<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999
REGISTRATION NO. 333-65429
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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 89502-6503
(775) 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 89502-6503
(775) 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION -- MARCH 1, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 1999
[A-55 LOGO]
A-55, INC.
SHARES OF COMMON STOCK
- --------------------------------------------------------------------------------
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 89502-6503
(775) 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: , 1999.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
- ------------------------------------------------------------------------------
<S> <C> <C>
Public offering price (Estimated): $ $
Underwriting fees:
Proceeds to Company:
</TABLE>
- --------------------------------------------------------------------------------
This investment involves risk. See "Risk Factors" beginning on Page 7.
- --------------------------------------------------------------------------------
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 DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
The undersigned is facilitating Internet distribution.
DLJDIRECT INC.
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.......................... 50
Certain Transactions................ 54
Principal Stockholders.............. 56
Description of Capital Stock........ 57
Shares Eligible for Future Sale..... 60
Underwriting........................ 61
Legal Matters....................... 63
Experts............................. 63
Additional Information.............. 64
Index to Financial Statements....... F-1
</TABLE>
-------------------------
A-55 has exclusive rights to use the "A-55" registered trademark and the
"Powered With Water" registered service mark. All other brand names and
trademarks appearing in this prospectus are the properties of their respective
holders.
-------------------------
2
<PAGE> 4
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 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 competitive
(when measured on the basis of dollars per unit of energy output) with 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
and its related technology are effective 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 and
technology can reduce emissions of NOx (oxides of nitrogen) and harmful
particulate matter compared with combustion of 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 most of its initial marketing efforts on the domestic
electricity generation industry, which consumed 5.3 billion gallons of refined
petroleum products and 3.0 trillion cubic feet of natural gas in 1997. As a
result of its marketing efforts to date, A-55 has entered into an agreement with
Northeast Utilities for an initial order of up to 30,000 barrels (approximately
1.3 million gallons) of A-55 Clean Fuels to be delivered in May 1999, and the
right to supply up to 330,000 barrels (approximately 13.9 million gallons) per
month of A-55 Clean Fuels for consumption at its Montville and Middletown
electricity generating plants in Connecticut.
We intend 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
- sales to approved distributors such as local fuel distribution companies
and petroleum refiners.
The existence of a substantial supply contract in a particular geographic region
could produce economies of scale that would allow local fuel distribution
companies to economically provide A-55 Clean Fuels to a number of smaller
customers in that region. In the Northeastern region of the United States, A-55
has entered into a memorandum of understanding with Global Petroleum Corp., a
major local fuel distribution company that could result in an agreement for the
distribution of A-55 Clean Fuels to its industrial No. 6 fuel oil customers.
There can be no assurance that the current negotiations with Global Petroleum
Corp. will be successful.
3
<PAGE> 5
We also believe that petroleum refiners will play an important role in the
production and distribution of A-55 Clean Fuels. Petroleum refiners may 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 1997, the petroleum refining industry supplied approximately 4.6 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 exceeds a variety of fuel
specifications, such as viscosity, 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 competitive with 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 through the 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. 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 operates in the highly competitive combustible fuels market. Unlike
traditional fossil fuels and established NOx reduction technologies, A-55 Clean
Fuels are new and potential customers may hesitate to rely on them before A-55
has demonstrated their long term effectiveness in commercial usage. In addition,
A-55's competitors such as large natural gas, coal and oil companies have
substantial resources and well established modes of production, distribution and
sales, while A-55 has limited experience in production, distribution, sales or
marketing. Further, there can be no assurance that A-55's patent rights will be
sufficient to prevent others from entering the market with competing products.
See "Risk Factors" and "Business--Competitors of A-55 and A-55 Clean Fuels."
A-55, Inc. is a Delaware corporation formed in July 1997 that has conducted
limited operations to date. Substantially 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. On January 28, 1999, A-55, L.P. (the
Nevada limited partnership) was merged with and into A-55, Inc. as 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.
The executive offