectus,
including those set forth in "Risk Factors."
In January 1994, the Delaware limited partnership by the name A-55, L.P.
was reorganized as a Nevada limited partnership by the same name (the
"Predecessor"). Prior to the closing of the offering, A-55, L.P., a Nevada
limited partnership, will be merged with and into A-55, Inc., which will
continue as the surviving entity of such merger (the "Reorganization"). As a
result of the Reorganization, the partners of A-55, L.P. will become the sole
stockholders of A-55, Inc. with the same proportionate ownership interests in
A-55, Inc. as they owned in A-55, L.P. immediately prior to the Reorganization.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to A-55 from the sale of the shares
of common stock offered hereby are estimated to be approximately $
($ if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $ per share (which is the
midpoint of the estimated range of the initial public offering price) and after
deducting estimated underwriting discounts and commissions and offering
expenses.
A-55 intends to use the net proceeds of the offering for general corporate
purposes, including working capital to support the growth of A-55's business
relating to production, distribution, sales and marketing, research and
development, application engineering, and for the promotion and development of
both its initial target markets and longer term market opportunities in the
international and transportation sectors. A-55 has not yet determined the amount
of funds that will be required for each such application, as these requirements
will depend upon the extent to which A-55 elects to purchase or lease future
facilities and equipment, its ability to identify and attract personnel in sales
and marketing and other designated areas, the rate of growth, if any, of future
sales and the terms of such sales. A-55 will utilize a portion of the net
proceeds to continue to aggressively protect its intellectual property rights
relating to the A-55 Technology.
Approximately $21.2 million will be used to repay the indebtedness of A-55
to Rudolf W. Gunnerman, who is the Chairman and Chief Executive Officer of A-55
("R. W. Gunnerman"). A-55's indebtedness under certain notes payable to R. W.
Gunnerman was approximately $19.1 million as of October 5, 1998 and bears
effective interest rates at the prime rate as charged from time to time, and is
currently 8.5% per annum, and would otherwise be payable at dates ranging from
on demand to February, 1999. Of the total amount of indebtedness outstanding at
October 5, 1998, approximately $8.6 million has been incurred within the last
year. The funds were used to fund product and market development and other
operating expenses. A-55 expects to incur additional indebtedness to R. W.
Gunnerman of $2.1 million to finance partnership distributions in connection
with the Reorganization on similar terms. See "Certain Transactions."
Pending the foregoing uses, the proceeds will be invested in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
A-55 currently intends to retain future earnings for the development of its
business and does not anticipate paying cash dividends in the foreseeable
future. A-55's future dividend policy will be determined by its board of
directors on the basis of various factors, including A-55's results of
operations, financial condition, capital requirements and investment
opportunities.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization as of September 30, 1998
on (i) a historical basis for A-55, L.P., (ii) a pro forma basis to give effect
to the Reorganization and (iii) a pro forma as further adjusted basis to give
effect to the sale by A-55, Inc. of shares of common stock in the offering and
the application of the estimated net proceeds therefrom. This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Use of Proceeds," the financial
statements and notes thereto of A-55, Inc. and A-55, L.P., and the unaudited pro
forma combined financial statements and related notes included in this
prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------------
PRO FORMA
AS FURTHER
ACTUAL PRO FORMA ADJUSTED
------------ ------------ ----------
<S> <C> <C> <C>
Cash................................ $ 1,743,500 $ 1,743,500 $
============ ============ ========
Advances from R. W. Gunnerman and
related accrued interest due at
dates ranging from on demand to
February, 1999.................... $ 19,027,300 $ 21,172,600(1)
Partners' (deficit)/shareholders'
equity (deficit):
Partners' (deficit)............... (19,077,400) --
Preferred stock, $0.001 par
value.......................... -- --
Common stock, $0.001 par value.... --
Paid in capital................... -- (21,222,700)(1)
Retained earnings................. --
------------ ------------ --------
Total partners'
(deficit)/shareholders'
equity (deficit)....... (19,077,400) (21,222,700)
------------ ------------ --------
Total capitalization................ $ (50,100) $ (50,100)
============ ============ ========
</TABLE>
- -------------------------
(1) Gives effect to advances of $2,145,300 from R. W. Gunnerman to pay partner
distributions in connection with the Reorganization.
17
<PAGE> 19
DILUTION
The net tangible book value (deficit) of A-55, Inc. as of September 30,
1998, after giving effect to the Reorganization, was approximately
$(21,222,700), or $( ) per share. Net tangible book value (deficit) per
share represents the amount of total tangible net assets of A-55, Inc. reduced
by the amount of its total liabilities and divided by the total number of shares
of common stock outstanding. After giving effect to the sale of the
shares of common stock offered hereby at an assumed initial
public offering price of $ per share, after deducting estimated underwriting
discounts and commissions and offering expenses, pro forma net tangible book
value of A-55, Inc. at September 30, 1998 would have been approximately
$ , or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution of $ per share to new investors. The following table illustrates
this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...... $
------
Net tangible book value per share before
offering........................................ $ --
Increase attributable to new investors............. --
------
Pro forma net tangible book value per share after
offering...........................................
------
Dilution per share of new investors.................. $
======
</TABLE>
The following table summarizes, on a pro forma basis after the offering as
of September 30, 1998, the differences between the existing stockholders and the
new investors with respect to the number of shares of common stock purchased
from A-55, Inc., the total consideration paid to A-55, Inc. and the average
price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------- -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders............... -- --% $ -- --% $ --
New Investors....................... -- -- -- -- --
----- ----- -------- ----- ------
Total..................... -- --% $ -- --% $ --
===== ===== ======== ===== ======
</TABLE>
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31,
1995, 1996 and 1997 and as of December 31, 1996 and 1997 have been derived from
the financial statements of A-55, L.P., which have been audited by
PricewaterhouseCoopers LLP, independent accountants, included in this
prospectus. The selected financial data for the years ended December 31, 1993
and 1994 and as of December 31, 1993, 1994 and 1995 have been derived from the
financial statements of A-55, L.P., which have been audited but are not
contained herein. The financial data set forth below as it relates to the
balance sheet at September 30, 1998 and the related statements of operations for
the nine months ended September 30, 1997 and 1998 are derived from the unaudited
financial statements of A-55, L.P. Such unaudited financial statements, in the
opinion of management, have been prepared on the same basis as the audited
financial statements and include all significant adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of the interim periods. The results of interim periods are not necessarily
indicative of the results of operations for the entire year. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the financial statements and
related notes of A-55, L.P., and the unaudited pro forma combined financial
statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Expenses:
General and administrative.... $ 1,769,400 $ 465,000 $ 534,400 $ 989,000 $ 2,081,500 $ 1,747,700 $ 2,991,600
Research and development...... 291,300 214,300 19,600 184,900 1,927,200 835,800 1,075,000
Sales and marketing........... 6,000 94,200 500 559,500 623,800 344,700 469,400
Legal......................... 12,600 -- 243,600 152,300 852,400 128,300 306,700
Depreciation and
amortization................ 176,800 109,700 36,600 261,000 1,361,600 1,034,500 998,500
----------- ----------- --------- ----------- ----------- ----------- -----------
2,256,100 883,200 834,700 2,146,700 6,846,500 4,091,000 5,841,200
Other income (expense):
Joint venture activities...... -- 780,600 (27,400) (383,000) -- -- --
Interest and other income..... 4,300 11,000 2,100 235,000 65,000 58,700 16,200
Interest expense.............. (2,100) (9,400) (9,800) (7,300) (1,800) (1,800) (3,200)
Interest expense to related
parties..................... (26,700) (6,000) (9,000) (402,800) (755,200) (548,400) (904,800)
----------- ----------- --------- ----------- ----------- ----------- -----------
Net income (loss)................. $(2,280,600) $ (107,000) $(878,800) $(2,704,800) $(7,538,500) $(4,582,500) $(6,733,000)
=========== =========== ========= =========== =========== =========== ===========
Pro forma net income (loss), as
adjusted(1)..................... $(6,781,500) $(5,825,000)
Pro forma net income (loss) per
share...........................
Pro forma weighted average common
shares outstanding(2)...........
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash...................... $ 1,085,300 $ 77,000 $ 5,700 $ 795,500 $ 783,800
Working capital
(deficit)............... (1,503,300) (624,800) (1,459,800) (9,655,100) (13,548,600)
Total assets.............. 2,454,700 1,234,500 1,203,800 5,651,300 4,676,600
Advances from
R. W. Gunnerman and
related accrued
interest................ 0 79,700 151,400 8,522,500 11,386,600
Total partners' capital
(deficit)/
stockholders' equity
(deficit)............... (156,000) 517,900 (351,100) (4,805,900) (12,344,400)
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------------
PRO FORMA
AS FURTHER
ACTUAL PRO FORMA(3) ADJUSTED(4)
------------ ------------ -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash...................... $ $1,743,500 $ 1,743,500
Working capital
(deficit)............... (19,981,100) (22,569,700)
Total assets.............. 5,585,200 5,585,200
Advances from
R. W. Gunnerman and
related accrued
interest................ 19,027,300 21,172,600
Total partners' capital
(deficit)/
stockholders' equity
(deficit)............... (19,077,400) (21,222,700)
</TABLE>
- -------------------------
(1) Pro forma net loss, as adjusted, reflects the combined historical net loss
of A-55, Inc. and A-55, L.P., adjusted for the reduction in interest expense
resulting from the application of $ million of estimated proceeds of the
offering to repay advances from R. W. Gunnerman. See "Use of Proceeds".
(2) See unaudited pro forma combined financial statements included in this
prospectus.
(3) Gives effect to the Reorganization and partnership distributions to be
completed in connection with the Reorganization which will be financed with
additional advances from R. W. Gunnerman.
(4) Further adjusted to reflect the sale of shares of common stock
offered hereby and the application of the estimated net proceeds from the
offering. See "Use of Proceeds."
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the financial statements and the respective notes
thereto included elsewhere in this prospectus. Except for the historical
information contained herein, the discussion in this prospectus contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of A-55's plans, objectives, expectations and intentions. The
cautionary statements made in this prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
prospectus. A-55's actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein.
OVERVIEW
A-55 is a development stage company and to date has focused its efforts
primarily on the development of A-55 Clean Fuels and A-55's current proprietary
knowledge base (the "A-55 Technology"). A-55 Technology includes both the
formulae and methods for production of A-55 Additive, and the related technology
and know-how necessary to blend and use A-55 Clean Fuels in specific combustion
applications. If A-55 is successful in implementing its business strategy, A-55
expects to complete its development stage by early 1999.
In July 1994, A-55 formed Advanced Fuels, L.L.C. ("Advanced Fuels") with
Caterpillar, Inc. ("Caterpillar") owning a 51% equity interest and A-55 owning
the remaining 49%. The joint venture was formed to pursue commercial
exploitation of the A-55 Technology in internal combustion engines. Under the
joint venture agreement, A-55 received consulting fee revenue for services
rendered to the joint venture. These consulting fees have been netted against
A-55's share of joint venture losses. In October 1996, A-55 acquired
Caterpillar's 51% interest in Advanced Fuels and the joint venture was
dissolved.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
General and Administrative. General and administrative expenses increased
$1,243,900, or 71%, to $2,991,600 for the nine months ended September 30, 1998,
from $1,747,700 in the comparable time period in 1997, primarily due to the
addition of new employees. A-55's general and administrative payroll for the
nine months ended September 30, 1998 increased $756,200, or 90%, from the
commensurate period in 1997. In the summer of 1997, A-55 began expanding its
management personnel. The remaining balance of the increase between periods of
$487,700 represents various supporting activities, including a $306,700 increase
in rent for A-55's corporate headquarters. A-55 began its occupation of the
corporate headquarters in May 1997. See "Certain Transactions". A-55 expects
that general and administrative expenses will continue to increase as A-55 hires
more personnel to support it's growth. Additional personnel will be required in
a variety of departments including, finance, human resources, business
development and legal. In addition, A-55 expects to experience additional
expenses associated with becoming a public company.
20
<PAGE> 22
Research and Development. Research and development expenses increased
$239,200, or 29%, to $1,075,000 for the nine months ended September 30, 1998,
from $835,800 in the comparable time period in 1997. The increase is due to an
expansion of A-55's combustion engineering department and development of testing
protocols and testing equipment. A-55 expects that research and development
costs will continue to increase in the future periods as A-55 continues to
expand its research and development and application engineering capabilities.
Increases will include among other things additional personnel, test programs,
testing equipment and consulting and laboratory services.
Sales and Marketing. Sales and marketing expenses increased $124,700, or
36%, to $469,400 for the nine months ended September 30, 1998 from $344,700 in
the comparable time period in 1997, primarily due to an increase in A-55's sales
and marketing staff. A-55 expects that sales and marketing expenses will
increase substantially in future periods as it expands its sales and marketing
staff and associated activities. See "Business-Sales and Marketing."
Legal. Legal expenses incurred during the nine month periods ended
September 30, 1998 and 1997 consisted of costs related to general corporate and
litigation matters.
Depreciation and Amortization. Depreciation and amortization expense for
the nine months ended September 30, 1998 consisted of amortization expense
totaling approximately $889,900 related to intellectual property obtained in the
acquisition of Advanced Fuels in October 1996 and depreciation expense totaling
$108,600. Depreciation and amortization expense for the nine months ended
September 30, 1997 consisted of amortization expense totaling $889,900 related
to the intellectual property associated with Advanced Fuels and depreciation
expense totaling $144,600. Depreciation expense for the nine months ended
September 30, 1998 decreased $36,000 compared with the comparable period in 1997
because certain items became fully depreciated in 1997.
Net loss. The net loss for the nine months ended September 30, 1998 totaled
($6,733,000) compared to a net loss of ($4,582,500) for the nine months ended
September 30, 1997. The increase in net loss was due primarily to the factors
discussed previously as they impacted the results for the nine months ended
September 30, 1998.
FISCAL YEAR 1997 COMPARED TO FISCAL YEARS 1996 AND 1995
General and Administrative. General and administrative expenses increased
$1,092,500 or 111% to $2,081,500 in 1997, from $989,000 in 1996. These expenses
increased $454,600 in 1996, or approximately 85% from $534,400 in 1995. The
increases in 1997 and 1996 were primarily due to the continued growth of A-55 to
support the ongoing development and commercialization of the A-55 Technology.
The increases of general and administrative expenses in 1997 compared to 1996,
and 1996 compared to 1995 were also due to A-55's acquisition of Advanced Fuels
in October 1996.
Research and Development. A-55's research and development expenses in 1997
increased $1,742,300 from $184,900 in 1996, which primarily represented
incremental costs incurred subsequent to the dissolution of the Advanced Fuels
joint venture in 1996. During 1995 and through October 1996, the level of
research and development activities performed directly by A-55 was
insignificant. Research and development, specifically product testing, was the
primary operating activity of Advanced Fuels from its inception in July 1994
through its acquisition and dissolution in October 1996.
21
<PAGE> 23
Sales and Marketing. Sales and marketing expenses in 1997 increased
approximately $64,300, or 11%, to $623,800, from $559,500 in 1996, due to the
hiring of additional sales and marketing personnel in 1997 and increased
marketing activities. A-55 first commenced sales and marketing activities in
1996, and consequently these expenses were insignificant in 1995.
Legal. Legal expenses in 1997 were approximately $700,100 higher than the
$152,300 incurred during 1996 primarily as a result of A-55 increasing its legal
reserve by $800,000. Legal expenses in 1996 decreased $91,300, or 37%, to
$152,300 primarily due to A-55 establishing a $200,000 legal reserve relating to
a lawsuit filed against it in 1995. See "Business -- Legal Proceedings".
Depreciation and Amortization. Depreciation and amortization expense in
1997 of $1,361,600 represented amortization expense totaling $1,186,600 related
to intellectual property obtained in the acquisition of Advanced Fuels in
October 1996 and depreciation expense totaling $175,000. Depreciation and
amortization in 1996 of $261,000 represented amortization expense totaling
$197,800 related to intellectual property obtained in the acquisition of
Advanced Fuels in October 1996 and depreciation expense totaling $63,200. There
was no amortization expense during 1995. The increase in depreciation expense in
1996 and subsequent increase in 1997 was due to the acquisition of equipment
necessary to the development of A-55 and its technology.
Joint Venture Activities. Joint venture activities for 1996 consisted of
A-55's equity share of net losses in Advanced Fuels totaling $1,133,000,
partially offset by consulting fees A-55 received from Advanced Fuels totaling
$750,000. In 1995, A-55's equity share of joint venture net losses of $1,027,400
was offset by consulting fees totaling $1,000,000. There were no joint venture
activities for 1997.
Net loss. The net loss in 1997 increased $4,833,700 from $2,704,800 in 1996
primarily due to the increased business activities as mentioned above to support
A-55 subsequent to the dissolution of Advanced Fuels. The net loss in 1996
increased $1,826,000 from $878,800 in 1995 primarily due to A-55's portion of
the loss generated by Advanced Fuels prior to dissolution, the operating
expenses incurred by A-55 subsequent to the acquisition and dissolution of
Advanced Fuels as well as increased activities to support the continued growth
of A-55.
LIQUIDITY AND CAPITAL RESOURCES
A-55 has incurred losses in each fiscal year since its inception in
November 1992, and at September 30, 1998 had an accumulated deficit of
approximately $20,486,100. During the period from November 1992 through July
1994, A-55 financed its operations and product and market development primarily
from partnership contributions and debt. From July 1994 through September 30,
1998, A-55 funded its operations and product and market development primarily
through cash advances from R.W. Gunnerman of approximately $17 million and
participation in the Advanced Fuels joint venture of approximately $2.4 million,
net of contributions, and cash received from international technology license
agreements of approximately $2.4 million.
A-55 used $6,087,900 cash to fund operations for the nine months ended
September 30, 1998, which primarily relates to the net loss recognized by A-55
for such period offset by depreciation and amortization and accrued interest.
Cash used to fund operations for 1997 was $1,965,000 while cash generated by
operations for 1996 and 1995
22
<PAGE> 24
was $457,400 and $322,100, respectively. Cash used from operations for fiscal
1997 represents primarily A-55's net loss offset by the deferred revenue
associated with international technology license agreements and depreciation and
amortization. Cash generated from operations for 1996 and 1995 represents
primarily Advanced Fuels joint venture activity, partially offset by A-55's net
losses each fiscal year.
A-55's cash used from investing activities of approximately $700,000 for
the nine months ended September 30, 1998 consists of expenditures for fixed
assets. The investing activities for 1997, 1996 and 1995 were approximately
$156,000, $5,756,000, and $493,000, respectively. The investing activity for
1997 represents primarily fixed asset expenditures. The investing activity for
1996 represents the purchase of the outstanding interest of Advanced Fuels for
approximately $5,668,000 as well as approximately $88,000 of fixed asset
expenditures. The investing activity for 1995 represents cash contributions of
$490,000 to Advance Fuels and approximately $3,000 of fixed asset expenditures.
A-55's financing activities for the nine months ended September 30, 1998 of
approximately $7,746,000 consist of net borrowings of approximately $6,736,000
from R. W. Gunnerman and approximately $1,000,000 from third parties. The net
cash provided by financing activities for 1997, 1996, 1995 consisted of
approximately $2,109,000, $6,089,000 and $99,000, respectively. The net cash
provided by financing activities for 1997 represents advances from R. W.
Gunnerman. The net cash provided by financing activities for 1996 represents net
advances of approximately $7,839,000 from R.W. Gunnerman and approximately
$1,750,000 of partner distributions. The net cash provided by financing
activities for 1995 represents insignificant advances from R.W. Gunnerman.
The net proceeds from the offering are estimated to be $ ,
assuming the Underwriter's over-allotment option is not exercised. A-55's future
capital requirements will depend upon numerous factors, including the rate of
market acceptance of A-55's products, and the terms of future sales. A-55's cash
needs will also be affected by whether it elects to purchase or lease the
facilities and equipment that are expected to be required to support its growth.
A-55 anticipates that the net proceeds of the offering together with existing
capital resources and cash generated from operations, if any, would be
sufficient to meet A-55's cash requirements for the next 12 months at its
anticipated level of operations. However, A-55 may seek additional financing
during the next 12 months. There can be no assurance that any additional
financing will be available to A-55 on acceptable terms, or at all, when
required by A-55.
YEAR 2000 COMPLIANCE
Currently, many hardware and software systems represent year data with two
instead of four digits (e.g. "01" instead of "2001"). This may cause such
hardware and software systems to produce erroneous results and/or to malfunction
when processing dates after December 31, 1999. As a result, many companies'
software and hardware systems may need to be upgraded or replaced in order to
correctly process dates after December 31, 1999 (that is, so as to be "Year 2000
compliant"). A-55 is evaluating the Year 2000 compliance issue as it relates to
A-55's internal information technology systems and non-information technology
systems (e.g., equipment with embedded technology) which are not extensive given
the limited nature of A-55's operations to date. A-55 believes that its existing
information technology systems are Year 2000 compliant. A-55 is currently
assessing the Year 2000 compliance of its non-information technology systems.
Until such testing is complete and such vendors and providers are contacted,
A-55 will not be able to
23
<PAGE> 25
completely evaluate whether its non-information technology systems will need to
be revised or replaced. A-55 has been informed by many of its primary vendors
for the ingredients of A-55 Additive that they are currently Year 2000
compliant. As A-55's operations grow, its exposure to Year 2000 compliance
issues relating to its information technology systems as well as to its
suppliers and customers will become increasingly important. To minimize its
exposure, A-55 intends to purchase information technology systems that are Year
2000 compliant and obtain assurances from any new suppliers and customers that
they are Year 2000 compliant.
To date A-55 has not incurred any direct costs in connection with
identifying or evaluating Year 2000 compliance issues, as it has utilized only
internal staff resources and has not hired contractors to assist it in this
endeavor. A-55 does not anticipate that the future cost of Year 2000 compliance
will be material. However, if higher than anticipated, such costs could have a
material adverse effect on A-55's business, results of operations and financial
condition.
A-55 is not currently aware of any Year 2000 compliance problems that would
have a material adverse effect on A-55's business, results of operations and
financial condition without taking into account A-55's efforts to avoid or fix
such problems. There can be no assurance that A-55's future vendors, suppliers
or customers in fact will be Year 2000 compliant even if they provide A-55 with
assurances of such compliance.
A-55 is engaged in an ongoing Year 2000 compliance assessment and has not
yet finalized any formal contingency plans. A-55 expects to finalize its
contingency plans during mid-1999.
24
<PAGE> 26
BUSINESS
In addition to the historical information contained herein, this prospectus
contains forward-looking statements which involve risks and uncertainties.
A-55's actual results may differ significantly from those discussed herein.
Factors that might cause such differences include, but are not limited to, those
discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as those discussed
elsewhere in this prospectus.
OVERVIEW
A-55 has developed, tested and begun to commercialize proprietary
petroleum-based fuel products known as "A-55 Clean Fuels" that are both less
expensive to use and environmentally "cleaner" than many fossil fuels used
today. A-55 Clean Fuels are produced using A-55's principal product, A-55
Additive, a proprietary formulation allowing for the stable blend of water and
almost any petroleum product, including relatively inexpensive "bottom of the
barrel" tar-like residues and residual oils that result from the process of
refining crude oil ("Residues"). A-55 believes that A-55 Clean Fuels can be
produced at a cost that is less, when compared on an energy equivalent basis,
than that of natural gas or almost any refined petroleum fuel product that is
consumed in large volumes to generate electricity as well as in many other
combustion applications.
Combustion tests of A-55 Clean Fuels by A-55, as well as by independent
agencies such as the EPA, demonstrate that A-55 Clean Fuels significantly reduce
emissions of NOx and harmful particulate matter, while maintaining a high energy
output by efficiently burning the carbon content of the fuel's petroleum base.
The tests also demonstrate that A-55 Clean Fuels are effective substitutes for
fossil fuels in a wide variety of applications including open-flame combustion,
such as electricity generation boilers, combustion turbines and internal
combustion engines. In addition, A-55 Clean Fuels have superior handling and
safety characteristics compared to those of other fossil fuels, including
natural gas.
A-55 believes that, due to their relative cost and emissions benefits, A-55
Clean Fuels will have broad application in a number of market segments. For its
initial commercialization of A-55 Clean Fuels, A-55 has targeted the domestic
electricity generation market, one of the largest users of fossil fuels, which
consumed 4.8 billion gallons of refined petroleum products and 2.7 trillion
cubic feet of natural gas in 1996. With deregulation of the electric utility
industry occurring at a rapid pace, utilities and independent power producers
are searching for ways to become more cost competitive. Because fuel represents
the largest variable operating expense of fossil fuel fired electricity
generating units, A-55 expects A-55 Clean Fuels to be well received by this
market. A-55 has received an initial purchase order that will require the
delivery of sufficient A-55 Additive to produce up to 70,000 barrels (2.9
million gallons) of A-55 Clean Fuels for Commonwealth Edison, an electric
utility with 1997 annual revenues of $7.1 billion. Such fuel is to be consumed
during the start-up phase of Commonwealth Edison's usage of A-55 Clean Fuels at
one of the five boilers located at its 2,600 megawatts ("MW") Collins Plant
located near Chicago.
A-55 intends to pursue the sale of A-55 Additive through two principal
distribution channels: direct sales to electricity generators and other large
fuel consumers that elect to blend A-55 Clean Fuels, and A-55 approved
distributors, such as petroleum refiners. A-55
25
<PAGE> 27
believes that petroleum refiners will play an important role in the production
and distribution of A-55 Clean Fuels. In addition, A-55 believes that petroleum
refiners will also be an important source of the base Residue and other refined
petroleum products for fuel consumers that elect to blend their own A-55 Clean
Fuels.
In 1996, the petroleum refining industry supplied approximately 4.2 billion
gallons of No. 6 fuel oil to electricity generators in the United States. No. 6
fuel oil consists of Residues that are generally blended or "cut" with more
refined petroleum products (typically called "cutter stock") to produce a fuel
that satisfies handling and usage specifications. By using A-55 Additive,
refiners will be able to blend Residues with water, instead of more expensive
cutter stock, to produce A-55 Clean Fuels that meet the specifications for No. 6
fuel oil. A-55 expects the cost of A-55 Clean Fuels based on Residues
("Residue-Based A-55 Clean Fuels") to consumers will be lower on an energy
equivalent basis than No. 6 fuel oil, based on current and historical market
prices of No. 6 fuel oil.
A-55 expects that the demand for A-55 Clean Fuels will be further enhanced
by the increasingly stringent restrictions on NOx and other harmful emissions,
such as those mandated by the federal Clean Air Act. Faced with these
restrictions and the prospect of increased competition from deregulation, U.S.
electric utilities that burn large quantities of coal and other "dirty" fossil
fuels are under considerable pressure to evaluate cost-effective alternatives to
generate electricity. A-55 believes that electricity generators will likely
respond to such pressure by, among other things, burning "cleaner" fuels or
investing in expensive new emissions control technology. Internationally, demand
for electricity is expected to nearly double during the 25-year period ending
2020, much of which is expected to be met by the combustion of fossil fuels.
Because air pollution already represents a major health hazard in a large number
of urban areas, many foreign governments are imposing or are expected to impose
regulatory programs to promote the development of more environmentally
responsible means of generating electricity. A-55 believes that A-55 Clean Fuels
will allow electricity generators and other large fossil fuel consumers, both in
the U.S. and abroad, to reduce harmful NOx emissions without investing in costly
emissions control technologies.
A-55 intends to produce A-55 Additive at a commercial facility being
completed near its headquarters in Reno, Nevada. Additionally, A-55 plans to
build a number of production facilities at strategic regional locations that
will allow it to meet the demands of its customers.
A-55 TECHNOLOGY & PRODUCTS
Development. In 1988, A-55's founder, R. W. Gunnerman, began a decade-long
research and development effort with the goal of creating stable blends of water
and petroleum products for use in combustion applications. This effort led to
the creation of the A-55 Technology that includes both the formulation and
method for production of A-55 Additive, and the related technology and know-how
necessary to blend and use A-55 Clean Fuels in specific combustion applications.
The research and development effort, initially conducted by R. W.
Gunnerman, and commencing in 1992 by A-55, L.P. (the Delaware limited
partnership which preceded the Predecessor) was first focused on smaller
applications such as internal combustion engines. In 1993, A-55 began customer
field tests in a transit bus and has since conducted further
26
<PAGE> 28
customer field tests of A-55 Clean Fuels in a variety of applications.
Concurrent with its work on internal combustion engines, A-55 expanded its focus
by exploring the use of A-55 Clean Fuels in large stationary applications such
as electricity generating boilers and combustion turbines. A-55's testing and
research led to the development of A-55 Clean Fuels designed specifically for
use in large electricity generating and industrial applications as a
cost-competitive fuel that reduces NOx.
A-55 Additive. A-55's primary product is A-55 Additive, a proprietary
liquid formulation that allows the stable blending of petroleum products and
water. A-55 Additive includes a number of components that enhance the stability
of the blend and facilitate combustion of A-55 Clean Fuels in a variety of
commercial applications. While A-55 maintains tight controls on the formulation
of A-55 Additive, all of its constituent ingredients are commercially available
from one or more national or international suppliers.
A-55 Clean Fuels. A-55 Clean Fuels are water and petroleum blends, with
A-55 Additive used as the blending agent. In most commercial applications, A-55
Clean Fuels typically contain by volume approximately 30% water and 70%
petroleum products, with A-55 Additive representing approximately 0.5%. The
water content in A-55 Clean Fuels allows less refined and typically less
expensive refined petroleum products such as Residues and naphtha to be utilized
in combustion applications where such products could not normally be burned
without special treatment, such as advance heating of Residues because of their
difficult handling characteristics. By utilizing A-55 Additive, almost any
petroleum product, even crude oil, can be blended with water. Even when produced
with "bottom of the barrel" petroleum Residues, A-55 Clean Fuels have
significantly reduced emissions of NOx upon combustion as compared with No. 6
fuel oil based on similar Residues.
Residue-Based A-55 Clean Fuels are liquids at temperatures down to 21
degreesF, which allows them to be stored, pumped and transported in a manner
similar to more refined petroleum fuel products, such as gasoline and diesel.
This represents an important advantage over conventional No. 6 fuel oils, which
are generally so thick that they must be heated to temperatures as high as 160
degreesF to maintain their usable viscosity. A-55 Clean Fuels can also be burned
in most combustion applications with relatively minor modifications to existing
equipment. In addition, by varying their petroleum base product, A-55 Clean
Fuels can be produced to meet the particular specifications of a given customer
for criteria such as desired viscosity and levels of sulphur or heavy metal
content. Safety is another significant advantage of A-55 Clean Fuels. Due to
their water content, they have a higher "flash point," making them less likely
to explode when they come into contact with a spark or an open flame at room
temperature than many conventional petroleum products or natural gas.
INDUSTRY OVERVIEW
A-55 believes that three important trends will lead to significant market
demand for A-55 Clean Fuels:
- Continued Growth in Energy Consumption--demand for energy--especially
electricity--continues to grow throughout both industrialized and
developing nations;
- Deregulation of Electric Utility Industry--cost pressures on domestic
electricity generators are increasing as many states move to deregulate
electric utilities and open the industry to greater competition; and
27
<PAGE> 29
- Increasing Environmental Regulation--concern about the environmental harm
caused by the burning of fossil fuels has increased, leading to more
stringent air quality regulations in both the United States and the rest
of the world.
Continued Growth in Energy Consumption
A-55 believes that it is well-positioned to capitalize on the expected
steady increase in the demand for energy throughout the world, which is
projected to continue for the foreseeable future. The table below sets forth the
increases in energy consumption projected by the Energy Information
Administration of the U.S. Department of Energy ("EIA") for the 25-year period
ending in the year 2020.
WORLD ENERGY CONSUMPTION BY REGION, 1995-2020
(IN QUADRILLION BTU)
<TABLE>
<CAPTION>
COMPOUND ANNUAL
REGION HISTORICAL PROJECTED GROWTH RATE
------ ---------- -------------- ---------------
1995 2010 2020 (1995-2020)
---------- ----- ----- ---------------
<S> <C> <C> <C> <C>
United States........................ 90.4 112.2 118.6 1.1%
Other Industrialized Nations......... 108.7 135.3 152.9 1.4%
Rest of World........................ 166.3 272.0 367.9 3.2%
----- ----- -----
Total...................... 365.4 519.5 639.4 2.3%
===== ===== =====
</TABLE>
Sources: EIA, Office of Energy Markets and End Use; International Statistics
Database and International Energy Annual 1996, DOE/EIA-2019(96) (Washington, DC,
February 1998); World Energy Projection System (1998).
As reflected in the table above, energy consumption in the U.S. and other
industrialized nations during the 25-year period from 1995 to 2020 is projected
to increase by over 30%. During the same period, energy consumption in the
developing nations is projected to increase by over 150%.
As reflected in the table below, fossil fuels are expected to continue to
provide the vast majority of the world's energy supply.
WORLD ENERGY CONSUMPTION BY ENERGY SOURCE, 1995-2020
(IN QUADRILLION BTU)
<TABLE>
<CAPTION>
COMPOUND ANNUAL
ENERGY SOURCE HISTORICAL PROJECTED GROWTH RATE
------------- ---------- -------------- ---------------
1995 2010 2020 (1995-2020)
---------- ----- ----- ---------------
<S> <C> <C> <C> <C>
Oil.................................. 142.5 195.5 237.3 2.1%
Natural Gas.......................... 78.1 133.3 174.2 3.3%
Coal................................. 91.6 123.6 156.4 2.2%
Nuclear.............................. 23.3 24.9 21.3 (0.4%)
Renewables........................... 30.1 42.4 50.2 2.1%
----- ----- -----
Total...................... 365.4 519.5 639.4 2.3%
===== ===== =====
</TABLE>
Sources: EIA, Office of Energy Markets and End Use, International Statistics
Database and International Energy Annual 1996, DOE/EIA-2019(96) (Washington, DC,
February 1998); World Energy Projection System (1998).
28
<PAGE> 30
A-55 believes that in order to satisfy the increasing demand for
electricity generated with fossil fuels, electricity generators will continue to
seek new technologies that allow for cost-effective means of burning fossil
fuels in an environmentally responsible manner.
Deregulation of Electric Utility Industry
In recent years, a number of states, including California, Illinois,
Massachusetts, New York, Pennsylvania and Rhode Island, have adopted legislative
or regulatory initiatives aimed at promoting competition in the electricity
generation industry and reducing the price of electricity to customers. These
initiatives have placed significant pressure on electric utilities and other
electricity generators to reduce costs in order to compete in a less regulated
environment. Because the price of fuel represents the largest variable operating
expense of fossil fuel fired electricity generators, A-55 believes that this
trend toward deregulation will cause the industry to continue to seek the lowest
cost energy sources and to comply with increasingly stringent environmental
regulations in the most cost-effective manner.
Increasing Environmental Regulation
Over the last few decades, governments in both industrialized and
developing nations throughout the world have struggled to mitigate the harmful
effects of emissions from the increased consumption of fossil fuels while
relying on those fuels to provide a majority of the global energy supply
necessary for economic growth. As environmental concerns have grown, many
governments have enacted increasingly stringent regulatory programs in response
to the negative impact that the burning of fossil fuels has on the environment.
These regulatory programs are likely to increase the demand for viable,
affordable and environmentally "clean" fuels, such as A-55 Clean Fuels.
Under the Clean Air Act, the EPA has exercised its authority to set
national ambient air quality standards for six "criteria pollutants," including
NOx, that cause adverse public health and environmental effects. Areas that are
in violation of the national ambient air quality standards are designated
"non-attainment areas" and may face federal sanctions. In 1996, electric
utilities and other stationary sources were responsible for approximately 45% of
the total NOx emissions in the United States, and the EPA estimates that
coal-fired electricity generating plants account for over 90% of the total NOx
emissions from all electric utilities. In an effort to address NOx emissions,
the EPA has adopted a variety of regulations under the Clean Air Act that are
being phased in through the year 2000 and thereafter.
While the regulatory climate worldwide is at varying stages of development
compared to the United States, many foreign countries have also established some
form of environmental policy framework that regulates pollution caused by fossil
fuel consumption. A-55 believes that worldwide regulation of environmental
pollutants will stimulate demand in international markets for NOx control
technologies and cleaner fuels, such as A-55 Clean Fuels.
TARGET MARKETS
A-55 has identified the target markets discussed below that it believes
will constitute significant sources of demand for its products.
29
<PAGE> 31
Electricity Generation Industry
In 1996, electricity generation in the United States exceeded 3 trillion
kilowatt hours. Electricity is generated using a variety of methods, determined
by, among other things, the availability and cost of fuels and overall energy
demand. The most common methods are steam-turbine generating units ("boilers")
and natural gas-fired or petroleum-fired combustion turbines ("turbines"). The
EIA estimates that in 1996 approximately 63% of electricity generating capacity
in the United States was supplied by boilers, which consumed 4.8 billion gallons
of petroleum, 874 million short tons of coal and 2.7 trillion cubic feet of
natural gas.
The following graph shows the primary energy sources for the net generation
of electricity by electric utilities in the United States in 1996.
U.S. ELECTRIC UTILITY NET GENERATION BY ENERGY SOURCE, 1996
[U.S. ELECTRIC UTILITY NET GENERATION GRAPH]
Source: EIA Electric Power Annual 1996
Fuel represents the largest variable operating expense of fossil fuel fired
electricity generating units. Because market prices for Residues tend to be
lower than those of almost all other petroleum products, A-55 believes that
Residue-Based A-55 Clean Fuels will represent a cost-effective fuel substitute
to the electricity generation market. To gain market acceptance of its product
in this market, A-55 initially plans to price A-55 Additive at a level that will
allow electricity generators to burn Residue-Based A-55 Clean Fuels at a cost
that does not exceed $2.00 per million Btu ("MmBtu"), which compares favorably
with the market price of No. 6 fuel oil and natural gas in recent years. The
table below sets forth the average annual delivered cost of No. 6 fuel oil and
natural gas for electric utilities for each of the years 1992-1997.
30
<PAGE> 32
AVERAGE DELIVERED COST OF FUEL TO U.S. ELECTRIC UTILITIES
(NO. 6 FUEL OIL VS. NATURAL GAS)
<TABLE>
<CAPTION>
NO. 6 FUEL OIL NATURAL GAS
($/MMBTU) ($/MMBTU)
-------------- -----------
<S> <C> <C>
1992................. $2.47 $2.33
1993................. 2.36 2.56
1994................. 2.41 2.23
1995................. 2.58 1.98
1996................. 3.03 2.64
1997................. 2.79 2.76
</TABLE>
Source: EIA, Cost and Quality of Fuels for Electric Utility Plants, 1992-97
Tables
Note: The indicated delivered cost represents annual averages; the actual
delivered cost varied significantly throughout each year.
No. 6 Fuel Oil. In certain regions of the United States, No. 6 fuel oil is
a significant fuel source for generating electricity. This is the case even
though combustion of No. 6 fuel oil tends to emit significant quantities of NOx
and other harmful air pollutants and despite the additional costs and
inconvenience of heating the fuel to facilitate its handling. In 1996, a total
of five states (New York, Connecticut, Massachusetts, Florida and Hawaii)
together received over 80% of the 4.1 billion gallons of the No. 6 fuel oil
delivered to U.S. electric utilities.
A-55 has identified four electric utilities in Florida and Hawaii that own
or operate oil-fired boilers with a combined generating capacity of 10,778 MW.
A-55 plans to focus significant marketing resources on these four companies as
potential purchasers of A-55 Clean Fuels. However, no assurances can be made
that A-55's efforts with these companies will be successful.
By way of example, A-55 estimates that a single 250 MW oil-fired boiler
would consume approximately 22 million gallons of Residue-Based A-55 Clean Fuels
per year. The production of this quantity of A-55 Clean Fuels would require
approximately 110,000 gallons of A-55 Additive. Because oil-fired boilers
generally serve as peak generating facilities, the foregoing example assumes the
boiler would operate at 10% of capacity.
The major determinants of the cost of producing No. 6 fuel oil are the
price of its base Residue and the price and the quantity of cutter stock, if
any, required to be blended with the Residue to meet required specifications for
No. 6 fuel oil. Residues vary considerably in terms of their viscosity, sulfur
content and other physical characteristics, based largely on the type of crude
oils from which the Residues are derived and the extent to which such Residues
have been refined. In general, the "heavier" or thicker the Residue, the lower
its price because a greater quantity of the more expensive cutter stock must be
blended with it for the final fuel oil product to meet required specifications.
While the cutter stock improves certain handling and other characteristics of
the fuel, it generally has a somewhat lower Btu content than most Residues.
Thus, the Btu content and cost of a given No. 6 fuel oil generally reflect the
combined Btu content and cost of both its Residue and cutter stock, if any.
Residue-Based A-55 Clean Fuels are cost competitive relative to No. 6 fuel oil
primarily because they derive all of their Btu content from the low-cost Residue
while No. 6 fuel oil derives its Btu content from both its base Residue and from
any cutter stock with which the Residue is blended.
31
<PAGE> 33
Based upon historical and current pricing trends of No. 6 fuel oil and
current price information about Residues, A-55 believes that it will have
significant flexibility in pricing A-55 Additive so that A-55 Clean Fuels are
cost competitive with No. 6 fuel oil. In addition, Residue-Based A-55 Clean
Fuels are able to utilize the same infrastructure as No. 6 fuel oil, minimizing
the cost to utilities of switching to A-55 Clean Fuels.
Natural Gas. Natural gas represents an important fuel source for the
generation of electricity in the United States. In 1996, the U.S. electricity
generation industry consumed 2.3 trillion cubic feet of natural gas in
electricity generation boilers either as a primary fuel source or as a secondary
fuel in many of the gas-fired boilers that can also burn No. 6 fuel oil. A-55
believes that most gas-fired boilers are capable of burning A-55 Clean Fuels
with minimal modification.
A-55 has received an initial purchase order that will require sufficient
A-55 Additive to produce 70,000 barrels (2.9 million gallons) of A-55 Clean
Fuels to use during the start-up phase of Commonwealth Edison's usage in one of
the five boilers located at its 2,600 MW Collins Plant located near Chicago. The
five boilers at the Collins Plant, which is currently used as a peak generating
facility, are capable of burning both No. 6 fuel oil and natural gas and each
have a 525-550 MW capacity. A-55 estimates that a 525 MW dual-fired boiler using
A-55 Clean Fuels as a primary fuel would consume approximately 44 million
gallons of Residue-Based A-55 Clean Fuels per year. The production of this
amount of A-55 Clean Fuels would require approximately 220,000 gallons of A-55
Additive. Because dual-fired boilers generally serve as peak generating
facilities, the foregoing example assumes the boiler would operate at 10% of
capacity. There can be no assurance that the start-up phase will be successful
or that Commonwealth Edison will purchase additional A-55 Clean Fuels for use in
this or any other facility.
Based upon historical and current pricing trends of natural gas and current
price information about Residues, A-55 believes that A-55 Clean Fuels could be
used in many boilers at a lower cost on an energy equivalent basis than natural
gas and that it will have significant flexibility in pricing A-55 Additive for
sale to this market.
Coal. Coal is a low-cost but relatively "dirty" fuel that is the primary
fuel burned to generate electricity in certain regions of the United States.
Coal-fired electricity generating plants tend to have high NOx emissions. A-55
believes that the operators of most coal-fired electricity generating plants are
in the process of evaluating alternative technical strategies for controlling
NOx emissions to comply with various regulations adopted by the EPA under the
Clean Air Act being phased in by the year 2000 and thereafter. In performing
this evaluation, and in light of ongoing deregulation of the electric utility
industry, A-55 believes that coal-fired plant operators are searching for
cost-effective solutions, particularly alternatives to the substantial capital
costs associated with either replacing or retrofitting existing plants with
emissions control technology. See "--Competition--Emissions Control
Technologies" and "--Industry Overview--Increasing Environmental Regulation."
A-55 believes that an effective alternative available to these plant
operators is to implement reburning as a strategy to control NOx emissions to
comply with the Clean Air Act. Reburning is a NOx control technology for boilers
in which a portion of the fuel (typically up to 20% of the total Btu content of
the plant's fuel) is injected downstream of the main burners to establish a fuel
rich zone where NOx gases resulting from the primary burn are reduced to
harmless nitrogen gas. Compared with other NOx emissions control
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technologies, the capital costs of reburning are, depending on the boiler size
and type, relatively low. At current market prices, coal is generally less
expensive than most reburn fuels, so A-55 believes that coal-fired electricity
generators will only use A-55 Clean Fuels as a reburn fuel, not as a substitute
for coal as the primary fuel, within coal-fired plants that endeavor to reduce
NOx emissions.
While most reburn installations to date (a majority of which have been in
European countries) have employed natural gas as the reburn fuel, utilizing
other less expensive reburn fuels could have significant economic benefits.
Tests have demonstrated that Residue-Based A-55 Clean Fuels yield comparable NOx
emissions reductions at competitive costs, or at a lower cost at current market
fuel prices, than natural gas and other fuels in most reburn applications. Many
coal-fired plants do not have direct access to a natural gas pipeline, thereby
significantly increasing the total cost of utilizing natural gas as a reburn
fuel in these facilities.
A-55 estimates that a single 300 MW coal-fired baseload boiler operating at
100% of capacity, employing a reburn strategy with Residue-Based A-55 Clean
Fuels providing it with 20% of its Btu fuel content, would consume approximately
53 million gallons of Residue-Based A-55 Clean Fuels per year, which represents
usage of approximately 264,000 gallons of A-55 Additive.
Tennessee Valley Authority ("TVA") is evaluating the use of A-55 Clean
Fuels to maintain maximum flexibility in its NOx compliance strategy. There can
be no assurance that future testing will be successful or that TVA will purchase
A-55 Clean Fuels for use in any of its facilities.
A-55 intends to focus its A-55 Clean Fuels reburn marketing efforts on
those electric utilities with coal-fired boilers that are subject to the NOx
control regulations under the Clean Air Act because A-55 believes that these
utilities are among the most likely to consider adopting a reburn strategy to
comply with NOx emissions standards. See "Risk Factors--Reburning may not become
a widely accepted method for controlling NOx emissions."
Petroleum Refining Industry
Virtually all of the refined petroleum products that are consumed in
electricity generating boilers and turbines are supplied, directly or
indirectly, by the petroleum refining industry. A-55 believes that many
electricity generators and other large fuel customers that elect to use A-55
Clean Fuels will seek to purchase that fuel product from petroleum refiners,
representing a significant distribution channel and market opportunity for A-55
to sell A-55 Additive.
The process of refining crude oil yields significant quantities of
Residues, such as atmospheric residue and vacuum residue. Depending on the type
of crude oil refined, these Residues can account for 15% to 45% by volume of the
refined petroleum. One manner in which refiners dispose of Residues is by
blending or "cutting" them with lighter and more expensive cutter stock to
create No. 6 fuel oil, in which the cutter stock may constitute up to 40% of its
volume.
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With A-55 Additive, refiners will be able to blend Residues with water
(including a refinery plant's hydrocarbon contaminated wastewater that would
otherwise require costly treatment to meet environmental standards for disposal)
to create A-55 Clean Fuels instead of blending Residues with more expensive
cutter stock to produce No. 6 fuel oil. For these reasons, A-55 believes that
Residue-Based A-55 Clean Fuels represent an opportunity for refiners to continue
to sell Residue-based fuels at acceptable prices while freeing up the more
valuable cutter stock for other uses. A-55 believes that, based on historical
prices of No. 6 fuel oil and its current price information about Residues,
refiners will be able to supply Residue-Based A-55 Clean Fuels at a lower price,
when measured on an energy equivalent basis, than No. 6 fuel oil. Due to the
cost advantages of producing Residue-Based A-55 Clean Fuels, A-55 believes that
refiners may be encouraged to produce A-55 Clean Fuels from Residues rather than
producing more refined petroleum products such as No. 6 fuel oil.
International Markets
In 1996, approximately 75% of the petroleum products consumed worldwide
were consumed outside the United States. Similarly, in 1995 (the most recent
year such data is available), over 80% of the residual fuel oils consumed
worldwide were consumed outside the United States. A-55 believes that there are
significant opportunities to market its products outside the United States,
particularly in countries that are large consumers of petroleum products.
Coal is expected to fuel a significant portion of the energy needed to meet
the increased global demand for electricity. The EIA expects global coal
consumption to increase 52% over the next 20 years. Governments of both
industrialized and developing nations around the world have enacted, and A-55
believes will continue to enact, increasingly stringent regulations that will
require both electricity generators and other industries that consume large
quantities of coal and other fossil fuels to reduce their NOx emissions.
While A-55 intends to continue to explore, and to the extent opportunities
are developed, pursue the international market for its products, it believes
that the more immediate opportunity exists in the domestic markets.
Transportation Sector
The transportation sector is one of the largest users of fossil fuels. This
sector includes on-road vehicles such as automobiles, buses and trucks, as well
as off-road vehicles such as mine excavation, farm and construction equipment,
and consumed approximately 180 billion gallons of refined petroleum products in
the United States in 1996. The sale of fuel for, and modification of, internal
combustion engines and vehicles are highly regulated in the United States. For
example, engines and vehicles may not be sold in the United States unless they
have been certified by the EPA as meeting certain prescribed emission standards.
The process of certification is both time consuming and costly.
Because the transportation sector produces approximately 50% of all NOx
emissions in the United States, A-55 believes that the sector is a significant
potential market for A-55 Clean Fuels due to their significant NOx reducing
characteristics. Before A-55 can successfully market to this sector, however, it
must complete testing and obtain certification of a variety of internal
combustion engines as modified to use A-55 Clean
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Fuels and obtain requisite federal, state and local approvals of A-55 Clean
Fuels. Completion of sufficient engine testing to penetrate a significant
portion of this market segment is not expected to be completed in the short
term. As a result, A-55 does not expect that the U.S. sales of its products to
this sector will make a significant contribution to its revenues in the short to
medium term.
STRATEGY
A-55's strategy is to aggressively pursue an extensive branding and
marketing campaign aimed at penetrating the following target markets:
- Electricity Generators--Electric utilities, independent power producers
and large industrial and commercial electricity generators consume
substantial volumes of fossil fuel. A-55 intends to further segment this
market by fuel usage:
- No. 6 Fuel Oil and Natural Gas--A-55 Clean Fuels can serve as a
cost-effective and environmentally responsible substitute for these
fuels.
- Coal--A-55 Clean Fuels can be used in combination with coal in
coal-fired electricity generating plants to help them comply with the
strict NOx emissions regulations being phased in through the year 2000
and thereafter.
- Petroleum Refiners--Refiners are currently well-positioned to profitably
produce, market and distribute A-55 Clean Fuels to the ultimate consumer.
A-55 intends to form strategic alliances with petroleum refiners in order
to reach electric utilities and other large fossil fuel consumers by
taking advantage of the existing supply relationships that refiners
maintain with such fuel consumers.
- International Markets--A-55 believes that through strategic alliances
with local companies, including energy suppliers, it can capitalize on
the increasing demand for electricity and the growing awareness of
environmental concerns in both industrialized and developing countries
abroad.
A-55 intends to develop the "A-55" brand in order to differentiate itself
and its products from those of potential competitors through an aggressive
advertising campaign that promotes A-55's technology and products.
SALES AND MARKETING
A-55 intends to market A-55 Clean Fuels both domestically and
internationally through its sales and marketing staff and senior management.
Each member of the sales and marketing staff is assigned a responsibility for
developing specific high-level relationships with existing customers and future
prospective accounts. In addition, A-55 intends to pursue a variety of business
relationships, such as strategic alliances and business ventures with petroleum
refiners, fuel traders, energy brokers and their respective customers so that
they become integrated with A-55's marketing efforts.
Direct Sales. A-55 anticipates that direct sales will be its most
productive marketing and sales channel, and therefore expects to rely heavily on
its sales and field service representatives. Typically, electricity generators
will be contacted at the corporate level and introduced to A-55 Clean Fuels. An
initial meeting with the potential customer's fuel buyers and representatives
from the asset allocation and planning department will be held to discuss the
cost and emissions benefits of A-55 Clean Fuels. In follow-up visits, A-55's
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field service representatives will work directly with the customer to verify
fuel specification requirements and to discuss the logistics for manufacturing
and supplying the fuel. Once a purchase order is received from a customer, the
field service representatives will assist the customer in implementing its use
of A-55 Clean Fuels.
A-55 currently has eleven employees in its sales and marketing divisions
and intends to expand this staff in the near future. Such expansion will include
the addition of sales and field service representatives. There can be no
assurances that A-55 will be successful in building a sufficiently large sales
and marketing team and sales force with requisite technical expertise to address
the target markets.
Petroleum Refiners, Fuel Traders and Energy Brokers. A-55 expects to
supplement its direct sales efforts by forming relationships with petroleum
refiners, fuel traders and energy brokers and plans to utilize this network to
market to potential electricity generator customers. A-55 may authorize the
petroleum refiners, traders and brokers to solicit customers and initiate
preliminary negotiations with customers on behalf of A-55.
Strategic Alliances with Key Customers. A-55 believes that certain of its
customers will serve as another channel through which it will market and
distribute its products. Many large electricity generators have the capability
to store a substantial inventory of fuel product, and they may serve as
distribution centers of A-55 Clean Fuels for their own and others' requirements.
International Markets. A-55 believes that the most effective way to
penetrate foreign markets is through strategic alliances with entities having
familiarity with the local political and regulatory environment. A-55's approach
to date has been to structure licensing arrangements such that A-55 will sell
A-55 Additive to the licensee at an established price and the licensee will
resell the A-55 Additive or use it to produce and sell A-55 Clean Fuels.
A-55 has entered into three international licenses: one covering Australia,
New Zealand and Papau New Guinea (the "Australian License"); one covering the
Republic of Korea and the Democratic People's Republic of Korea (the "Korean
License"); and one covering the Russian Federation (the "Russian License").
A-55 entered into the Australian License (covering Australia, New Zealand
and New Guinea) in March 1997, which granted a license to A-55 (Australia)
Limited, an Australian corporation established by Beston Pacific Corporation
Limited, a private investment bank headquartered in Adelaide, South Australia
that pursues growth opportunities within the Asia Pacific region. In
consideration for the grant of the license, A-55 received a 30% equity interest
in the licensee. The Australian License expires upon the expiration of the last
patent to expire underlying the A-55 Technology filed in the designated
territory. The Australian License requires an aggregate $5.0 million territorial
license fee cash payment over the one-year period which ended March 1, 1998, of
which approximately $1.4 million has been paid. A-55 has suspended the payment
obligations of the licensee under the Australian License pending completion of
certain field tests being conducted by the licensee. The Australian License
provides for payment of a 0.5% royalty to A-55 for all sales based on the A-55
Technology in the designated territory. To date, no royalties have been paid or
are payable under this license and all monies received have been recognized as
deferred revenue pending completion of field tests and the negotiation of a
revised payment schedule. A-55 believes that subject to a successful conclusion
to
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these field tests, the Australian licensee has the ability to perform its
obligations under the Australian License.
The Korean License was entered into in June 1997, which granted a license
to an entity to be formed by Stanton Energy Fund Party, Limited, a private
investment group headquartered in Melbourne, Australia with expertise in energy
and environmental technology that explores international business opportunities.
In consideration for the grant of the license, A-55 is to receive a 30% equity
interest in the licensee entity to be formed by Stanton, which may not be
diluted by any further issuances of equity interests by the licensee. The Korean
License expires on the later of June 8, 2022 or the date of expiration of
certain patents underlying the A-55 Technology filed the United States or in
either North or South Korea. The Korean License requires an aggregate $10.0
million territorial license fee cash payment over the one-year period which
ended June 9, 1998, of which $1.0 million has been paid. A-55 is negotiating a
revised payment schedule with Stanton. The Korean License provides for payment
of a 1.0% royalty to A-55 for all sales based on the A-55 Technology in Korea.
To date, no royalties have been paid or are payable under this license and all
monies received have been recognized as deferred revenue pending completion of
negotiations for a revised payment schedule. A-55 believes that the current
economic climate in South Korea may adversely affect Stanton's ability to
perform its obligations under the Korean license.
The Russian License was entered into in June 1998 with Vanetik &
Associates, Inc., which granted an exclusive license to a U.S. corporation to be
formed by Vanetik. In addition to the grant of the license, the Russian License
also provides for certain exclusive rights to negotiate licenses and for certain
rights of first refusal with regard to licenses for various other territories of
the former Soviet Union. In consideration for the grant of the license, A-55 is
to receive a 30% equity interest in the licensee entity to be formed by Vanetik,
which may not be diluted by any further issuances of equity interests by the
licensee without A-55's approval. The Russian License expires on the later of
June 22, 2023 or the date of expiration of the last patent to expire underlying
the A-55 Technology. The Russian License requires an aggregate $20.0 million
territorial license fee cash payment. This amount is due in four separate
payments in the following amounts and on the following dates: $1.0 million on
December 31, 1998; $5.0 million on June 30, 1999; $7.0 million on December 31,
1999; and $7.0 million on June 30, 2000. The Russian License provides for
payment of a 2.0% royalty to A-55 for all sales based on the A-55 Technology in
the Russian Federation, which royalty automatically reduces to 1% after the
$20.0 million territorial license fee has been paid in full. To date, no
royalties have been paid or are payable under this license. A-55 believes that
the current economic climate in the Russian Federation may adversely affect
Vanetik's ability to perform its obligations under the Russian License.
In the long term, royalties and other revenues derived from international
licensees and other strategic relationships may represent a material portion of
A-55's total revenues. To reduce its exposure to foreign exchange risks, A-55
intends to denominate its royalties and other payments in U.S. dollars. If any
revenues from international sources were to become payable in foreign
currencies, they could be subject to fluctuations in currency exchange rates. If
as a result of such currency fluctuations the effective price of A-55's products
were to increase in the local markets, demand for those products could decline,
and could
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have an adverse affect on A-55's revenues. A-55 currently does not use
derivative instruments to hedge foreign exchange rate risk.
In addition, international operations are subject to a variety of risks,
including tariffs, import restrictions and other trade barriers, changes in
regulatory requirements, longer accounts receivable payment cycles, adverse tax
consequences, export license requirements, differing standards regarding the
enforcement of contracts, foreign government regulation, political and economic
instability and changes in diplomatic and trade relationships. Certain countries
in which A-55 currently licenses or may in the future license its A-55
Technology may impose substantial withholding taxes on payments for intellectual
property, which A-55 may not be able to offset fully against its U.S. tax
obligations.
A-55's licensees are subject to many of these risks. The risks associated
with international licenses of A-55's technology may have a direct or indirect
adverse effect on A-55's business, financial condition and results of
operations.
A-55 will continue to selectively pursue opportunities in the international
arena, but believes that its more immediate revenue generating opportunities
exist in the domestic markets.
TESTING AND PERFORMANCE
In the course of developing its products, A-55 has completed a variety of
tests (conducted independently or by A-55) to measure emissions from and
determine the efficacy of A-55 Clean Fuels in an assortment of combustion
applications. The tests described in this section were performed using certain
equipment, fuel, conditions and test protocols. A-55 believes these results are
indicative of general performance characteristics. However, there can be no
assurance that these results will be replicated with other equipment, fuel,
conditions or test methods.
Boiler Testing. Pursuant to a Cooperative Research and Development
Agreement under EPA's Environmental Technology Verification program, in 1997 the
EPA tested A-55 Clean Fuels in a 2.5 million Btu/hour North American Package
Boiler. The emissions of a No. 2 diesel, No. 2 diesel-based A-55 Clean Fuels,
and naphtha-based A-55 Clean Fuels were measured as the boiler was operated at
low, mid, and high loads. Each of the A-55 Clean Fuels tested contained 30%
water by volume and no significant modifications to the boiler were needed to
burn A-55 Clean Fuels. Relative to the No. 2 diesel, NOx emissions were 15% to
34% lower for the No. 2 diesel-based A-55 Clean Fuels, and 33% to 51% lower for
the naphtha-based A-55 Clean Fuels, when measured on an energy equivalent basis.
The hydrocarbon (HC), carbon monoxide (CO), and particulate emissions were too
low for each fuel to draw statistically valid conclusions about differences in
their emissions from the burning of No. 2 diesel or A-55 Clean Fuels.
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The graph below illustrates the average NOx emissions produced in these tests by
No. 2 diesel compared to A-55 Clean Fuels based on both No. 2 diesel and
naphtha.
EPA BOILER TEST: NOX EMISSIONS ANALYSIS
(A-55 CLEAN FUELS VS. NO. 2 DIESEL)
[EPA BOILER TEST: NOX EMISSIONS ANALYSIS GRAPH]
Source: EPA Environmental Technology Verification Test
Research Triangle Park, NC; April 1997
Note: Emissions were measured on an energy equivalent
basis.
A-55 has also conducted its own preliminary testing comparing NOx emissions
from No. 6 fuel oil with Residue-Based A-55 Clean Fuels with 30% water content
by volume. The preliminary testing showed NOx emissions were an average of 40%
lower with Residue-Based A-55 Clean Fuels, when measured on an energy equivalent
basis. The graph below illustrates the average NOx emissions produced in these
tests by No. 6 fuel oil compared to Residue-Based A-55 Clean Fuels as combusted
in a test burner.
A-55 TECHNICAL CENTER TEST: NOX EMISSIONS ANALYSIS
(A-55 CLEAN FUELS VS. NO. 6 FUEL OIL)
A-55 CLEAN FUELS VS. NO. 6 FUEL OIL GRAPH
Source: A-55 Technical Center Test - Reno, NV; May 26-27,
1998
Note: Emissions were measured on an energy equivalent basis.
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Combustion Turbine Testing. Pursuant to a test agreement with the TVA, No.
2 diesel-based A-55 Clean Fuels were tested in August 1997 in a General Electric
MS7OOOB, 54 MW combustion turbine. The TVA test compared No. 2 diesel alone with
No. 2 diesel-based A-55 Clean Fuels with 30% and 35% water by volume. The tests
were conducted at loads of 44 MW, 30 MW and 10 MW. Minor modifications were made
to the unit to allow it to operate with A-55 Clean Fuels. The test results
demonstrated that NOx emissions compared to No. 2 diesel were 53% and 55% lower
with No. 2 diesel-based A-55 Clean Fuels with 30% water by volume and 35% water
by volume, respectively, when measured on an energy equivalent basis. In
addition, the test indicated a net power output gain of two MW when burning A-55
Clean Fuels at base load. The graph below illustrates the average reduction in
NOx emissions produced in these test by No. 2 diesel compared with A-55 Clean
Fuels based on No. 2 diesel.
TVA COMBUSTION TURBINE TEST: NOX EMISSIONS ANALYSIS
(A-55 CLEAN FUELS VS. NO. 2 DIESEL)
A-55 CLEAN FUELS VS. DIESEL GRAPH
Source: Tennessee Valley Authority Test - Colbert Steam Plant, AL;
August 19-21, 1997
*Note: The TVA Combustion Turbine Test was conducted as a real-time
test over a 35-minute period. Diesel fuel was burned for the
first 15 minutes of the test period at which time the Diesel
was replaced with A-55 Clean Fuels for the remainder of the
test. Average NOx emissions for Diesel and A-55 Clean Fuels
were calculated using steady-state operating levels during
minutes 5-15 and 20-30, respectively.
Reburn Testing. In February 1998, A-55 conducted bench scale tests at the
Energy and Environmental Research Corporation's ("EER") facility in California
in order to determine the potential of A-55 Clean Fuels as a reburn fuel in an
electric utility scale application. The tests compared the effectiveness of
natural gas to A-55 Clean Fuels based on naphtha and No. 6 fuel oil, when used
as a reburn fuel to reduce NOx. Each test demonstrated NOx emissions reductions
for A-55 Clean Fuels that were similar to those of natural gas, when compared on
an energy equivalent basis. The graph below illustrates the
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percentage of the NOx reduction experienced in these tests when reburning with
natural gas and A-55 Clean Fuels based on No. 6 fuel oil.
EER REBURN TEST: NOX REDUCTION ANALYSIS
(A-55 CLEAN FUELS VS. NATURAL GAS)
A-55 CLEAN FUELS VS. NATURAL GAS GRAPH
Source: Energy and Environmental Research Reburn Test - Irvine CA;
February 18-19, 1998
Note: Initial NOx levels were 800 ppm prior to the addition of
Natural Gas
and A-55 Clean Fuels as reburn fuels.
In May 1998, A-55 contracted with EER to conduct a larger pilot scale test
using A-55 Clean Fuels as a reburn fuel and both natural gas and coal as base
fuels. The test results generally confirmed the previous bench scale test
results described above, demonstrating that NOx reductions in excess of 70%
could be achieved using A-55 Clean Fuels to provide approximately 20% of the
total combustion's Btu content.
Internal Combustion Engine Testing. A-55 has conducted numerous tests to
measure emissions, power, performance and fuel consumption in a variety of
internal combustion diesel and gasoline engines through a combination of
in-house, independent laboratories and in-field customer testing. Independent
tests, including those conducted by the California Truck Testing Services and
the Southwest Research Institute on diesel engines operating on A-55 Clean
Fuels, have shown significant reductions in NOx and particulates, as well as
soot and smoke, without compromising engine horsepower or torque. Tests on the
use of A-55 Clean Fuels in spark-ignited (gasoline) engines conducted mostly at
A-55's testing facility in Reno with its own dynamometers and emission measuring
test equipment, and to a more limited extent by independent laboratories, have
shown similar NOx emissions reducing trends as with diesel engines. While these
tests have shown an increase in emissions of HC and CO in certain applications,
these emissions levels were generally either within EPA standards or were at
levels that A-55 believes can be brought within compliance by the use of
standard emission control equipment.
COMPETITION
Fossil Fuel Suppliers
A-55 believes that its primary competition in most of its target markets
will be the suppliers of No. 6 fuel oil and natural gas. The combustible fuels
market is intensely competitive, supplied by many major international and
national oil, gas and coal
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companies. To the extent that these companies regard A-55 as a competitor, they
can be expected to compete vigorously with A-55. A-55 cannot predict the
reaction of these energy companies to the advancement of A-55 products, although
natural gas suppliers can be expected to regard A-55 as a direct competitor to
the extent A-55 Clean Fuels are successful in displacing significant quantities
of natural gas as a fuel source. A-55 believes that the reaction of coal
suppliers may be at least somewhat favorable in that they may view A-55 Clean
Fuels as a means by which coal-fired plant operators can adopt a cost-effective
reburn strategy to endeavor to comply with ever stricter environmental and
energy regulations while allowing them to continue burning coal as the primary
fuel source. In addition, petroleum refiners may be motivated to use the
Residues that they would otherwise have used to produce and sell No. 6 fuel oil
to instead produce and sell Residue-Based A-55 Clean Fuels.
Alternative Fuels Suppliers; Emissions Control Technologies
A-55 expects to face competition from producers of alternative fuels,
including water and petroleum blends similar to those of A-55, as well as from
the manufacturers of emissions control technologies. Many of these producers and
manufacturers may have significantly greater financial, political and other
resources than A-55. Currently, A-55 is aware of one alternative fuel being
marketed for use in the electricity generating industry. The fuel product,
marketed under the brand name "Orimulsion," is a blend of approximately 70%
bitumen (a high-sulfur tar-like fossil fuel from Venezuela) and 30% water.
Although A-55 believes that Orimulsion is being used commercially by electricity
generators in a number of countries outside the United States, A-55 is not aware
of any U.S. electricity generator that has contracted to purchase Orimulsion in
commercial quantities. Considerable governmental and private efforts have been
devoted to alternative resources, such as natural gas and alcohol-based fuels,
and to emissions control technologies such as catalytic converters. A-55's
success in new markets may depend in part on its ability to effectively
demonstrate to its target consumers that A-55 Clean Fuels offer a more effective
or less expensive alternative to traditional fuels than other alternative fuels
or emissions control technologies.
While a variety of NOx emission control technologies have been developed
over the years for use by coal-fired electricity generating plants, they may be
broadly classified into two primary categories: flue-gas treatment and
combustion modifications. A-55 believes that of the various technologies
available, only a few are currently considered to be reasonably cost effective
to coal-fired electricity generators to achieve compliance with NOx emissions
restrictions.
Flue-Gas Treatment. Among the available flue-gas treatment technologies,
A-55 believes that operators of coal-fired electricity generating plants
generally consider either Selective Catalytic Reduction ("SCR") or Selective
Non-Catalytic Reduction ("SNCR") to be the two leading options. SCR is an
effective post-combustion NOx control technology used with coal-fired
electricity generating boilers, employing a catalyst to enhance the reaction
between ammonia or urea and NOx, SNCR is a newer technology that relies upon
higher flue gas temperatures to effect the reaction between ammonia or urea and
NOx, eliminating the need for a catalyst.
Combustion Modifications. Among the available combustion modifications to
reduce NOx emissions, A-55 believes that operators of coal-fired electricity
generating plants will generally consider reburning and co-firing to be the
leading contenders. The co-firing of
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coal with other fuels such as natural gas, wood chips or other waste products
has been employed in several electricity generating boilers. This technique can
reduce the overall generation of NOx relative to the amount of coal that is
replaced. Whether this NOx control strategy is available to an electricity
generator on a cost-effective basis depends on the type of boiler, its ability
to handle multiple fuels and the availability of the alternative fuel. For a
discussion of reburning as a NOx control strategy, see "--Target
Markets--Electricity Generation Industry--Coal."
PATENTS AND INTELLECTUAL PROPERTY PROTECTION
The patent rights embodying a portion of the A-55 Technology are licensed
exclusively to A-55 from the inventor, R. W. Gunnerman. These patent rights
consist of one issued U.S. patent, four pending U.S. patent applications, 36
granted patents in foreign countries and 42 pending patent applications in
foreign countries. The foreign patents and applications cover 52 different
foreign countries, including countries in North and South America, Europe, the
Far East, the Middle East, the African continent and the former Soviet
republics. The current U.S. patent was reissued on May 14, 1996 to include
broader claims than in the original patent issued in October 1992, which broader
claims reflected the continuing development and expansion of A-55's technology.
The existing patent covers the combustion of water and hydrocarbon blends in
internal combustion engines, which may become important to the competitive
position of A-55 in the United States at such time as A-55 elects to focus its
sales and marketing efforts on the transportation sector where internal
combustion engines tend to be dominant. That patent will expire in June 2009.
One of the pending patent applications covers the use of such blends as fuels to
be burned in electricity generating plants. Each of the four pending U.S. patent
applications covers the production of a water-phased blended fuel.
The granted patents and pending patent applications in foreign countries
generally cover both the combustion of a water and hydrocarbon blend in internal
combustion engines and the production of a water-phased blended fuel. None of
the patents or pending applications have ever been challenged or opposed in any
jurisdiction, either U.S. or foreign. However, as is common in the patent
application process, the Patent Office has raised certain challenges with
respect to the four patent applications pending in the U.S. and A-55 is unable
to predict the likelihood that any of the applications will be approved.
Research efforts are continually under way to further develop the A-55
Technology, and new patents will be applied for as further discoveries and
improvements are made.
A-55 attempts to protect its trade secrets and other proprietary
information through agreements with licensees, proprietary information
agreements with employees and consultants and other security measures. A-55 also
relies on trademarks and trade secret laws to protect its intellectual property.
Despite these efforts, there can be no assurance that others will not gain
access to A-55's trade secrets, or that A-55 can meaningfully protect its
intellectual property. In connection with the dissolution in October of 1996 of
its joint venture with Caterpillar, Inc. ("Caterpillar"), A-55 granted
Caterpillar certain rights to use certain of the A-55 Technology in connection
with internal combustion engines and A-55 is currently involved in certain
litigation with Caterpillar regarding technology-related issues. In addition,
effective trade secret protection may be unavailable or limited in certain
foreign countries. Although A-55 intends to protect its rights vigorously, there
can be no assurance that such measures will be successful.
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<PAGE> 45
There can be no assurance that the pending U.S. or foreign patent
applications or any future U.S. or foreign patent applications will be approved,
that any issued patents will protect A-55's intellectual property or will not be
challenged by third parties, or that the patents of others will not have a
material adverse effect on A-55's business, financial condition and results of
operations. Litigation may be necessary in the future to enforce A-55's patent
rights or other intellectual property rights, to protect A-55's trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity, and there can be no
assurance that A-55 would prevail in any future litigation. Any such litigation,
whether or not determined in A-55's favor or settled by A-55, could be costly
and would divert the efforts and attention of A-55's personnel from normal
business operations, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
See "Risk Factors--Limited protection of A-55's intellectual property."
License Agreement with Caterpillar. Pursuant to the October 1996 agreement
dissolving a joint venture that A-55 had formed in July 1994 with Caterpillar to
commercialize advanced fuels for use in internal combustion engines, including
spark-ignited (gasoline), compression-ignited (diesel) and turbine engines,
Caterpillar was granted (i) exclusive rights to engine-related technology with
respect to the production and conversion of Caterpillar engines, (ii)
non-exclusive rights to engine-related technology with respect to the conversion
of non-Caterpillar engines to consume aqueous fuel produced by Caterpillar
(until October 24, 1999, these non-exclusive rights become operative only under
certain circumstances), (iii) non-exclusive rights to fuel-related technology to
make, have made, use or sell (but not license) gasoline- or naphtha-based
aqueous fuels, but only for Caterpillar diesel and natural gas engines, (iv)
non-exclusive rights to the fuel-related technology to sell diesel-based aqueous
fuel in all applications for products of the kind sold by Caterpillar, and (v)
beginning on October 24, 2001, non-exclusive rights to the fuel-related
technology to license diesel-based aqueous fuel in all applications for products
of the kind sold by Caterpillar. A-55 and Caterpillar also agreed to pay each
other a royalty in the amount of $0.005 per gallon of aqueous fuel (or the
equivalent in surfactant) sold by it directly, through license, by sale of
technology or by other action. The first royalty payment is not payable until a
party and its licensees have cumulatively sold 2.0 billion gallons of aqueous
fuel (or the equivalent in surfactant). To date, under various test programs
A-55 has sold less than 100,000 gallons of aqueous fuel for use in internal
combustion engines. A-55 is not currently targeting this market and does not
expect to become liable for royalty payments under the Caterpillar agreement in
the short to medium term. The royalty obligation is effective for ten years from
the date the first royalty payment is due. The parties also agreed that, should
A-55 or Caterpillar enter into an arrangement with an oil company for the
manufacture or distribution of diesel-based aqueous fuel and receive a lump sum
payment in connection therewith, the other party would be entitled to 20% of the
lump sum payment. See "--Legal Proceedings."
GOVERNMENT REGULATION
A-55's operations are subject to a variety of federal, state and local laws
and regulations governing the release or discharge of pollutants into the air,
soil and the water (including ground water), product specifications, and the
generation, treatment, storage, transportation and disposal of solid and
hazardous waste and materials with hazardous and
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<PAGE> 46
toxic constituents. Such laws generally have become and are becoming
increasingly stringent. As is the case with all companies involved in similar
activities, A-55 faces exposure from actual or potential claims and lawsuits
involving environmental matters, including soil and water contamination, air
pollution and personal injuries or property damage allegedly caused by
substances produced, handled, transported, used, released or disposed of by
A-55.
Over time, A-55's business will involve the production and distribution of
substantially greater quantities of A-55 Additive, and therefore it will be
required to develop and implement more extensive and formal procedures for (i)
the proper handling, storage, and transportation of its finished additive and
the chemical ingredients used in its manufacture; (ii) emission of contaminants
to the ambient air during production, transportation, and storage activities and
discharge of contaminants to a water body or a wastewater treatment facility
during production or storage activities; and (iii) disposal of waste products.
In addition, there may be state or local requirements applicable to the location
of production or storage facilities which may apply to the Company's production
and distribution operations.
During the remainder of the current fiscal year and the next fiscal year we
expect to manufacture all A-55 Additive required to meet projected customer
demand at our nearly complete mixing facility in Sparks, Nevada, which has been
designed to comply with all applicable federal, state and local environmental
laws and regulations. We estimate that the total capital costs for environmental
control facilities at the mixing facility will be approximately $35,000. In the
future, A-55's requirements for additional mixing facilities will depend on the
rate of market acceptance of its products and the location of its future
customers, which we are unable to predict at this time. The rate at which such
facilities are added in the future will be the largest determinant of the amount
of capital costs that A-55 will be required to incur for environmental control
facilities over the next several fiscal years. See "-- Facilities."
See "Risk Factors--A-55 could potentially incur costs and liability
associated with environmental matters."
Fuel used in electric generating boilers, turbines and other stationary
applications is not subject to fuel specification requirements as stringent as
those that apply to fuel sold for use in on-road vehicles. State and local
pollution control agencies regulate fuels used in stationary applications such
as electricity generating units indirectly, by limiting the amount of various
emissions released by them as well as regulating the quantity of sulphur and
other chemicals within the fuel itself prior to its combustion. Fuels used by
electricity generators are regulated through operating permits issued by state
or local agencies or the EPA. Operating permits include limitations on
emissions, visibility (opacity), control technology limits and operating limits
which involve fuel type, hours of operation, maximum fuel feed rate and maximum
heat value. Some electricity generators that plan to burn A-55 Clean Fuels may
require a modification of their relevant operating permits before they can do
so.
The use of fuels in automobile and other internal combustion engine
vehicles is highly regulated in the United States, primarily by the federal
government although certain states also have adopted regulations applicable to
such vehicles. Before A-55 Clean Fuels are marketed broadly for this purpose,
A-55 may need to demonstrate in official testing situations that these fuels
satisfy certain requirements. It may also be required to show that
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<PAGE> 47
adjusting engines to operate on A-55 Clean Fuels will not compromise
anti-tampering regulations that are designed to maintain the efficacy of
emissions reducing equipment required of on-road vehicles, or obtain either
certification or appropriate waivers of such requirements.
Unanticipated changes in existing regulatory requirements, or the failure
of A-55 to comply with such requirements or adoption of new requirements, could
have a material adverse effect on A-55's business, financial condition and
results of operations. A-55 is also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and hazardous substance
disposal. There can be no assurance that such laws or regulations will not have
a material adverse effect on A-55's business, financial condition or results of
operations.
See "Risk Factors--A-55 requires certain regulatory approvals."
PRODUCTION AND DISTRIBUTION
A-55 currently produces all of its A-55 Additive and small quantities of
A-55 Clean Fuels at its technical center in Reno, Nevada. As market demand for
A-55 Clean Fuels and A-55 Additive increases, A-55 expects to enlarge its
existing facilities and build or acquire new A-55 Additive blending facilities
at strategic locations where market demand is greatest. A-55 generally does not
intend to produce A-55 Clean Fuels in order to directly supply the demands of
customers for the finished fuel product, but it does intend to produce A-55
Additive. A-55 expects that both petroleum refiners and some of the larger
consumers of A-55 Clean Fuels will purchase A-55 Additive directly from A-55 and
its distributors to produce A-55 Clean Fuels.
A-55 does not refine crude oil in order to produce Residues or any other
petroleum product that may be used as a base for A-55 Clean Fuels; nor does it
produce any component of A-55 Additive. Its production of A-55 Additive consists
of blending its ingredients in the proper formulation required for specific
applications. While there are multiple suppliers for Residues, naphtha, diesel,
gasoline, and each of the A-55 Additive ingredients, A-55 is evaluating several
alternatives to secure sources of supply of its raw materials, including
building or acquiring a production facility or entering into strategic alliances
with chemical production facilities or petroleum refiners.
Commercial products similar to A-55 Additive and A-55 Clean Fuels, and
their raw materials, are routinely transported and distributed by tank truck,
rail tank car, barge and ocean-going vessels. Distribution centers and final
destination storage facilities are typically large capacity storage tanks
equipped to properly and safely store petrochemical type products. A-55 plans to
transport, distribute and store A-55 Additive and its raw materials in a manner
consistent with industry best practices and regulatory requirements. The
handling and storage characteristics of A-55 Clean Fuels closely resemble those
of conventional petroleum fuels. See "--Government Regulation."
FACILITIES
A-55's administrative offices are located in a leased building in Reno,
Nevada, containing approximately 45,000 square feet of space. The building is
leased to A-55 by R. W. Gunnerman, for a term expiring on June 30, 2000. See
"Certain Transactions."
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<PAGE> 48
A-55's technical center is located in a facility in Reno, Nevada that is
owned by A-55. The facility covers three acres and includes buildings containing
an aggregate of approximately 25,000 square feet of space.
A-55 is completing a commercial scale A-55 Additive mixing plant located in
a building in Sparks, Nevada that is leased by the Company for a term of three
years. A-55 has designed the 33,000 square foot, 80,000 gallon per day capacity
mixing facility, scheduled for completion and operation by the fourth quarter of
1998, to serve as a template for the construction of other mixing facilities in
the U.S. and abroad.
EMPLOYEES
A-55 currently employs approximately 50 full-time employees. A-55 has not
experienced any work stoppages and believes its relations with its employees are
good. None of A-55's employees is covered by a collective bargaining agreement.
LEGAL PROCEEDINGS
A-55 and R. W. Gunnerman are named defendants in a lawsuit instituted by
Richard J. Schneider in Fayette County, Ohio, Court of Common Pleas on March 29,
1995. In the suit, Mr. Schneider alleges that A-55 and R. W. Gunnerman granted
him an exclusive license to develop, market and sublicense the A-55 Technology
in aviation-related applications pursuant to a letter agreement dated September
20, 1993. In the suit, Mr. Schneider seeks, among other things, specific
performance by the Company and R. W. Gunnerman of their obligations under the
letter agreement, including providing him with the formulation of A-55 Additive.
After a court trial, judgment was entered on June 19, 1997, ordering that (i)
A-55 and R. W. Gunnerman perform their obligations under the letter agreement
and (ii) A-55 and R. W. Gunnerman pay the court costs of the suit. On July 1,
1997, the Company and R. W. Gunnerman filed a Notice of Appeal with the Court of
Appeals of Fayette County, Ohio, Twelfth Appellate District. Mr. Schneider then
filed a Motion of Enforcement of the June 19 judgment with the trial court.
After a hearing on November 25, 1997, the trial court entered judgment, granting
Mr. Schneider's motion and required A-55 and R. W. Gunnerman to disclose the
formulation of A-55 Additive to Mr. Schneider. The Court also required the
posting of a $1,000,000 bond for damages suffered by Mr. Schneider as a result
of A-55's failure to produce the formulation of A-55 Additive, and specified
that Mr. Schneider would be entitled to collect such bond if the June 19
judgment was affirmed on appeal. A-55 and R. W. Gunnerman also appealed the
November 25 judgment to the appellate court. The November 25 and June 19 appeals
were subsequently consolidated. On August 24, 1998, the appellate court affirmed
the trial court's judgments, again ordering that the formulation of A-55
Additive be disclosed to Mr. Schneider. The Court held, however, that the
calculation of $1,000,000 for damages was without specific basis and remanded
the issue of the calculation of damages to the trial court. The Company has not
yet disclosed the formulation of A-55 Additive to Mr. Schneider or provided him
with a license to the A-55 Technology. Mr. Schneider has filed motions to
enforce the June 19 judgment in state district court in Washoe County, Nevada.
A-55 and Mr. Gunnerman intend to appeal the August 24 decision of the appellate
court. There can be no assurance that A-55 and R. W. Gunnerman will be
successful in their appeal, or that, if A-55 and R. W. Gunnerman are successful
in their appeal, that A-55 and R. W. Gunnerman would be successful in any
subsequent trial.
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<PAGE> 49
In a separate action, on July 14, 1997, A-55 sued Mr. Schneider in state
district court in Washoe County, Nevada, alleging that Mr. Schneider breached a
Secrecy/Confidential Disclosure Agreement entered into by A-55 and Mr. Schneider
on September 17, 1993. In the suit, A-55 seeks injunctive relief and unspecified
monetary damages. Mr. Schneider has filed an answer to the claim and the parties
are currently in discovery.
In a third action, on January 22, 1998, A-55 sued Mr. Schneider in federal
district court in Reno, Nevada, alleging that he infringed A-55's trademarks. In
its complaint, A-55 seeks unspecified damages and has requested injunctive
relief. The Court issued a preliminary injunction against Mr. Schneider's use of
A-55's trademarks, subject to the posting of a $100,000 bond by A-55, which it
has posted.
In early 1998, A-55 learned that Caterpillar had recently received title by
assignment to four U.S. patents related to the use of aqueous fuel in internal
combustion engines. A-55 believes that these patents cover inventions developed
all or in part by R. W. Gunnerman and should have been assigned to A-55 as a
result of the dissolution of the joint venture between A-55 and Caterpillar. In
April 1998, A-55 initiated steps towards arbitration, pursuant to the terms of
the parties' joint venture agreement. In May 1998, Caterpillar filed suit in
federal court in Peoria, Illinois against A-55, seeking a declaration that
Caterpillar owns all right, title, and interest in and to the disputed patents.
Shortly thereafter, A-55 filed a demand for arbitration in Denver, Colorado
under the terms of the joint venture agreement. At the same time, A-55 filed a
motion in the federal district court in Illinois to dismiss or stay the action
and to compel Caterpillar to participate in the arbitration in Denver. Recently,
the Court in Illinois granted A-55's motion and has ordered Caterpillar to
participate in the arbitration and has stayed the Illinois action. Caterpillar
has appealed the Court's ruling.
A-55 is not presently a party to any other pending material legal
proceedings. A-55 may be subject from time to time to various other legal
proceedings which arise in the ordinary course of its business. Specifically,
A-55 anticipates that it may be necessary, from time to time, to protect the
proprietary intellectual property rights underlying the A-55 Technology against
third-party infringement. A-55 intends to aggressively pursue legal remedies
against any such infringers. A-55 anticipates that it may incur significant
legal and other expenses related to the protection of its proprietary
intellectual property. In addition, A-55 may incur significant legal expenses in
connection with other future litigation which may arise in the course of its
business. Any prolonged or complex litigation could have an adverse effect on
A-55's financial condition and results of operations, as well as result in the
diversion of management's attention from day-to-day business operations.
Consumers and others who purchase A-55's products or use A-55 Clean Fuels
may bring liability claims against A-55 allegedly resulting from the use of
these products. A-55 does not currently have product liability insurance and may
not be able to obtain and maintain adequate levels of such insurance in the
future on acceptable terms or in sufficient amounts to protect it.
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<PAGE> 50
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and senior employees of A-55, Inc. and
their ages as of the date of this prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rudolf W. Gunnerman.................. 70 Chief Executive Officer and Chairman of the
Board
Thomas N. Harvey..................... 49 President
Daniel J. Klaich..................... 48 Executive Vice President, Policy and
Planning, Secretary and Director
Peter W. Gunnerman................... 32 Executive Vice President, Business
Development and Director
Patrick M. Grimes.................... 31 Chief Financial Officer
Dr. William C. Tao................... 40 President, Power Markets Division
Dr. Thomas M. Houlihan............... 59 Senior Vice President, Power Markets
Division
Kristina Gunnerman................... 36 Vice President, Personnel
Alexander J. Paior................... 51 Director of International Development
</TABLE>
- -------------------------
Rudolf W. Gunnerman is the founder of A-55, L.P. and the principal
stockholder of A-55, Inc. and has been Chief Executive Officer of A-55, L.P.
since its inception in November 1992 and of A-55, Inc. since it was formed in
July 1997. He was elected A-55, Inc.'s Chairman of the Board in September 1997.
Mr. Gunnerman has over 40 years of experience in the research and development of
various commercial technologies and products, primarily within the energy
industry, and most recently in the field of clean fuels and combustion
technology.
Thomas N. Harvey has been President of A-55, Inc. and A-55, L.P. since May
1998. From January 1992 to May 1998 he served as Chairman of the Board of the
Global Environment & Technology Foundation (a not-for-profit organization which
has provided public service in environmental and technology commercialization
for ten years) and continues to serve as a director of that organization. From
October 1996 to May 1998, Mr. Harvey was Senior Vice President of Business
Development for The Columbus Group, which represents U.S. and foreign interests
in securing business development opportunities and arranging investment
financing in the U.S. and abroad. From May 1997 to May 1998, Mr. Harvey was the
Chairman of the Board of Roy Weston, Inc., a publicly held environmental
engineering company, and continues to serve as a director of such company. Mr.
Harvey is currently the President and a director of Globequest International,
Ltd., a family owned consulting business. Mr. Harvey received an engineering
degree from West Point in 1971, a masters degree in international relations from
Boston University in 1973, and an M.B.A. degree from the University of Puget
Sound in 1979.
Daniel J. Klaich has been an officer of A-55, Inc. since September 1997 and
of A-55, L.P. since January 1994, currently as Executive Vice President, Policy
and Planning and Secretary. He has been a director of A-55, Inc. since its
inception. From January 1980 to December 1993, he was a partner in the Reno,
Nevada law firm of Walter, Key, Maupin, Oats, Cox, Klaich & LeGoy, which served
as A-55, L.P.'s primary outside counsel. Mr. Klaich received a B.S. in
Accounting from the University of Nevada in 1972, a law
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<PAGE> 51
degree from the University of Washington in 1975, and an L.L.M. degree in
taxation from the New York University School of Law in 1978.
Peter W. Gunnerman has been an officer of A-55, Inc. since September 1997
and of A-55, L.P. since its inception in November 1992 (currently as Executive
Vice President of Business Development) and a director of A-55, Inc. since its
inception. Mr. Gunnerman has worked on the development of the A-55 Technology
with his father, Rudolf W. Gunnerman, since 1988. Mr. Gunnerman received a B.A.
in History and German from the University of Oregon in 1988.
Patrick M. Grimes has been Chief Financial Officer of A-55, Inc. and A-55,
L.P. since October 1998. Prior to that, Mr. Grimes served as Controller of A-55
beginning in August 1997. From November 1991 to August 1997, Mr. Grimes was
employed by Ernst & Young LLP. Mr. Grimes received a B.S. in Business
Administration from California State University of Sacramento in 1990. Mr.
Grimes is a certified public accountant.
Dr. William C. Tao joined A-55 as the President of the Power Markets
Division in July 1998. Between October 1985 and December 1997, Dr. Tao worked at
the Lawrence Livermore National Laboratory, most recently as the Director of
International Program Development. In that capacity, Dr. Tao worked with the
World Bank and the Asian Development Bank on infrastructure building. Dr. Tao
has served on the President's Council on Sustainable Energy since January 1996.
Dr. Tao received a degree in Chemical Engineering and Nuclear Engineering from
the University of California in 1980. He received his masters degree from
Stanford University in 1981 and his Ph.D. also from Stanford University in 1986.
Dr. Thomas M. Houlihan joined A-55 in July 1998 as Senior Vice President of
the Power Markets Division. Between January 1994 and September 1997, Dr.
Houlihan was an American Society of Mechanical Engineers Executive Fellow in the
White House Science Office and The Interagency Environmental Technology Office.
At the White House Science Office, Dr. Houlihan worked with personnel from 20
federal agencies to produce the position paper on sustainable development. Dr.
Houlihan received his B.S. degree in Mechanical Engineering from Manhattan
College in 1957 and his Ph.D., also in Mechanical Engineering, from Syracuse
University in 1961.
Kristina Gunnerman joined A-55 in July 1997 as its Director of Human
Resources. Prior to joining A-55 she was engaged in the practice of law in
Sacramento, California, as Staff Attorney to a law and motion judge of the
California Superior Court. Ms. Gunnerman received her B.A. degree in German and
Political Science from the University of Oregon in 1983 and her law degree from
the University of California, Hastings College of the Law, in 1988.
Alexander J. Paior has served as Director of International Development of
A-55 since May 1998. Between September 1996 and May 1998, he was a full-time
consultant to A-55 on international business development. Prior to September
1996, Mr. Paior practiced law and investment banking in Australia for over 20
years, including international commercial transactions in both Australia and
Southeast Asia. Between October 1995 and June 1996, Mr. Paior was retained by
the South Australian government to assist in the disposal of government assets
in excess of US $1 billion. Mr. Paior received a Bachelor of Laws from
University of Adelaide in 1974.
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Officers are elected annually by the board of directors and serve at the
discretion of the board. The board of directors of A-55, Inc. has three members,
each of whom are employees of A-55, Inc. All of the current directors serve
until the next annual stockholders' meeting or until their successors have been
duly elected and qualified. The board expects to appoint at least two
non-employee directors to the board of directors within ninety days of
consummation of the offering. There are no family relations between the
directors and executive officers except that R. W. Gunnerman is the father of
Peter Gunnerman and Kristina Gunnerman.
A-55 is dependent on the active participation of its principal executive
officers and the its ability to continue to attract and retain highly capable
management personnel. The loss of the services of key personnel could have a
material adverse affect on A-55.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors of A-55, Inc. intends to establish an audit
committee and a compensation committee after consummation of the offering. The
board anticipates that the audit committee will consist of non-employee
directors and Mr. Klaich and will serve to: (i) make recommendations to the
board of directors of the independent auditors who conduct the annual
examination of A-55's accounts; (ii) review the scope of the annual audit and
periodically meet with A-55's independent auditors to review their findings and
recommendations; (iii) approve major accounting policies or changes to those
policies; and (iv) periodically review A-55's principal internal financial
controls. The board expects that the compensation committee will consist of two
or more non-employee directors and will serve to review the compensation of
executive officers of A-55 and make recommendations regarding such compensation
to the board of directors.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid or accrued by A-55 for the
year ended December 31, 1997 to its Chief Executive Officer and each of its two
other executive officers with annual compensation in excess of $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY
--------------------------- --------
<S> <C> <C>
Rudolf W. Gunnerman.................................. 1997 $375,000
Chief Executive Officer
Daniel J. Klaich..................................... 1997 125,000
Executive Vice President, Policy and Planning
Peter W. Gunnerman................................... 1997 125,000
Executive Vice President, Business Development
</TABLE>
COMPENSATION OF DIRECTORS
Directors of A-55, Inc. have not received cash for services provided as
board or committee members; however, A-55, Inc. anticipates that compensation
for non-employee directors will commence following the offering at levels to be
determined by the board. Directors are also reimbursed for expenses incurred in
attending meetings of the board or committees thereof.
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<PAGE> 53
EMPLOYMENT AGREEMENTS
A-55 has entered into an at-will employment agreement with Mr. Thomas N.
Harvey. Pursuant to this agreement, Mr. Harvey is entitled to an annual base
salary of $250,000 for his first year of employment and $300,000 each additional
year. Mr. Harvey is also entitled to: (i) a one-time grant of options to
purchase 150,000 shares of the common stock at a per share exercise price equal
to the offering price, such options to vest over five years; and (ii) annual
grants of non-qualified stock options in amounts and under terms consistent with
options granted to other senior officers of A-55, subject to approval of the
board of directors. The agreement may be terminated at will or for cause (as
defined in the agreement) and provides that if he is terminated without cause,
or resigns for good reason (as defined in his agreement), he will be entitled to
be paid severance equal to three years of his base salary if such termination
occurs on or before March 1, 2003, and one year of his base salary if such
termination occurs after such date. The agreement contains a covenant not to
solicit employees or customers of A-55 for a period of two years following the
termination of employment.
A-55 has entered into an employment agreement with Dr. William Charles Tao.
Pursuant to this agreement, Dr. Tao is entitled to an annual base salary of
$240,000 per year. The agreement may be terminated upon Dr. Tao's death, his
failure to satisfactorily perform his duties, or for economic circumstances
beyond the control of A-55. Mr. Tao has agreed not to become directly or
indirectly engaged in or involved with any business competitive or similar to
that of A-55 during the term of the agreement. The agreement also provides that
Dr. Tao may purchase from R.W. Gunnerman 2% of the total shares of A-55 at a
price equal to 90% of the offering price. Such options vest in June 2001 subject
to acceleration upon the satisfactory completion of certain performance
criteria.
A-55 has entered into an at-will employment agreement with Dr. Thomas
Houlihan. Pursuant to this agreement, Dr. Houlihan is entitled to an annual base
salary of $180,000 per year.
1998 STOCK OPTION PLAN
At or promptly after the effectiveness of the Reorganization, A-55, Inc.
intends to adopt a stock option plan (the "1998 Stock Option Plan") intended to
provide directors, officers, employees and consultants of A-55 with an
opportunity to invest in A-55 and to advance the interests of A-55 and its
stockholders by enabling A-55 to attract and retain qualified personnel. The
1998 Stock Option Plan will provide for the granting of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and nonqualified stock options. The maximum number of shares of common
stock that may be subject to options granted under the 1998 Stock Option Plan
will not exceed, in the aggregate, the number of shares equal to % of the
shares of common stock outstanding immediately following consummation of the
offering. Shares of common stock that are attributable to grants that have
expired, terminated or been cancelled or forfeited will be available for
issuance or use in connection with future grants. The compensation committee
will administer the 1998 Stock Option Plan and select the individuals who will
receive awards and establish the terms and conditions of such awards.
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<PAGE> 54
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Pursuant to the provisions of the Delaware General Corporation Law, A-55,
Inc. has adopted provisions in its certificate of incorporation (the
"Certificate") which provide that directors of A-55, Inc. shall not be
personally liable for monetary damages to A-55, Inc. or its stockholders for a
breach of fiduciary duty as a director, except for liability as a result of (i)
a breach of the director's duty of loyalty to A-55, Inc. or its stockholders;
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (iii) an act related to the unlawful stock
repurchase or payment of a dividend under Section 174 of Delaware General
Corporation Law; and (iv) transactions from which the director derived an
improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The bylaws require A-55, Inc. to indemnify its officers and directors, and
permits A-55, Inc. to indemnify its other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. A-55, Inc. intends
to enter into separate indemnification agreements with its directors and
officers which may, in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require A-55, Inc., among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them in which they
could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
At present, other than the legal proceedings described in "Business-Legal
Proceedings," there is no pending litigation or proceeding involving a director,
officer, employee or agent of A-55, Inc. where indemnification will be required
or permitted. A-55, Inc. is not aware of any other threatened litigation or
proceeding which may result in a claim for such indemnification.
CERTAIN TRANSACTIONS
The partners of A-55, L.P. have approved the Reorganization. Pursuant to
the Reorganization, the partnership interests in A-55, L.P. are to be converted
into all of the shares of common stock of A-55, Inc. prior to consummation of
the offering. All such partnership interests outstanding will be converted on
the same conversion ratio, and Messrs. R. W. Gunnerman, Daniel J. Klaich and
Peter W. Gunnerman will receive, respectively, shares representing 78.7%, 3.0%
and 3.0% of the total shares of A-55, Inc. outstanding immediately prior to the
completion of the offering. See "Principal Stockholders."
The A-55 Technology is owned by R. W. Gunnerman, who licensed the
technology to A-55 pursuant to an Exclusive License Agreement dated January 3,
1994, by and among R. W. Gunnerman and A-55, L.P. (as subsequently amended, the
"Technology License"). Pursuant to the Technology License, R. W. Gunnerman
granted A-55 an exclusive license to exploit the A-55 Technology in return for a
93.8% interest in A-55, L.P. The Technology License provides for no royalty or
other payments to R. W. Gunnerman. The Technology License will be amended and
restated in connection with consummation of the Reorganization.
53
<PAGE> 55
At October 5, 1998, A-55, L.P. had notes payable and related accrued
interest of approximately $19.1 million to R. W. Gunnerman pursuant to several
promissory notes of A-55, L.P. payable to R. W. Gunnerman. The notes are payable
on demand and bear interest at 8.5% per annum. In addition, in connection with
the Reorganization, A-55, L.P. will distribute $2,145,300 in cash to a specified
class of limited partners and expects to obtain the funds required for those
distributions under additional notes payable to R.W. Gunnerman. A-55 intends to
repay all of such amount with a portion of the net proceeds from the Offering.
See "Use of Proceeds."
In connection with the settlement in October 1998 of certain litigation
brought by a third party against R. W. Gunnerman, A-55, L.P. and A-55, Inc., R.
W. Gunnerman agreed to repay $11.5 million to the third party, $2.0 million of
which has been paid. The remaining $9.5 million is payable on or before April
30, 1999 and is secured by real property owned by R. W. Gunnerman as well as a
security interest in 51% of the limited partners' interest in A-55, L.P. and 51%
of the outstanding voting stock in A-55, Inc. Of R. W. Gunnerman's settlement
payment, $1.5 million relates to the repayment to the third party of amounts
previously advanced by the third party to A-55, L.P. The $1.5 million is
included in the notes payable to R. W. Gunnerman.
From time to time A-55 utilizes for corporate travel purposes a plane owned
by Starbright Charter, Ltd., a corporation wholly owned by R. W. Gunnerman.
Through October 31, 1998, A-55 has paid Starbright Charter, Inc. approximately
$258,000. A-55 believes that the amounts paid for such services do not exceed
the fair market value thereof.
A-55 leases office facilities at 5270 Neil Road, Reno, Nevada, from R. W.
Gunnerman pursuant to a lease dated April 16, 1997. The lease requires monthly
rental payments of approximately $63,000 through April 2000. A-55 believes that
the amounts paid for such facilities do not exceed the fair market rental
thereof.
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<PAGE> 56
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information about the beneficial
ownership of A-55, Inc.'s common stock as of December 1, 1998, and as adjusted
to reflect the sale by A-55, Inc. of the shares offered upon the completion of
the offering (i) by each person who is known by A-55, Inc. to own beneficially
more than five percent (5%) of the outstanding shares of common stock, (ii) by
each of A-55, Inc.'s directors, (iii) by each of the Named Executive Officers,
(iv) by all directors and executive officers as a group. The table gives effect
to the Reorganization. Except as otherwise indicated, A-55, Inc. believes that
the beneficial owners of the securities listed below, based on information
provided by such owners, had sole investment and voting power with respect to
the common stock shown below as being beneficially owned by them, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED AFTER
PRIOR TO THE OFFERING THE OFFERING(1)
NAME OF STOCKHOLDER --------------------- -------------------
------------------- NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C>
Rudolf W. Gunnerman(2)................. 78.7% %
Daniel J. Klaich....................... 3.0
Peter W. Gunnerman..................... 3.0
All directors and executive officers as
a group (9 persons).................. 85.7% %
</TABLE>
- -------------------------
(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Includes shares held by RWG, Inc., a Nevada corporation and
general partner of the Predecessor, of which R. W. Gunnerman is the sole
stockholder.
55
<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon consummation of the offering, A-55, Inc. will have authorized capital
stock of shares consisting of shares of common stock, $0.001
par value, and shares of preferred stock, $0.001 par value. As of June
30, 1998, giving effect to the Reorganization, shares of common stock
were outstanding, held by 89 holders of record, and no shares of preferred stock
were outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock
that may be issued, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available for the payment of dividends. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
A-55, Inc., the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and liquidation preferences of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock to be issued upon completion of
the offering will be fully paid and non-assessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue up to shares of preferred stock
in one or more series and to designate the dividend rate, voting rights and
other rights, preferences and restrictions of each series, any or all of which
may be greater than the rights of the common stock. A-55, Inc. has no present
plans to issue any shares of preferred stock.
One of the effects of undesignated preferred stock may be to enable the
board to discourage an attempt to obtain control of A-55, Inc. by means of a
tender offer, proxy contest, merger or otherwise and to protect the continuity
of A-55, Inc.'s management. The issuance of shares of preferred stock may
adversely affect the rights of holders of common stock. For example, preferred
stock issued by A-55, Inc. may rank prior to the common stock as to dividend
rights, liquidation preference or both, may have full or limited voting rights
and may be convertible into shares of common stock. Accordingly, the issuance of
shares of preferred stock may discourage bids for the common stock or may
otherwise adversely affect the market price of the common stock.
CLASSIFIED BOARD OF DIRECTORS; FILLING VACANCIES
The Certificate provides that the board is divided into three classes and
that the number of directors in each class shall be as nearly equal as is
possible based upon the number of directors constituting the entire board. The
Certificate effectively provides that the term of office of the first class will
expire at the annual meeting of stockholders following the date of this
prospectus, the term of office of the second class will expire at
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<PAGE> 58
the second annual meeting of stockholders following the date of this prospectus,
and the term of office of the third class will expire at the third annual
meeting of stockholders following the date of this prospectus. At each annual
meeting of stockholders, successors to directors of the class whose term expires
at such meeting will be elected to serve for three-year terms and until their
successors are elected and qualified.
The classification of directors has the effect of making it more difficult
for stockholders to change the composition of the board. At least two annual
meetings of stockholders, instead of one, will generally be required to effect a
change in a majority of the board. Such a delay may help to provide the board
with sufficient time to analyze an unsolicited proxy contest, a tender or
exchange offer or any other extraordinary corporate transaction. However, such
classification provisions could also have the effect of discouraging a third
party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of A-55, Inc., even though such an attempt might be
beneficial to A-55, Inc. and its stockholders. The classification of the board
could thus increase the likelihood that incumbent directors will retain their
positions.
Under Delaware law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. The Certificate does not override this provision.
The Certificate does provide that, subject to the rights of any holders of
preferred stock, newly created directorships resulting from an increase in the
authorized number of directors or vacancies on the board resulting from death,
resignation, retirement, disqualification or removal of directors or any other
cause may be filled only by the board (and not by the stockholders unless there
are no directors in office), provided that a quorum is then in office and
present, or by a majority of the directors then in office, if less than a quorum
is then in office, or by the sole remaining director. Accordingly, the board
could prevent any stockholder from enlarging the board and filling the new
directorships with such stockholder's own nominees.
The provisions of the Certificate governing the removal of directors and
the filling of vacancies may have the effect of discouraging a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
gain control of A-55, Inc., or of attempting to change the composition or
policies of the board, even though such attempts might be beneficial to A-55,
Inc. or its stockholders. These provisions of the Certificate could thus
increase the likelihood that incumbent directors will retain their positions.
STOCKHOLDER MEETING PROVISIONS
The bylaws provide that (subject to the rights of any holders of preferred
stock) (i) only a majority of the board, the Chief Executive Officer or a duly
appointed committee of the board will be able to call a special meeting of
stockholders; and (ii) following the offering, stockholder action may be taken
only at a duly called and convened annual or special meeting of stockholders and
may not be taken by written consent. These provisions, taken together, prevent
stockholders from forcing consideration by the stockholders of stockholder
proposals over the opposition of the board, except at an annual meeting.
The bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for election as director, or to bring other business
before an annual meeting of stockholders of A-55, Inc. (the "Notice Procedure").
The Notice Procedure provides that, subject to the rights of any holders of
preferred stock, only
57
<PAGE> 59
persons who are nominated by or at the direction of the board, any committee
appointed by the board, or by a stockholder who has given timely written notice
to the Secretary of A-55, Inc. prior to the meeting at which directors are to be
elected will be eligible for election as directors of A-55, Inc. The Notice
Procedure provides that at an annual meeting only such business may be conducted
as has been brought before the meeting by, or at the direction of, the board,
any committee appointed by the board, or by a stockholder who has given timely
written notice to the Secretary of A-55, Inc. of such stockholder's intention to
bring such business before such meeting. Under the Notice Procedure, to be
timely, notice of stockholder nominations or proposals to be made at an annual
or special meeting must be received by A-55, Inc. not less than 60 days nor more
than 90 days prior to the scheduled date of the meeting (or, if less than 70
days' notice or prior public disclosure of the date of the meeting is given,
than not later than the 15th day following the earlier of (i) the day such
notice was mailed or (ii) the day such public disclosure was made). These
notices must contain certain prescribed information.
The Notice Procedure affords the board an opportunity to consider the
qualifications of proposed director nominees or the merit of stockholder
proposals, and, to the extent deemed appropriate by the board, to inform
stockholders about such matters, and also provides a more orderly procedure for
conducting annual meetings of stockholders.
Although the bylaws do not give the board any power to approve or
disapprove stockholder nominations for the election of directors or proposals
for action, the foregoing provisions may have the effect of precluding a contest
for the election of directors or the consideration of stockholder proposals and
of discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal, if
the proper advance notice procedures are not followed, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
A-55, Inc. and its stockholders.
DELAWARE LAW
A-55, Inc. is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, subject to
certain exceptions such as the approval of the board of directors and of the
holders of at least two-thirds of the outstanding shares of voting stock not
owned by the interested stockholder. The existence of this provision would be
expected to have an anti-takeover effect, possibly inhibiting attempts that
might result in a premium over the market price for the shares of common stock
held by stockholders.
TRANSFER AGENT
A-55, Inc.'s transfer agent and registrar for its common stock is
.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for the common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of the common stock.
58
<PAGE> 60
Upon consummation of the offering, A-55, Inc. will have outstanding an
aggregate of shares of common stock, assuming (i) the issuance of
shares of common stock offered by A-55, Inc. hereby and (ii) no
exercise of the Underwriters' over-allotment option. Of these shares, the
shares sold in the offering will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares purchased by "affiliates" of A-55, Inc. as that term is defined in Rule
144 under the Securities Act (whose sales would be subject to certain
limitations and restrictions described below).
The remaining shares of common stock held by existing
stockholders were issued and sold by A-55, Inc. in reliance on exemptions from
the registration requirements of the Securities Act. All these shares will be
subject to "lock-up" agreements described below on the effective date of the
offering. Beginning 180 days after the effective date of the offering, these
shares will become eligible for sale upon expiration of lock-up agreements
described below, subject to the limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of common stock then outstanding (approximately
shares immediately after the offering) or (ii) generally, the average weekly
trading volume in the common stock during the four calendar weeks preceding the
required filing of a Form 144 with respect to such sale. Sales under Rule 144
are generally subject to the availability of current public information about
A-55, Inc. Under Rule 144(k), a person who is not deemed to have been an
affiliate of A-55, Inc. at any time during the 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice filing provisions of Rule 144.
All of A-55, Inc.'s stockholders (including A-55, Inc.'s executive officers
and directors), who in the aggregate beneficially own shares of common
stock of A-55, Inc., have agreed that they will not, subject to certain limited
exceptions, directly or indirectly, offer, sell or otherwise dispose of any
shares of common stock or any securities exercisable for any such shares for a
period of 180 days after the effective date of the offering without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
59
<PAGE> 61
UNDERWRITING
Under the terms of, and subject to the conditions contained in the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which this prospectus forms a part, each of the
underwriters named below (the "Underwriters"), for whom Donaldson, Lufkin &
Jenrette Securities Corporation is acting as the representative (the
"Representative"), has severally agreed to purchase, and A-55, Inc. has agreed
to sell to each Underwriter, the number of shares of common stock set forth
opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........
--------
Total............................................
========
</TABLE>
The costs and expenses payable by A-55 in connection with the offering,
other than underwriting commissions and discounts are estimated to be
approximately $ .
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase shares of common stock are subject to certain
conditions, and that, if any of the foregoing shares are purchased by the
Underwriters pursuant to the Underwriting Agreement, all the shares offered
hereby must be purchased.
A-55 has been advised that the Underwriters propose to offer the shares of
common stock directly to the public initially at the price to public set forth
on the cover page of this prospectus, and to certain selected dealers (who may
include the Underwriters) at such public offering price less a selling
concession not in excess of $ per share. The selected dealers may
reallow a concession not in excess of $ per share to certain brokers
and dealers. After the initial public offering, the public offering price, the
concession to selected dealers and the reallowance may be changed by the
Representative.
A-55, Inc. has granted to the Underwriters an option to purchase up to an
additional shares of common stock, at the initial price to
the public less the aggregate underwriting discount, solely to cover
over-allotments. This option may be exercised at any time up to 30 days after
the date of this prospectus. To the extent that the Underwriters exercise such
option, each Underwriter will be committed, subject to certain conditions, to
purchase a number of shares proportionate to such Underwriter's initial
commitment as indicated in the preceding table. If all such shares
are purchased by the Underwriters, the total underwriting discount will be
$ .
A-55 has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments that the Underwriters may be required to make in respect
thereof. Such indemnification provisions would require A-55 to hold the
Underwriters harmless from and against any and all losses, claims, damages,
liabilities and judgments caused by any untrue statement contained in this
prospectus or by any omission to state a material fact herein, except for untrue
statements or omissions based upon information relating to any Underwriter
furnished in writing to A-55 by such Underwriter expressly for use in this
prospectus, and subject to certain other limitations.
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<PAGE> 62
A-55, Inc. and all of its stockholders, including its executive officers
and directors, have agreed with the Underwriters not to offer, sell, pledge,
contract to sell, grant any option, right of warrant to purchase, or otherwise
transfer or dispose of directly or indirectly any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock or
in any manner transfer all or a portion of the economic consequences associated
with the ownership of any common stock for a period of 180 days after the date
of the prospectus without the prior written consent of the Representative and
subject to certain limited exceptions. See "Shares Eligible for Future Sale."
No action has been taken in any jurisdiction by A-55 or the Underwriters
that would permit a public offering of the common stock offered pursuant to the
offering in any jurisdiction where action for that purpose is required, other
than the United States. The distribution of this prospectus and the offering or
sale of the shares of common stock offered hereby in certain jurisdictions may
be restricted by law. Accordingly, the shares of common stock offered hereby may
not be offered or sold, directly or indirectly, and neither this prospectus nor
any other offering material or advertisements in connection with the common
stock may be distributed or published, in or from any jurisdiction, except under
circumstances that will result in compliance with applicable rules and
regulations of any such jurisdiction. Such restrictions may be set out in
applicable prospectus supplements. Persons into whose possession this prospectus
comes are required by A-55 and the Underwriters to inform themselves about and
to observe any applicable restrictions. This prospectus does not constitute an
offer of, or an invitation to subscribe for purchase of, any shares of common
stock and may not be used for the purpose of an offer to, or solicitation by,
anyone in any jurisdiction or in any circumstances in which such offer or
solicitation is not authorized or is unlawful.
The Representative has informed A-55 that the Underwriters do not intend to
confirm sales of common stock offered hereby to any accounts over which they
exercise discretionary authority.
A-55, Inc. has applied to list the common stock on the Nasdaq National
Market under the trading symbol "AQVV."
Prior to the offering, there has been no public market for the common
stock. The initial public offering price for the shares of common stock will be
negotiated between A-55 and the Representative. The factors to be considered in
determining the initial public offering price of the common stock, in addition
to the prevailing market conditions, will be A-55 historical performance,
estimates of the business potential and earnings prospects of A-55, an
assessment of A-55 management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the Underwriters may bid for and purchase shares of
common stock in the open market to cover syndicate short positions. In addition,
the Underwriters may bid for and purchase shares of common stock in the open
market to stabilize the price of the common stock. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The Underwriters are not required to engage in these activities
and may end these activities at any time.
In the ordinary course of its business, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") has entered into an agreement to serve as
financial advisor to A-55.
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<PAGE> 63
As compensation therefor, DLJ may receive, at its option, either cash payable by
A-55 or options to purchase common stock from R.W. Gunnerman.
LEGAL MATTERS
The validity of the shares of common stock offered by A-55, Inc. hereby
will be passed upon for A-55, Inc. by Howard, Rice, Nemerovski, Canady, Falk &
Rabkin, a Professional Corporation, San Francisco, California, which has acted
as counsel to A-55 in connection with the offering. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by Andrews
& Kurth L.L.P., Houston, Texas.
EXPERTS
The balance sheets of A-55, L.P. as of December 31, 1996 and 1997, and the
related statements of operations, partners' capital (deficit) and cash flows for
each of the three years in the period ended December 31, 1997, and the period
from November 1, 1992 (inception) through December 31, 1997, and the results of
operations and cash flows of Advanced Fuels L.L.C. for the periods ended
December 31, 1995 and October 24, 1996 and for the period from July 6, 1994
(inception) through October 24, 1996, and the balance sheets of A-55, Inc. as of
December 31, 1997 and September 30, 1998, included in this prospectus, have been
so included in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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<PAGE> 64
ADDITIONAL INFORMATION
A-55, Inc. has filed with the Commission a registration statement on Form
S-1 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act of 1933, as amended, with
respect to the common stock offered hereby. This prospectus, which forms a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement. For further information with respect to A-55,
Inc. and the common stock, reference is made to the Registration Statement.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference to such exhibit. Copies of the Registration Statement may be
examined without charge at the Public Reference Section of the Commission, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and the Commission's
Regional Offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the Registration Statement can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by
the Commission. Information on the operation of the Public Reference Section of
the Commission may be obtained by calling the Commission at 1-800-SEC-0330. The
Commission maintains a World Wide Web site that contains registration
statements, reports, proxy and information statements and other information
regarding registrants (including the Company) that file electronically with the
Commission. The address of such World Wide Web site is http://www.sec.gov.
A-55, Inc. intends to furnish its stockholders with annual reports
containing financial statements for each fiscal year audited by independent
auditors.
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<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
A-55, INC.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-2
Balance Sheet as of December 31, 1997 and September 30,
1998...................................................... F-3
Notes to Financial Statement................................ F-4
A-55, L.P.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-6
Balance Sheets as of December 31, 1996 and 1997, and
September 30, 1998........................................ F-7
Statements of Operations for the period from November 1,
1992 (inception) to December 31, 1997, and for the years
ended December 31, 1995, 1996 and 1997, and for the nine
months ended September 30, 1997 and 1998.................. F-8
Statements of Partners' Capital (Deficit) for the period
from November 1, 1992 (inception) to December 31, 1997,
and for the years ended December 31, 1995, 1996 and 1997,
and for the nine months ended September 30, 1998.......... F-9
Statements of Cash Flows for the period from November 1,
1992 (inception) to December 31, 1997, and for the years
ended December 31, 1995, 1996 and 1997, and for the nine
months ended September 30, 1997 and 1998.................. F-10
Notes to Financial Statements............................... F-11
ADVANCED FUELS L.L.C.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-21
Statements of Operations for the period from July 6, 1994
(inception) to October 24, 1996 (dissolution), and for the
year ended December 31, 1995, and for the period ended
October 24, 1996 (dissolution)............................ F-22
Statements of Cash Flows for the period from July 6, 1994
(inception) to October 24, 1996 (dissolution), and for the
year ended December 31, 1995, and for the period ended
October 24, 1996 (dissolution)............................ F-23
Notes to Financial Statements............................... F-24
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Pro Forma Combined Balance Sheet as of September 30, 1998... F-26
Pro Forma Combined Statement of Operations for the nine
months ended September 30, 1998........................... F-27
Pro Forma Combined Statement of Operations for the year
ended December 31, 1997................................... F-28
Notes to Pro Forma Balance Sheet and Statements of
Operations................................................ F-29
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
A-55, Inc.
In our opinion, the accompanying balance sheets present fairly, in all
material respects, the financial position of A-55, Inc. at December 31, 1997 and
September 30, 1998 in conformity with generally accepted accounting principles.
This financial statement is the responsibility of A-55, Inc.'s management; our
responsibility is to express an opinion on this financial statement based on our
audits. We conducted our audits of this statement in accordance with generally
accepted auditing standards which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Sacramento, CA
December 3, 1998
F-2
<PAGE> 67
A-55, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Deferred offering costs............................... $157,800 $443,300
-------- --------
Total assets................................ $157,800 $443,300
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to affiliate...................................... $157,800 $443,300
-------- --------
Total liabilities........................... 157,800 443,300
-------- --------
Commitment (Note 4)
Stockholders' equity:
Preferred stock, $0.001 par value; 1,000 shares
authorized, no shares issued or outstanding...... -- --
Common stock, $0.001 par value; 9,000 shares
authorized, no shares issued or outstanding...... -- --
Paid-in capital
Retained earnings................................... -- --
-------- --------
Total stockholders' equity.................. -- --
-------- --------
$157,800 $443,300
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 68
A-55, INC.
NOTES TO FINANCIAL STATEMENT
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
A-55, Inc., a Delaware corporation, has been established to develop,
produce and market environmental technology related to cost-competitive clean
fuels.
A-55, Inc. was formed in July 1997 in anticipation of a merger of certain
entities under common control (the "Reorganization"). The Reorganization will be
undertaken in connection with the planned offering of common stock (the
"Offering").
The balance sheet should be read in conjunction with the historical
Financial Statements of A-55, L.P., included elsewhere in this Prospectus.
FINANCIAL STATEMENT PRESENTATION
The preparation of the balance sheet in conformity with generally accepted
accounting principals 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 balance sheet. Actual
results could differ from those estimates.
STOCK-BASED COMPENSATION
A-55, Inc. will account for stock-based employee compensation arrangements
in accordance with the provisions of APB No. 25 "Accounting for Stock Issued to
Employees", and comply with the disclosure provisions of SFAS No. 123
"Accounting for Stock-Based Compensation". Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of A-55, Inc. stock and the amount an employee must pay to acquire
the stock.
INCOME TAXES
Income taxes are computed using the asset and liability method under which
deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between tax bases and financial reporting
bases of assets and liabilities.
2. DEFERRED OFFERING COSTS AND DUE TO AFFILIATE
Through December 31, 1997 and September 30, 1998, A-55, L.P. has incurred
costs totaling $157,800 and $443,300, respectively, in conjunction with the
Offering. These costs have been transferred to A-55, Inc. by A-55, L.P. and are
reflected as deferred offering costs, with the corresponding liability recorded
as due to affiliate, in the accompanying balance sheets. If the Offering is
consummated, the costs will be deducted from the proceeds from the Offering. If
the Offering is not consummated, the costs will be charged to expense in the
period in which a decision has been made to terminate the Offering. In such
event, the costs would be borne by A-55, L.P.
3. STOCK OPTIONS
Pursuant to an employment agreement, A-55, Inc. will, upon the completion
of the Offering, grant an option to purchase 150,000 shares of A-55, Inc.'s
common stock to an
F-4
<PAGE> 69
A-55, INC.
NOTES TO FINANCIAL STATEMENT (CONTINUED)
employee. The shares will vest ratably over a five year period. The exercise
price of the option will equal the Offering price of A-55, Inc.'s common stock.
In July 1998, R. W. Gunnerman granted a key employee of A-55, L.P. the
option to purchase from R. W. Gunnerman up to a two percent interest in A-55,
Inc., based upon the total issued shares immediately following the Offering, at
a purchase price equal to ten percent below the Offering price of A-55, Inc.'s
common stock. The option will vest in June 2001 and allows for accelerated
vesting based upon completion of certain performance criteria by the employee.
In accordance with APB 25, A-55, Inc. will recognize compensation expense for
the ten percent discount ratably from the date of the Offering through June
2001. To the extent the employee's vesting period is accelerated prior to June
2001, the compensation expense recognized by A-55, Inc. will be adjusted
proportionately.
4. COMMITMENT
A-55, Inc. has entered into an agreement with an entity that will provide
financial advisory services to A-55, Inc. for a period of up to 24 months,
commencing October 1, 1998. The entity will receive up to $2,000,000 for such
services rendered contingent upon the occurrence of one or more transactions as
defined in the agreement. In lieu of any cash payment, the entity may elect to
receive options to purchase up to 1.6 percent of the common stock of A-55, Inc.
from R. W. Gunnerman.
F-5
<PAGE> 70
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
A-55, L.P.
In our opinion, the accompanying balance sheets and the related statements
of operations, of partners' capital (deficit) and of cash flows present fairly,
in all material respects, the financial position of A-55, L.P. (a development
stage enterprise) at December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 and the period from November 1, 1992 (inception) through
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the management of A-55,
L.P.; our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards, which require that we plan and
perform the audits 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 financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Sacramento, CA
December 3, 1998
F-6
<PAGE> 71
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1996 1997 1998
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.............................. $ 795,500 $ 783,800 $ 1,743,500
Inventories....................... -- 97,700 75,000
Other current assets.............. 6,600 18,400 5,000
Receivable from affiliate......... -- 157,800 443,300
----------- ------------ ------------
Total current assets...... 802,100 1,057,700 2,266,800
Property and equipment, net......... 1,487,200 1,443,500 2,032,900
Intellectual property, net.......... 3,362,000 2,175,400 1,285,500
----------- ------------ ------------
$ 5,651,300 $ 4,676,600 $ 5,585,200
=========== ============ ============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Trade accounts payable............ $ 139,900 $ 482,500 $ 830,800
Accrued expenses.................. 1,794,800 2,737,200 1,380,100
Short-term indebtedness........... -- -- 1,009,700
Advances from R.W. Gunnerman and
related accrued interest....... 8,522,500 11,386,600 19,027,300
----------- ------------ ------------
Total current
liabilities............ 10,457,200 14,606,300 22,247,900
Deferred revenue.................... -- 2,414,700 2,414,700
----------- ------------ ------------
Total liabilities......... 10,457,200 17,021,000 24,662,600
----------- ------------ ------------
Commitments and contingencies (Note
9)
Partners' deficit:
General partner's contributions,
net of distributions........... 1,180,200 1,180,200 1,180,200
Limited partners' contributions,
net of distributions........... 228,500 228,500 228,500
Deficit accumulated during
development stage.............. (6,214,600) (13,753,100) (20,486,100)
----------- ------------ ------------
Total partners' deficit... (4,805,900) (12,344,400) (19,077,400)
----------- ------------ ------------
$ 5,651,300 $ 4,676,600 $ 5,585,200
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 72
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED,
NOVEMBER 1, 1992 YEARS ENDED DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO ------------------------------------- -------------------------
DECEMBER 31, 1997 1995 1996 1997 1997 1998
----------------- --------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Expenses:
General and
administrative......... $ 5,911,400 $ 534,400 $ 989,000 $ 2,081,500 $ 1,747,700 $ 2,991,600
Research and
development............ 2,637,300 19,600 184,900 1,927,200 835,800 1,075,000
Sales and marketing...... 1,284,000 500 559,500 623,800 344,700 469,400
Legal.................... 1,425,000 243,600 152,300 852,400 128,300 306,700
Depreciation and
amortization........... 1,954,100 36,600 261,000 1,361,600 1,034,500 998,500
------------ --------- ----------- ----------- ----------- -----------
13,211,800 834,700 2,146,700 6,846,500 4,091,000 5,841,200
Other income (expense):
Joint venture
activities............. 370,200 (27,400) (383,000) -- -- --
Interest and other
income................. 318,600 2,100 235,000 65,000 58,700 16,200
Interest expense......... (30,400) (9,800) (7,300) (1,800) (1,800) (3,200)
Interest expense to
related parties........ (1,199,700) (9,000) (402,800) (755,200) (548,400) (904,800)
------------ --------- ----------- ----------- ----------- -----------
Net loss................... $(13,753,100) $(878,800) $(2,704,800) $(7,538,500) $(4,582,500) $(6,733,000)
============ ========= =========== =========== =========== ===========
Allocation of net loss:
General partner.......... $ (2,636,300) $ (8,800) $ (27,000) $ (75,400) (46,000) (67,400)
Limited partners......... (11,116,800) (870,000) (2,677,800) (7,463,100) (4,536,500) (6,665,600)
------------ --------- ----------- ----------- ----------- -----------
$(13,753,100) $(878,800) $(2,704,800) $(7,538,500) $(4,582,500) $(6,733,000)
============ ========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 73
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
----------- ------------ ------------
<S> <C> <C> <C>
Partners' capital, November 1, 1992
(inception)....................... $ -- $ -- $ --
Contributions..................... 2,214,000 2,697,600 4,911,600
Distributions..................... (1,170,000) (1,916,700) (3,086,700)
Partnership interests issued to
employees...................... -- 1,324,000 1,324,000
Reclassification of partnership
status......................... 144,900 (144,900) --
Net loss.......................... (2,525,100) (105,900) (2,631,000)
----------- ------------ ------------
Partners' capital (deficit),
December 31, 1994................. (1,336,200) 1,854,100 517,900
Contributions..................... -- 9,800 9,800
Net loss.......................... (8,800) (870,000) (878,800)
----------- ------------ ------------
Partners' capital (deficit),
December 31, 1995................. (1,345,000) 993,900 (351,100)
Distributions..................... (8,700) (1,741,300) (1,750,000)
Net loss.......................... (27,000) (2,677,800) (2,704,800)
----------- ------------ ------------
Partners' deficit, December 31,
1996.............................. (1,380,700) (3,425,200) (4,805,900)
Net loss.......................... (75,400) (7,463,100) (7,538,500)
----------- ------------ ------------
Partners' deficit, December 31,
1997.............................. (1,456,100) (10,888,300) (12,344,400)
Net loss (Unaudited).............. (67,400) (6,665,600) (6,733,000)
----------- ------------ ------------
Partners' deficit, September 30,
1998 (Unaudited).................. $(1,523,500) $(17,553,900) $(19,077,400)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 74
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
1992 NINE MONTHS ENDED
(INCEPTION) TO YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------------------------- -------------------------
1997 1995 1996 1997 1997 1998
------------------ ---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.......................... $(13,753,100) $ (878,800) $(2,704,800) $(7,538,500) $(4,582,500) $(6,733,000)
Adjustments to reconcile net loss
to net cash (used in) provided
by operating activities:
Depreciation and amortization... 1,954,100 36,600 261,000 1,361,600 1,034,500 998,500
Receivables from Advanced Fuels
offset against purchase price
of joint venture.............. (331,900) -- (331,900) -- -- --
Equity in loss of joint
venture....................... 3,430,200 1,027,400 1,133,000 -- -- --
Loss on disposal of property and
equipment..................... 28,000 -- -- 24,400 -- --
Compensation expense for
partnership interests issued
to employees.................. 1,324,000 -- -- -- -- --
Changes in operating assets and
liabilities:
Inventory..................... (97,700) -- -- (97,700) (95,500) 22,700
Other current assets.......... (18,400) 2,400 5,800 (11,800) 6,600 13,400
Receivable from affiliate..... (157,800) -- -- (157,800) (128,900) (285,500)
Trade accounts payable........ 482,500 12,700 126,300 342,600 82,900 348,300
Accrued expenses.............. 2,737,200 120,200 1,632,000 942,400 550,200 904,800
Accrued interest.............. 1,092,800 1,600 336,000 755,200 1,914,700 --
Deferred revenue.............. 2,414,700 -- -- 2,414,700 206,900 (1,357,100)
------------ ---------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
operating activities........ (895,400) 322,100 457,400 (1,964,900) (1,011,100) (6,087,900)
------------ ---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment....................... (2,041,200) (2,600) (88,100) (155,700) (108,300) (698,000)
Contributions to joint venture.... (990,000) (490,000) -- -- -- --
Purchase of joint venture......... (5,668,100) -- (5,668,100) -- -- --
------------ ---------- ----------- ----------- ----------- -----------
Net cash used for investing
activities.................. (8,699,300) (492,600) (5,756,200) (155,700) (108,300) (698,000)
------------ ---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Partners' contributions........... 4,921,400 9,800 -- -- -- --
Distributions to partners......... (4,836,700) -- (1,750,000) -- -- --
Proceeds from issuance of
short-term debt, net............ -- 1,009,700
Advances from R. W. Gunnerman,
net............................. 10,293,800 89,400 7,838,600 2,108,900 1,058,000 6,735,900
------------ ---------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities.................. 10,378,500 99,200 6,088,600 2,108,900 1,058,000 7,745,600
------------ ---------- ----------- ----------- ----------- -----------
Net change in cash................ 783,800 (71,300) 789,800 (11,700) (61,400) 959,700
Cash, beginning of period......... -- 77,000 5,700 795,500 795,500 783,800
------------ ---------- ----------- ----------- ----------- -----------
Cash, end of period............... $ 783,800 $ 5,700 $ 795,500 $ 783,800 $ 734,100 $ 1,743,500
============ ========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid..................... $ 137,300 $ 17,200 $ 74,100 $ 1,800 $ 1,800 $ --
============ ========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 75
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
A-55, L.P. was formed as a Delaware limited partnership in November 1992
for the purpose of developing, producing and marketing environmental technology
related to cost-competitive clean fuels (the "A-55 Technology"). In January
1994, A-55, L.P. was reorganized as a Nevada limited partnership.
A-55, L.P. is a development stage enterprise and, to date, has focused its
efforts primarily on the development of the A-55 Technology. The A-55 Technology
includes A-55, L.P.'s proprietary additive which allows for the stable blend of
almost any petroleum product with water to create clean fuels that are both less
expensive to use and environmentally cleaner than many fossil fuels used today.
A-55, L.P.'s development activities have included internal research and
development as well as research and development conducted through a
since-dissolved joint venture with Caterpillar, Inc. (Note 4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PLANNED OFFERING AND RELATED COSTS
In connection with the initial public offering, A-55, L.P. intends to
complete a merger (the "Reorganization") with A-55, Inc., a Delaware
corporation, with A-55, Inc. continuing as the surviving entity of such merger.
As a result of the Reorganization, the partners of A-55, L.P. will become the
sole stockholders of A-55, Inc. with the same proportionate ownership interests
in A-55, Inc. as they owned in A-55, L.P. immediately prior to the
Reorganization. In conjunction with the Reorganization, A-55, L.P. intends to
make certain Partner distributions totaling $2,145,300.
A-55, L.P. has incurred costs totaling $157,800 and $443,300 on behalf of
A-55, Inc. at December 31, 1997 and September 30, 1998, respectively, in
connection with capital raising efforts. These costs have been charged to A-55,
Inc. and the corresponding receivable has been recorded by A-55, L.P.
FINANCIAL STATEMENT PRESENTATION
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from territorial license agreements will be recognized when the
licensee has completed all contractual requirements to be granted a license and
collection of license fees is reasonably assured.
F-11
<PAGE> 76
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist
primarily of costs incurred in the development of A-55, L.P.'s aqueous fuel
technology.
INCOME TAXES
No provisions have been made for federal or state income taxes because such
taxes, if any, are the responsibility of the individual partners.
Differences between the tax and book bases of A-55, L.P.'s assets and
liabilities exist due primarily to the amortization period of intellectual
property, the timing of revenue recognition and the deductibility of certain
accrued expenses. This difference results in net assets for tax purposes being
$2,195,800 and $7,389,000 greater than the net assets for book purposes at
December 31, 1996 and 1997.
As noted in "Planned Offering and Related Costs" above, A-55, L.P. intends
to transfer all of its assets and liabilities to A-55, Inc. in exchange for all
the outstanding shares of common stock of A-55, Inc. Following the transfer,
A-55, Inc. will be subject to income taxes as a C Corporation.
A pro forma provision for income taxes, showing the tax effects as if A-55,
L.P. had always been subject to income taxes as a C corporation, has not been
included in the accompanying statement of operations. No income tax benefit
would be recognized for the years ended December 31, 1995, 1996 and 1997 due to
A-55, L.P. recognizing pre-tax losses and there is substantial doubt as to A-55,
L.P.'s ability to utilize these losses in the future.
ADVERTISING
A-55, L.P. expenses the costs of advertising the first time advertising
takes place. Advertising expenses, for the years ended December 31, 1995, 1996,
and 1997 as well as the nine months ended September 30, 1997 and 1998 were not
significant.
ALLOCATION OF INCOME, LOSSES AND DISTRIBUTIONS
A-55, L.P. has three classes of limited partnership interests: A, B and C.
Losses are allocated to all partners, except Class C limited partners,
based on participation percentages. No additional losses are allocated to Class
B limited partners whose capital balances fall to zero. Any remaining losses are
allocated to the general partner.
After offsetting prior losses, 50% of all profits, and 50% of distributions
of cash from operations as determined by the general partner, are allocated to
Class B limited partners until they are allocated an amount equal to their
original capital contributions. The remaining 50% is allocated to the other
partners, including the general partner, based on their relative participation
percentages. Thereafter, profits and distributions are allocated to all
partners, including the general partner, based on participation percentages.
F-12
<PAGE> 77
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Class C limited partners have no initial capital contribution requirements.
INVENTORIES
Inventories consist primarily of fuel-blending units held for sale.
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. The cost of maintenance and
repairs is expensed as incurred; significant renewals and betterments are
capitalized. Depreciation expense is recognized on the straight-line method over
estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings.................................. 31 years
Machinery and equipment.................... 5 years
Office furniture and equipment............. 5 - 7 years
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996, 1997 and
the nine months ended September 30, 1997 and 1998 was $36,600, $63,200,
$175,000, $144,600 and $108,600 respectively.
INTELLECTUAL PROPERTY
Intellectual property represents the fair value of the rights to Advanced
Fuels' aqueous fuel technology re-acquired by A-55, L.P. in October 1996 (Note
4). Intellectual property is amortized on a straight-line basis over three
years. Amortization expense for the years ended December 31, 1996 and 1997 was
$197,800 and $1,186,600, respectively, and was $889,900 for the nine months
ended September 30, 1997 and 1998, respectively.
PARTNERSHIP CAPITAL-BASED COMPENSATION
A-55, L.P. accounts for Partnership capital-based employee compensation
arrangements in accordance with the provisions of APB No. 25, "Accounting for
Stock Issued to Employees," and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Under APB 25, compensation
cost is recognized based on the difference, if any, on the date of grant between
the fair value of A-55, L.P.'s capital interests and the amount an employee must
pay to acquire the partnership interest.
INTERIM FINANCIAL DATA (UNAUDITED)
The unaudited financial statements as of September 30, 1998 and for the
nine months ended September 30, 1997 and 1998 have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations, in accordance with generally accepted accounting
principles.
F-13
<PAGE> 78
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET COMPONENTS
The components of certain balance sheet captions are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1996 1997 1998
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment, net:
Land and improvements.......... $ 377,900 $ 513,800 $ 513,800
Buildings and improvements..... 763,300 628,800 628,800
Machinery and equipment........ 390,700 435,300 472,800
Office furniture and
equipment................... 115,800 194,200 225,200
Construction-in-progress....... -- -- 629,500
---------- ---------- ----------
1,647,700 1,772,100 2,470,100
Less--accumulated
depreciation................ (160,500) (328,600) (437,200)
---------- ---------- ----------
$1,487,200 $1,443,500 $2,032,900
========== ========== ==========
Accrued expenses:
Refundable marketing fees...... $1,500,000 $1,500,000 $ --
Legal.......................... 200,000 1,000,000 1,000,000
Other.......................... 94,800 237,200 380,100
---------- ---------- ----------
$1,794,800 $2,737,200 $1,380,100
========== ========== ==========
</TABLE>
In 1996, A-55, L.P. received $1,500,000 from an individual who signed a one
year agreement to represent A-55, L.P. in marketing its aqueous fuel technology.
Under the agreement, A-55, L.P. would have been obligated to pay the individual
an agreed-upon royalty from any sales resulting from the individual's efforts
during the one year period. No such sales agreements were consummated during
this period. In September 1998, R. W. Gunnerman assumed the liability to refund
these marketing fees, and the Advances from R. W. Gunnerman were increased
accordingly. See Note 6.
4. ADVANCED FUELS JOINT VENTURE
In July 1994, A-55, L.P. formed a joint venture, Advanced Fuels, L.L.C.,
(Advanced Fuels), with Caterpillar, Inc. (Caterpillar), to commercialize the
A-55 aqueous fuel technology for use in internal combustion engines, including
spark-ignited (gasoline), compression-ignited (diesel) and turbine engines.
Pursuant to the formation agreement, A-55, L.P. contributed, in exchange for a
49% interest in Advanced Fuels, $500,000 cash, $303,200 of equipment at its net
book value, and an exclusive license to the A-55 aqueous fuel technology for the
specified purposes of Advanced Fuels. In 1995, A-55, L.P. contributed an
additional $490,000 cash to Advanced Fuels.
Under the joint venture agreement, A-55, L.P. agreed to provide Advanced
Fuels with consulting services regarding business and technology matters,
potential sales licenses, patent issues and the supervision of fuel testing. For
these consulting services, Advanced
F-14
<PAGE> 79
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fuels remitted cash to A-55, L.P. of $1,000,000 and $750,000 for the years ended
December 31, 1995 and 1996, respectively.
A-55, L.P. accounted for its investment in the Advanced Fuels joint venture
under the equity method of accounting. A-55's share of the net losses of
Advanced Fuels was $1,027,400 and $1,133,000 for the years ended December 31,
1995 and 1996, respectively. A significant portion of the expenses incurred by
Advanced Fuels were paid by A-55, L.P. with subsequent reimbursement received
from Advanced Fuels. These transactions are not included in A-55, L.P.'s
statements of operations except to the extent losses were allocated by the joint
venture. Total Advanced Fuels expenses funded by A-55, L.P. were $506,600 and
$1,170,000 for the years ended December 31, 1995 and 1996, respectively.
In October 1996, A-55, L.P., using funds borrowed from R. W. Gunnerman,
acquired Caterpillar's 51% interest in Advanced Fuels for $6,000,000 and the
joint venture was dissolved. Under the terms of the dissolution agreement, A-55,
L.P. acquired all tangible assets of Advanced Fuels. Advanced Fuels' liabilities
to A-55, L.P. and Caterpillar were forgiven. No third party liabilities of
Advanced Fuels existed at the date of dissolution. Pursuant to the dissolution
agreement, Caterpillar was granted (i) exclusive rights to the engine-related
technology with respect to the conversion of Caterpillar engines, (ii)
nonexclusive rights to the engine-related technology with respect to the
conversion of non-Caterpillar engines to consume aqueous fuel produced by
Caterpillar (until October 24, 1999, these nonexclusive rights become operative
only under certain circumstances), (iii) nonexclusive rights to the fuel-related
technology to make, have made, use or sell (but not license) gasoline- or
naphtha-based aqueous fuels, but only for Caterpillar diesel and natural gas
engines, (iv) nonexclusive rights to the fuel-related technology to sell
diesel-based aqueous fuel in all applications for products of the kind sold by
Caterpillar, and (v) beginning on October 24, 2001, nonexclusive rights to the
fuel-related technology to license diesel-based aqueous fuel in all applications
for products of the kind sold by Caterpillar. A-55, L.P. and Caterpillar also
agreed to pay each other a royalty in the amount of $0.005 per gallon of aqueous
fuel (or the equivalent in surfactant) sold by it directly, through license, by
sale of technology or by other action. The first royalty payment is not payable
until a party and its licensees have cumulatively sold 2.0 billion gallons of
aqueous fuel (or the equivalent in surfactant). The royalty obligation is
effective for ten years from the date the first royalty payment is due. The
parties also agreed that, should A-55, L.P. or Caterpillar enter into an
arrangement with an oil company for the manufacture or distribution or
diesel-based aqueous fuel and receive a lump sum payment in connection
therewith, the other party would be entitled to 20% of the lump sum payment. At
December 31, 1996 and 1997, no amounts were payable or receivable under the
royalty agreement or lump sum payment agreement.
F-15
<PAGE> 80
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A-55, L.P. accounted for the acquisition using the purchase method of
accounting. The purchase price consisted of $5,668,100 in cash and the
forgiveness by A-55, L.P. of $331,900 of receivables from Advanced Fuels,
reduced by the reversal of A-55, L.P.'s liability to fund Advanced Fuels'
deficit totaling $2,086,600. The net purchase price of $3,913,400 was allocated
as follows:
<TABLE>
<S> <C>
Equipment.......................................... $ 353,600
Intellectual property.............................. 3,559,800
----------
$3,913,400
==========
</TABLE>
The acquired equipment was capitalized to property and equipment, as it
will be utilized by A-55 in its ongoing research efforts. The liability for
accumulated deficit consists of A-55's underfunded investment in Advanced Fuels
at the date of the acquisition. Intellectual property was capitalized as an
intangible asset as it represents the fair value of the rights to Advanced
Fuels' aqueous fuel technology acquired by A-55, L.P.
The above joint venture activity has been reflected as "joint venture
activities" in the statements of operations as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Equity in net loss of joint venture... $1,027,400 $1,133,000
Consulting revenues earned from joint
venture............................. (1,000,000) (750,000)
---------- ----------
$ 27,400 $ 383,000
========== ==========
</TABLE>
In the opinion of management, the consulting revenues earned from the joint
venture approximate those that would be earned in an arm's-length transaction
with other third parties.
5. SHORT-TERM INDEBTEDNESS
In September 1998, A-55, L.P. borrowed $1,009,700 from a third party under
a note payable, partially secured by real property, due in March 1999. In
October 1998, A-55, L.P. transferred the loan proceeds to R. W. Gunnerman as a
reduction to the Advances from R. W. Gunnerman.
F-16
<PAGE> 81
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. ADVANCES FROM R. W. GUNNERMAN AND RELATED ACCRUED INTEREST
A-55, L.P. has borrowing arrangements with the developer of A-55's
proprietary technology, who is a limited partner and the majority shareholder in
a corporation, which is the general partner of A-55, L.P. (R. W. Gunnerman), to
provide funding for the general operations of A-55, L.P. Advances from R. W.
Gunnerman and the related accrued interest consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1996 1997 1998
---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured advances, bearing
interest at prime (8.5% at
December 31, 1997) and due at
dates ranging from on demand
to February 1999............. $8,184,900 $10,293,800 $17,029,700
Accrued interest on advances... 337,600 1,092,800 1,997,600
---------- ----------- -----------
$8,522,500 $11,386,600 $19,027,300
========== =========== ===========
</TABLE>
Subsequent to September 30, 1998, A-55, L.P. has received $965,700 of
additional advances from R. W. Gunnerman. See Note 3. These advances are due on
demand and bear interest at prime.
In September 1998, R. W. Gunnerman assumed A-55, L.P.'s $1,500,000
liability for the refundable marketing fees discussed in Note 3 in connection
with a settlement in October 1998 of certain litigation against R. W. Gunnerman,
A-55, L.P. and A-55, Inc. The litigation was brought by the individual who
funded the marketing fees.
Estimation of the fair value of advances from R. W. Gunnerman is not
considered practicable due to the relationships involved.
7. TERRITORIAL LICENSE AGREEMENTS
During the year ended December 31, 1997, A-55, L.P. entered into four
territorial license agreements: (i) one covering Australia, New Zealand and
Papau New Guinea (the "Australia License"), (ii) one covering the Republic of
Korea and the Democratic People's Republic of Korea (the "Korean License"), and
(iii) two covering the Russian Federation (the "Russian Licenses"). Each of
these licenses provides for payment to A-55, L.P. of certain initial territorial
license fees and an on-going royalty which ranges from 0.5% to 1.0% of the sales
in the applicable territory. Additionally, A-55, L.P. is granted a 30% ownership
interest in the licensee corporation. The initial territorial license fees under
the Australian, Korean, and Russian Licenses amount to $35.0 million in the
aggregate. Of this amount, the Australian and Korean Licenses together account
for $15.0 million, all of which has become due, but only $2,414,700 of which has
been paid to date. A-55, L.P. has suspended the payment obligations of the
licensee under the Australian License pending completion of certain field tests
being performed by the licensee in Australia and is currently negotiating a
revised payment schedule with the licensee under the Korean License. All cash
collected from the Australian and Korean
F-17
<PAGE> 82
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
licenses has been recorded as deferred revenue pending the completion of the
field tests and negotiation of the revised payment schedule. Under the Russian
License, territorial license payments are not due until the licensee completes
certain field tests and other detail requirements, which have not been completed
to date. No royalties have been paid under any of the licenses.
8. PARTNERSHIP OPTIONS
In January 1996, R. W. Gunnerman granted a key employee the option to
purchase a three-quarter percent limited partnership interest, owned by R. W.
Gunnerman, for $750,000. Management believes that the fair market value of this
three-quarter percent partnership interest on the date of grant was $750,000.
The option vested 33.3 percent immediately as of the date of grant and the
remaining portion vested 33.3 percent in January 1997 and 1998. At each vesting
date, the employee exercised the option in exchange for a note payable to R. W.
Gunnerman and acquired the vested partnership interest. In September 1997, R. W.
Gunnerman granted another key employee the option to purchase a one percent
limited partnership interest, owned by R. W. Gunnerman, for $5,000,000. In
management's judgment, the fair market value of this partnership interest on the
date of grant was $3,000,000. The option vested immediately as of the date of
grant and was exercised in September 1998 in exchange for $225,000 in cash and a
note payable to R. W. Gunnerman for the balance. In January 1998, R. W.
Gunnerman granted an individual the option to purchase a one percent partnership
interest, owned by R. W. Gunnerman, for $3,000,000. In management's judgment,
the fair market value of this partnership interest on the date of grant was
$3,000,000. The option vested immediately and expires ten years from the date of
grant.
In conjunction with the Offering described in Note 2, all unexercised
options to purchase limited partnership interests convert, without change to the
original exercise price and vesting period, into options to purchase common
stock of A-55, Inc. from R. W. Gunnerman. Additionally, the percentage ownership
interest the optionee is entitled to purchase does not change upon the
conversion of the options. This ownership percentage is determined based upon
the total number of common shares outstanding immediately following the
completion of the Offering.
A-55, L.P. has applied APB Opinion 25 and related Interpretations in
accounting for the issuance of these options. No compensation cost was charged
against operations for these options as the fair market value of the interest
approximated the exercise price on the date of grant. Had compensation costs for
the years ended December 31, 1996 and 1997 related to the options been
determined based on the minimum value of the options at the grant date
consistent with FASB Statement 123, A-55, L.P.'s net loss would have been
increased to the pro forma amount indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Net loss:
As reported........................... $2,704,800 $7,538,500
Pro forma............................. $2,738,000 $7,655,100
</TABLE>
F-18
<PAGE> 83
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The fair value of the options are estimated on the date of the grant using
a minimum value option-pricing model with the following weighted-average
assumptions used for the grant: risk-free weighted average interest rate of 7%,
distribution rate of 0% and weighted average expected option life of 1.5 years.
Minimum value option-pricing models require the input of highly subjective
assumptions, which are subject to change from time to time.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
During April 1997, A-55, L.P. entered into a three year operating lease to
lease a facility from R. W. Gunnerman. Future minimum rental payments under the
operating lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1998.................................... $ 756,000
1999.................................... 756,000
2000.................................... 252,000
----------
$1,764,000
==========
</TABLE>
Rent expense under the operating lease totaled $0, $0 and $441,000 for the
years ended December 31, 1995, 1996 and 1997, respectively, and totaled $252,000
and $594,000 for the nine month periods ended September 30, 1997 and 1998,
respectively.
PROFESSIONAL SERVICES
A-55, L.P. has entered into an agreement with an entity that will provide
financial advisory services to A-55, L.P. for a period of up to 24 months,
commencing October 1, 1998. The entity will receive up to $2,000,000 for such
services, contingent upon the occurrence of one or more transactions as
described in the agreement. In lieu of any cash payment, the entity may elect to
receive options to purchase common stock of A-55, Inc. from R. W. Gunnerman.
EMPLOYMENT AGREEMENTS
A-55, L.P. has entered into employment agreements with certain key
employees which entitle the employees to severance benefits ranging from one to
three years of base salary if termination of the employee occurs without cause.
No amounts have been accrued for severance benefit expense at December 31, 1996,
1997 or September 30, 1998.
LEGAL PROCEEDINGS
A-55, L.P. and R. W. Gunnerman are named defendants in a lawsuit instituted
by a former limited partner of A-55, L.P. (the "Plaintiff") on March 29, 1995 in
which the Plaintiff alleges that A-55, L.P. and R. W. Gunnerman granted him an
exclusive license to develop, market and sublicense the A-55 Technology in
aviation-related applications pursuant to a letter agreement dated September 20,
1993. In the lawsuit, the Plaintiff seeks, among other things, specific
performance by A-55, L.P. and R. W. Gunnerman of their obligations under the
letter agreement, including providing him with information
F-19
<PAGE> 84
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
concerning the formulation of A-55 Additive. After a court trial, judgment was
entered on June 19, 1997, ordering that (i) A-55, L.P. and R. W. Gunnerman
perform their obligations under the letter agreement and (ii) A-55, L.P. and R.
W. Gunnerman pay the court costs of the suit. On July 1, 1997, A-55, L.P. and R.
W. Gunnerman filed a Notice of Appeal. The Plaintiff then filed a Motion of
Enforcement of the June 19, 1997 judgment with the trial court. After a hearing,
on November 25, 1997, the Court granted the Plaintiff's motion, requiring the
posting of a $1,000,000 bond for damages suffered by the Plaintiff pending the
results of A-55, L.P.'s appeal and requiring A-55, L.P. and R. W. Gunnerman to
disclose the formulation of the A-55 Additive to the Plaintiff. The bond has not
yet been posted, and the Plaintiff has filed various motions to enforce the June
19, 1997 judgment in Nevada. A-55, L.P.'s legal expenses for the years ended
December 31, 1995 and 1997 include accruals of $200,000 and $800,000,
respectively, for payment commitments related to this lawsuit. A-55, L.P. and R.
W. Gunnerman appealed the November 25, 1997 judgment to the appellate court. On
August 24, 1998, the appellate court affirmed the trial court's judgment. A-55,
L.P. and R. W. Gunnerman intend to further appeal this matter. There can be no
assurance that A-55, L.P. and R. W. Gunnerman will be successful in the appeal,
or that, if A-55, L.P. and R. W. Gunnerman are successful in the appeal, that
A-55, L.P. and R. W. Gunnerman would be successful in any subsequent trial.
In early 1998, A-55, L.P. learned that Caterpillar had recently received
title by assignment to four United States patents related to the use of aqueous
fuel in internal combustion engines. A-55, L.P. believes that these patents
cover inventions developed by R. W. Gunnerman and should have been assigned to
A-55, L.P. under the terms of the Advanced Fuels dissolution agreement between
A-55, L.P. and Caterpillar. In April 1998, Caterpillar filed suit in federal
district court in Peoria, Illinois against A-55, L.P., requesting a declaration
that Caterpillar owns all right, title, and interest in and to the disputed
patents. Caterpillar is not seeking monetary damages against A-55, L.P. with
respect to its suit. In July 1998, the district court ruled in favor of A-55,
L.P.'s motion to compel arbitration of the dispute in Denver, Colorado, as
provided in the joint venture agreement, and stayed the litigation pending the
outcome of such arbitration. No amounts have been recorded in the Financial
Statements related to the future outcome of this matter.
10. RELATED PARTY TRANSACTIONS
In addition to the related party transactions addressed in Notes 4, 6 and
9, A-55, L.P., during the nine month period ended September 30, 1998, has paid
approximately $258,000 in travel expenses to a corporation wholly owned by R.W.
Gunnerman. No travel expenses to this entity were incurred prior to 1998.
F-20
<PAGE> 85
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Advanced Fuels L.L.C.
In our opinion, the accompanying statements of operations and of cash flows
present fairly, in all material respects, the results of operations and cash
flows of Advanced Fuels L.L.C. (a development stage enterprise) for the periods
ended December 31, 1995 and October 24, 1996 and for the period from July 6,
1994 (inception) through October 24, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Advanced Fuels L.L.C.'s management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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 financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As further described in Note 3 to the financial statements, on October 24,
1996, one of the members acquired the interest of the other member and Advanced
Fuels L.L.C. was dissolved.
PricewaterhouseCoopers LLP
Sacramento, CA
September 15, 1997
F-21
<PAGE> 86
ADVANCED FUELS L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 6, 1994 PERIOD ENDED
(INCEPTION) TO YEAR ENDED OCTOBER 24,
OCTOBER 24, 1996 DECEMBER 31, 1996
(DISSOLUTION) 1995 (DISSOLUTION)
---------------- ------------ -------------
<S> <C> <C> <C>
Revenue:
Product sales...................... $ 31,800 $ 5,300 $ 26,500
Cost of revenue:
Product sales...................... 54,700 24,500 30,200
----------- ----------- -----------
Gross profit......................... (22,900) (19,200) (3,700)
----------- ----------- -----------
Expenses:
General and administrative......... 337,400 121,700 178,200
Research and development........... 2,448,700 848,200 1,190,300
Consulting fees to A-55, L.P....... 3,750,000 1,000,000 750,000
----------- ----------- -----------
6,536,100 1,969,900 2,118,500
----------- ----------- -----------
Operating loss....................... (6,559,000) (1,989,100) (2,122,200)
Other income (expense):
Interest income and other.......... 12,300 12,200 100
Interest expense to Caterpillar.... (350,800) (119,800) (190,200)
----------- ----------- -----------
Net loss............................. $(6,897,500) $(2,096,700) $(2,312,300)
=========== =========== ===========
Allocation of net loss:
Caterpillar........................ $(3,517,700) $(1,069,300) $(1,179,300)
A-55, L.P.......................... (3,379,800) (1,027,400) (1,133,000)
----------- ----------- -----------
$(6,897,500) $(2,096,700) $(2,312,300)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 87
ADVANCED FUELS L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 6, 1994 PERIOD ENDED
(INCEPTION) TO YEAR ENDED OCTOBER 24,
OCTOBER 24, 1996 DECEMBER 31, 1996
(DISSOLUTION) 1995 (DISSOLUTION)
---------------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $(6,897,500) $(2,096,700) $(2,312,300)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and amortization... 151,700 63,200 57,900
Changes in operating assets and
liabilities:
Receivables from A-55, L.P.... (25,000) (25,000) --
Prepaid expenses and other
assets..................... -- (13,000) 13,000
Accounts payable to members... 428,900 (252,300) 222,900
Accrued interest payable to
Caterpillar................ 190,200 (1,200) 150,600
----------- ----------- -----------
Net cash used for operating
activities.............. (6,151,700) (2,325,000) (1,867,900)
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and
equipment....................... (139,400) -- (98,200)
Cash received on disposal of
property and equipment.......... 15,100 15,100 --
----------- ----------- -----------
Net cash (used for)
provided by investing
activities.............. (124,300) 15,100 (98,200)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' contributions............. 2,336,000 1,000,000 --
Proceeds from notes payable to
Caterpillar..................... 3,940,000 990,000 1,700,000
----------- ----------- -----------
Net cash provided by
financing activities.... 6,276,000 1,990,000 1,700,000
----------- ----------- -----------
Net change in cash................... -- (319,900) (266,100)
Cash, beginning of period............ -- 586,000 266,100
----------- ----------- -----------
Cash, end of period.................. $ -- $ 266,100 $ --
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during period for
interest........................ $ 160,600 $ 121,000 $ 39,600
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Member contributions of property
and equipment................... $ 303,200
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 88
ADVANCED FUELS L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Advanced Fuels L.L.C. (Advanced Fuels) was formed on July 6, 1994 as a
limited liability company pursuant to State of Delaware laws. Advanced Fuels was
51% owned by Caterpillar Inc. (Caterpillar), a Delaware corporation, and 49%
owned by A-55 L.P. (A-55), a Nevada limited partnership, (collectively, the
members). Advanced Fuels was a development stage company formed to commercialize
the A-55 aqueous fuel technology for use in internal combustion engines,
including spark ignited (gasoline), compression ignited (diesel) and turbine
engines. Caterpillar's initial contribution to Advanced Fuels consisted
primarily of $836,000 cash. A-55's initial contribution to Advanced Fuels
consisted of $500,000 cash, $303,200 of equipment at its net book value and an
exclusive license to the A-55 aqueous fuel technology for the specified purposes
of Advanced Fuels. Additionally, Caterpillar agreed to make periodic loans to
Advanced Fuels to fund its working capital requirements. Caterpillar and A-55
were also required to contribute an additional $510,000 and $490,000,
respectively, to fund the 1995 operations of Advanced Fuels. These contributions
were paid by the members in 1995.
Income and loss for the operations of Advanced Fuels were allocated to the
members in accordance with their respective ownership percentages.
Under the joint venture agreement, A-55 agreed to provide Advanced Fuels
with consulting services regarding business and technology matters, potential
sales licenses, patent issues and the supervision of fuel testing. For these
consulting services, Advanced Fuels remitted to A-55 $1,000,000 and $750,000 for
the periods ended December 31, 1995 and October 24, 1996.
Operations of Advanced Fuels were conducted primarily at the headquarters
of A-55, utilizing employees of the members. The majority of expenses incurred
by Advanced Fuels were paid by the members with subsequent reimbursement by
Advanced Fuels. These transactions are recorded as expenses of Advanced Fuels
when incurred by the members. Total Advanced Fuels expenses incurred by the
members were $969,900 and $1,368,500 for the periods ended December 31, 1995 and
October 24, 1996, respectively. As discussed in Note 3, on October 24, 1996,
Advanced Fuels was dissolved.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized when the product is shipped.
F-24
<PAGE> 89
ADVANCED FUELS L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs were expensed as incurred and consist
primarily of costs incurred in the development of the aqueous fuel technology.
MACHINERY AND EQUIPMENT
Machinery and equipment is carried at cost. Depreciation expense is
recognized on the declining balance method over a five-year useful life. The
cost of maintenance and repairs is expensed to operations are incurred;
significant renewals and betterments are capitalized.
INCOME TAXES
No provisions have been made for federal or state income taxes because such
taxes, if any, are the responsibility of the members.
3. DISSOLUTION OF JOINT VENTURE
In October 1996, A-55 acquired Caterpillar's 51% interest in Advanced Fuels
for $6,000,000 and Advanced Fuels was dissolved. Under the terms of the
dissolution agreement, A-55 acquired all tangible assets of Advanced Fuels.
Accounts payable to the members and notes payable and related accrued interest
to Caterpillar were forgiven. Pursuant to the dissolution agreement, Caterpillar
was granted (i) exclusive rights to the engine-related technology with respect
to the conversion of Caterpillar engines, (ii) nonexclusive rights to the
engine-related technology with respect to the conversion of non-Caterpillar
engines to consume aqueous fuel produced by Caterpillar (until October 24, 1999,
these nonexclusive rights become operative only under certain circumstances),
(iii) nonexclusive rights to the fuel-related technology to make, have made, use
or sell (but not license) gasoline- or naphtha-based aqueous fuels, but only for
Caterpillar diesel and natural gas engines, (iv) nonexclusive rights to the
fuel-related technology to sell diesel-based aqueous fuel in all applications
for products of the kind sold by Caterpillar, and (v) beginning on October 24,
2001, nonexclusive rights to the fuel-related technology to license diesel-based
aqueous fuel in all applications for products of the kind sold by Caterpillar.
A-55 and Caterpillar also agreed to pay each other a royalty in the amount of
$0.005 per gallon of aqueous fuel (or the equivalent in surfactant) sold by it
directly, through license, by sale of technology or by other action. The first
royalty payment is not payable until a party and its licensees have cumulatively
sold 2.0 billion gallons of aqueous fuel (or the equivalent in surfactant). The
royalty obligation is effective for ten years from the date the first royalty
payment is due. The parties also agreed that, should A-55 or Caterpillar enter
into an arrangement with an oil company for the manufacture or distribution or
diesel-based aqueous fuel and receive a lump sum payment in connection
therewith, the other party would be entitled to 20% of the lump sum payment.
F-25
<PAGE> 90
A-55, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
HISTORICAL FOR THE FOR THE
A-55, INC. A-55, L.P. ELIMINATIONS COMBINED REORGANIZATION REORGANIZATION
---------- ------------ ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.......................... $ -- $ 1,743,500 $ -- $ 1,743,500 $ -- $ 1,743,500
Inventories................... -- 75,000 -- 75,000 -- 75,000
Other current assets.......... -- 5,000 -- 5,000 -- 5,000
Receivable from affiliate..... -- 443,300 (443,300) -- -- --
-------- ------------ --------- ------------ ------------ ------------
Total current assets...... -- 2,266,800 (443,300) 1,823,500 -- 1,823,500
Property and equipment, net... -- 2,032,900 -- 2,032,900 -- 2,032,900
Intellectual property, net.... -- 1,285,500 -- 1,285,500 -- 1,285,500
Deferred offering costs....... 443,300 -- -- 443,300 -- 443,300
-------- ------------ --------- ------------ ------------ ------------
$443,300 $ 5,585,200 $(443,300) $ 5,585,200 $ -- $ 5,585,200
======== ============ ========= ============ ============ ============
LIABILITIES AND EQUITY (DEFICIT)
Trade accounts payable........ $ -- $ 830,800 $ -- $ 830,800 $ -- $ 830,800
Accrued expenses.............. 1,380,100 -- 1,380,100 -- 1,380,100
Short-term indebtedness....... -- 1,009,700 -- 1,009,700 -- 1,009,700
Advances from R.W. Gunnerman
and related accrued
interest.................... -- 19,027,300 -- 19,027,300 2,145,300(b) 21,172,600
Due to affiliate.............. 443,300 -- (443,300) -- -- --
-------- ------------ --------- ------------ ------------ ------------
Total current
liabilities............. 443,300 22,247,900 (443,300) 22,247,900 2,145,300 24,393,200
Deferred revenue.............. -- 2,414,700 -- 2,414,700 2,414,700
-------- ------------ --------- ------------ ------------ ------------
Total liabilities......... 443,300 24,662,600 (443,300) 24,662,600 2,145,300 26,807,900
-------- ------------ --------- ------------ ------------ ------------
Partners'
(deficit)/stockholders'
equity (deficit):
Partners' deficit........... -- (19,077,400) -- (19,077,400) 21,222,700(a) 2,145,300
(2,145,300)(b) (2,145,300)
Preferred stock, $0.001 par
value, 1,000 shares
authorized, no shares
issued or outstanding..... -- -- -- -- -- --
Common stock, $0.001 par
value, 9,000 shares
authorized, and
shares issued and
outstanding, pro forma and
pro forma as adjusted..... -- -- -- -- [](a) []
Paid-in capital............. -- -- -- -- (21,222,700)(a) (21,222,700)
Retained earnings........... -- -- -- -- --
-------- ------------ --------- ------------ ------------ ------------
Total partners' deficit/
stockholders' equity
(deficit)............... -- (19,077,400) -- (19,077,400) (2,145,300) (21,222,700)
-------- ------------ --------- ------------ ------------ ------------
$443,300 $ 5,585,200 $(443,300) $ 5,585,200 $ -- $ 5,585,200
======== ============ ========= ============ ============ ============
<CAPTION>
PRO FORMA
FOR THE
PRO FORMA OFFERING AND
ADJUSTMENTS REORGANIZATION
FOR THE RELATED
OFFERING TRANSACTIONS
----------- --------------
<S> <C> <C>
ASSETS
Cash.......................... (c)
Inventories...................
Other current assets..........
Receivable from affiliate.....
-------- --------
Total current assets......
Property and equipment, net...
Intellectual property, net....
Deferred offering costs....... (c)
-------- --------
======== ========
LIABILITIES AND EQUITY (DEFICI
Trade accounts payable........
Accrued expenses.............. (c)
Short-term indebtedness.......
Advances from R.W. Gunnerman
and related accrued
interest.................... (d)
Due to affiliate..............
-------- --------
Total current
liabilities.............
Deferred revenue..............
-------- --------
Total liabilities.........
-------- --------
Partners'
(deficit)/stockholders'
equity (deficit):
Partners' deficit...........
Preferred stock, $0.001 par
value, 1,000 shares
authorized, no shares
issued or outstanding.....
Common stock, $0.001 par
value, 9,000 shares
authorized, and
shares issued and
outstanding, pro forma and
pro forma as adjusted..... (c)
Paid-in capital............. (c)
Retained earnings...........
-------- --------
Total partners' deficit/
stockholders' equity
(deficit)...............
-------- --------
======== ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 91
A-55, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR FOR THE
THE OFFERING AND OFFERING AND
OFFERING RELATED OFFERING RELATED
A-55, INC. A-55, L.P. TRANSACTIONS TRANSACTIONS
---------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Expenses:
General and
administrative......... $ -- $ 2,991,600 $ -- $ 2,991,600
Research and
development............ -- 1,075,000 -- 1,075,000
Sales and marketing....... -- 469,400 -- 469,400
Legal..................... -- 306,700 -- 306,700
Depreciation and
amortization........... -- 998,500 -- 998,500
-------- ----------- -------- -----------
-- 5,841,200 -- 5,841,200
Other income (expense):
Interest and other
income................. -- 16,200 -- 16,200
Interest expense.......... -- (3,200) 3,200(e) --
Interest expense to
related parties........ -- (904,800) 904,800(e) --
-------- ----------- -------- -----------
Net loss.................... $ -- $(6,733,000) $908,000 $(5,825,000)
-------- ----------- -------- -----------
Weighted average common
shares outstanding........ $ --
===========
Net loss per share.......... $ --
===========
</TABLE>
See accompanying notes.
F-27
<PAGE> 92
A-55, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR FOR THE
THE OFFERING AND OFFERING AND
OFFERING RELATED OFFERING RELATED
A-55, INC. A-55, L.P. TRANSACTIONS TRANSACTIONS
---------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Expenses:
General and
administrative.......... $ -- $ 2,081,500 $ -- $ 2,081,500
Research and development... -- 1,927,200 -- 1,927,200
Sales and marketing........ -- 623,800 -- 623,800
Legal...................... -- 852,400 -- 852,400
Depreciation and
amortization............ -- 1,361,600 -- 1,361,600
------- ----------- -------- -----------
-- 6,846,500 -- 6,846,500
Other income (expense):
Interest and other
income.................. -- 65,000 -- 65,000
Interest expense........... -- (1,800) 1,800(e) --
Interest expense to related
parties................. -- (755,200) 755,200(e) --
------- ----------- -------- -----------
Net loss..................... $ -- $(7,538,500) $757,000 $(6,781,500)
======= =========== ======== ===========
Weighted average common
shares outstanding......... $ --
===========
Net loss per share........... $ --
===========
</TABLE>
See accompanying notes.
F-28
<PAGE> 93
A-55, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET AND STATEMENTS OF OPERATIONS
1. BASIS OF PRESENTATION
In connection with the initial public offering (the "Offering"), A-55, L.P.
intends to complete a merger (the "Reorganization") with A-55, Inc., a Delaware
corporation, with A-55, Inc. continuing as the surviving entity of such
Reorganization. As a result of the Reorganization, the partners of A-55, L.P.
will become the sole stockholders of A-55, Inc. with the same proportionate
ownership interests in A-55, Inc. as they owned in A-55, L.P. immediately prior
to the merger. In addition, A-55, L.P. intends to make certain Partner
distributions totaling $2,145,300.
The unaudited pro forma financial data reflects the Reorganization related
transactions described below and the Offering as if such transactions had been
completed as of September 30, 1998 for pro forma balance sheet data purposes and
as of January 1, 1997 for pro forma statements of operations data purposes. This
data does not necessarily reflect the results of operations or financial
position of A-55, Inc. that would have resulted had such transactions actually
been consummated as of such dates. Also, this data is not necessarily indicative
of the future results of operations or future financial position of A-55, Inc.
There are no material nonrecurring charges or credits directly attributable
to the Offering which would be included in income within the 12 months
succeeding the Offering anticipated by A-55, Inc. The pro forma financial
statements do not include amortization associated with compensation expense
associated with stock options issued in conjunction with the Offering.
2. PRO FORMA ADJUSTMENTS
REORGANIZATION RELATED TRANSACTIONS
a) Reflects the planned transfer of all assets and liabilities of A-55,
L.P. in exchange for all of the outstanding common stock of A-55, Inc., and the
reclassification of the partners' deficit to common stock and paid-in-capital.
b) Represents additional advances from R. W. Gunnerman to fund partner
distributions prior to the Offering.
OFFERING
c) Represents the net proceeds to A-55, Inc. from the Offering [to be
determined], after the repayment of advances from R. W. Gunnerman and related
accrued interest and direct expenses related to the Offering.
d) Reflects the repayment of advances to R. W. Gunnerman and related
accrued interest with a portion of the proceeds from the Offering.
e) Reflects the pro forma effect on interest expense as a result of
retiring short-term indebtedness and advances from R. W. Gunnerman with proceeds
from the Offering.
F-29
<PAGE> 94
A-55, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET AND STATEMENTS OF OPERATIONS
(CONTINUED)
3. DEFERRED OFFERING COSTS
A-55, Inc. has incurred costs totaling $443,300 in connection with the
Offering. These costs have been reflected as deferred costs in the accompanying
balance sheet. If the Offering is consummated, the cost will be deducted from
the proceeds received from the Offering. If the Offering is not consummated, the
costs will be charged to expense in the period in which a decision is made to
terminate the Offering. In such event, the costs would be borne by A-55, L.P.
4. PRO FORMA NET LOSS PER SHARE
Pro forma per share data is computed based on the net loss and
shares of common stock outstanding after giving respect to the Offering Related
Transactions and the Offering.
F-30
<PAGE> 95
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1998
A-55, INC.
SHARES OF COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
DONALDSON, LUFKIN & JENRETTE
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers
that affect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealer's obligation to deliver a prospectus when acting as an underwriter in
this offering and when selling previously unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 96
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the common stock being registered
hereby, other than underwriting commissions and discounts.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
SEC registration fee........................................ $ 33,925
NASD filing fee............................................. 12,000
Nasdaq National Market Listing Fee.......................... *
Blue Sky fees and expenses.................................. *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer Agent and Registrar fees........................... *
Miscellaneous expenses...................................... *
--------
Total............................................. $
========
</TABLE>
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
A-55, Inc. has included in the Certificate and the bylaws provisions to (i)
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the General
Corporation Law of the State of Delaware (the "DGCL") and (ii) indemnify its
directors and officers to the fullest extent permitted by the DGCL, including
circumstances in which indemnification is otherwise discretionary.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by each in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses (including attorneys' fees) actually and reasonably incurred by
directors, officers, employees or agents in connection with the defense or
settlement of an action or suit, and only with respect to a matter as to which
they shall have acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged liable to
the corporation, unless and only to the extent that the court in which the
action or suit was brought shall determine upon application that the defendant
directors, officers, employees or agents are fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
II-1
<PAGE> 97
A-55, Inc.'s directors and officers are covered by insurance policies
indemnifying them against certain civil liabilities, including liabilities under
the federal securities laws, which might be incurred by them in such capacity.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of A-55, Inc., its directors and officers, and by A-55, Inc. of
the Underwriters, for certain liabilities, including liabilities arising under
the Securities Act of 1933, as amended (the "Securities Act"), and affords
certain rights of contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since May 1, 1996, the Registrant (including its predecessor) has issued
and sold the following unregistered securities:
In the Reorganization, the partnership interests in A-55, L.P. will be
converted into all of the shares of common stock of A-55, Inc. that are
outstanding prior to the offering (the "Merger Shares"). The Merger Shares
have not been, and will not be, registered under the Securities Act in
reliance on the exemption provided by Section 4(2) thereof as an offer and
sale of securities which does not involve any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1+ Agreement of Merger between A-55, Inc. and A-55, L.P.
3.1+ Amended and Restated Certificate of Incorporation of A-55,
Inc.
3.2+ Amended and Restated Bylaws of A-55, Inc.
4.1+ Form of A-55, Inc.'s common stock certificate.
5.1* Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, as to the validity of the
issuance of the securities registered hereby.
10.1+ Exclusive License Agreement by and between A-55, L.P. and
Rudolf W. Gunnerman, dated as of January 3, 1994.
10.2+ First Amendment to Exclusive License Agreement by and
between A-55, L.P. and Rudolf W. Gunnerman, dated as of
January 1, 1995.
10.3+ Second Amendment Exclusive License Agreement by and between
A-55, L.P. and Rudolf W. Gunnerman, dated as of August 18,
1998.
10.4+ License Agreement by and between Advanced Fuels, L.L.C. and
Caterpillar Inc., dated as of July 7, 1994.
10.5+ Agreement of Dissolution of Advanced Fuels, L.L.C. by and
between A-55, L.P. and Caterpillar Inc., dated as of October
24, 1996.
10.6+ Employment Agreement by and between A-55, L.P. and Thomas N.
Harvey dated January 7, 1998.
</TABLE>
II-2
<PAGE> 98
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
10.7+ Employment Agreement by and between A-55, L.P. and Dr.
William Charles Tao dated June 30, 1998.
10.8+ Employment Agreement by and between A-55, L.P. and Dr.
Thomas M. Houlihan dated July 1, 1998.
10.9* Form of Indemnification Agreement entered into by and
between A-55, Inc. and each of its directors and executive
officers.
10.10+ License (Republic of Korean & Democratic People's Republic
of Korea) by and between A-55, L.P. and Stanton Energy Fund
Pty. Limited dated June 9, 1997.
10.11+ License (Exclusive--Australia, New Zealand & New Guinea) by
and between A-55, L.P. and A-55 (Australia) Ltd. dated March
4, 1997.
10.12+ License Agreement by and between A-55, L.P. and Vanetik and
Associates, Inc. dated December 2, 1997.
10.13+ License Agreement by and between A-55, L.P. and Vanetik and
Associates, Inc. dated June 22, 1998.
10.14+ Promissory Note dated September 30, 1997 issued by A-55,
L.P. for the benefit of R. W. Gunnerman.
10.15+ Form of Promissory Note in the aggregate amount of
$4,350,000 issued by A-55, L.P. for the benefit of R. W.
Gunnerman.
10.16+ Lease Agreement by and between A-55, L.P. and Rudolf W.
Gunnerman dated April 16, 1997.
10.17+ Amendment Number One to Lease Agreement by and between A-55,
L.P. and Rudolf W. Gunnerman dated June 2, 1997.
10.18* 1998 Stock Option Plan.
10.19 Letter regarding the fuel purchase order between
Commonwealth Edison and A-55, L.P. dated July 20, 1998.
23.1* Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
24.1+ Powers of Attorney (included on page II-5).
</TABLE>
- ------------------------------
* To be filed by amendment
+ Previously filed
All other schedules are omitted because they are inapplicable or the
requested information is shown in the financial statements of the registrant or
related notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
II-3
<PAGE> 99
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(5) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therewith, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement No. 333-65429 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Reno, State of Nevada, on the 4th day of December, 1998.
A-55, Inc.
By: /s/ RUDOLF W. GUNNERMAN
--------------------------------------
Rudolf W. Gunnerman
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ RUDOLF W. GUNNERMAN Chief Executive December 4, 1998
- ----------------------------------------------------- Officer and
Rudolf W. Gunnerman Chairman of the
Board (principal
executive officer)
/s/ PATRICK M. GRIMES Chief Financial December 4, 1998
- ----------------------------------------------------- Officer and
Patrick M. Grimes Treasurer
(principal
financial and
accounting
officer)
/s/ DANIEL J. KLAICH Director December 4, 1998
- -----------------------------------------------------
Daniel J. Klaich
/s/ PETER W. GUNNERMAN Director December 4, 1998
- -----------------------------------------------------
Peter W. Gunnerman
</TABLE>
II-5
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1+ Agreement of Merger between A-55, Inc. and A-55, L.P.
3.1+ Amended and Restated Certificate of Incorporation of A-55,
Inc.
3.2+ Amended and Restated Bylaws of A-55, Inc.
4.1+ Form of A-55, Inc.'s common stock certificate.
5.1* Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, as to the validity of the
issuance of the securities registered hereby.
10.1+ Exclusive License Agreement by and between A-55, L.P. and
Rudolf W. Gunnerman, dated as of January 3, 1994.
10.2+ First Amendment to Exclusive License Agreement by and
between A-55, L.P. and Rudolf W. Gunnerman, dated as of
January 1, 1995.
10.3+ Second Amendment Exclusive License Agreement by and between
A-55, L.P. and Rudolf W. Gunnerman, dated as of August 18,
1998.
10.4+ License Agreement by and between Advanced Fuels, L.L.C. and
Caterpillar Inc., dated as of July 7, 1994.
10.5+ Agreement of Dissolution of Advanced Fuels, L.L.C. by and
between A-55, L.P. and Caterpillar Inc., dated as of October
24, 1996.
10.6+ Employment Agreement by and between A-55, L.P. and Thomas N.
Harvey dated January 7, 1998.
10.7+ Employment Agreement by and between A-55, L.P. and Dr.
William Charles Tao dated June 30, 1998.
10.8+ Employment Agreement by and between A-55, L.P. and Dr.
Thomas M. Houlihan dated July 1, 1998.
10.9* Form of Indemnification Agreement entered into by and
between A-55, Inc. and each of its directors and executive
officers.
10.10+ License (Republic of Korean & Democratic People's Republic
of Korea) by and between A-55, L.P. and Stanton Energy Fund
Pty. Limited dated June 9, 1997.
10.11+ License (Exclusive--Australia, New Zealand & New Guinea) by
and between A-55, L.P. and A-55 (Australia) Ltd. dated March
4, 1997.
10.12+ License Agreement by and between A-55, L.P. and Vanetik and
Associates, Inc. dated December 2, 1997.
10.13+ License Agreement by and between A-55, L.P. and Vanetik and
Associates, Inc. dated June 22, 1998.
10.14+ Promissory Note dated September 30, 1997 issued by A-55,
L.P. for the benefit of R. W. Gunnerman.
10.15+ Form of Promissory Note in the aggregate amount of
$4,350,000 issued by A-55, L.P. for the benefit of R. W.
Gunnerman.
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
10.16+ Lease Agreement by and between A-55, L.P. and Rudolf W.
Gunnerman dated April 16, 1997.
10.17+ Amendment Number One to Lease Agreement by and between A-55,
L.P. and Rudolf W. Gunnerman dated June 2, 1997.
10.18* 1998 Stock Option Plan.
10.19 Letter regarding the fuel purchase order between
Commonwealth Edison and A-55, L.P. dated July 20, 1998.
23.1* Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
24.1+ Powers of Attorney (included on page II-5).
</TABLE>
- ------------------------------
* To be filed by amendment
+ Previously filed
<PAGE> 1
Exhibit 10.19
[COMED LETTERHEAD]
July 20, 1998
Mr. Rudolf W. Gunnerman
President & CEO
A-55 Limited Partnership
Corporate Headquarters
5270 Neil Road
Reno, LV 89502
Re: Fuel Purchase Order
Dear Mr. Gunnerman:
As agreed during the July 15, 1998 meeting between ComEd and A-55 L.P., ComEd is
prepared to purchase up to 70,000 barrels of A-55 Clean Fuels for approximately
$11.00 per barrel - equivalent to $1.90 per MmBtu. This initial volume of fuel
will be used during the start-up phase of one of the five boilers located at
ComEd's Collins Plant and will meet ComEd's fuel specifications. All fuel
specifications, including Btu content, will be tested by a mutually accepted
third party laboratory. All fuel specification testing will be paid for by A-55
L.P.
The start-up phase will commence on the week of September 21st. A-55 has agreed
to deliver to, and ComEd has agreed to make storage available at the Collins
Plant for this initial volume of A-55 Clean Fuels on or before August 31, 1998.
Upon successful completion of the start-up phase, ComEd could potentially
purchase an ongoing volume of A-55 Clean Fuels up to 140,000 barrels (or more
as required) per day at the agreed upon price of $1.90 per MmBtu. It is
understood that discounts in fuel pricing will be available. These discounts
are subject to business arrangements between our companies regarding both the
on-site manufacture and storage, long term fuel contracts and volumes purchased
of A-55 Clean Fuels as we have previously discussed. Having regard to these
factors the purchase price after discounts could be approximately $7.50 per
barrel - equivalent to $1.50 per MmBtu. All fuel receivables will be due seven
days after delivery to the Collins Plant.
We understand that in addition to it's price advantage over $6 fuel oil and
natural gas, A-55 Clean Fuels offer significant NOx reduction benefits over $6
fuel oil together with increased safety and more convenient handling.
Please forward all pertinent billing information to my office so that a fuel
purchase order reflecting the above parameters can be prepared.
Sincerely,
/s/ ROBERT P. LUKACSEK
Robert P. Lukacsek
Fuel Buyer
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated December 3, 1998,
relating to the financial statements of A-55, Inc. and A-55, L.P.; and September
15, 1997, relating to the financial statements of Advanced Fuels L.L.C., which
appear in such Prospectus. We also consent to the reference to us under the
headings "Experts" and "Selected Financial Data" in such Prospectus. However, it
should be noted that PricewaterhouseCoopers LLP has not prepared or certified
such "Selected Financial Data".
PricewaterhouseCoopers LLP
Sacramento, CA
December 3, 1998
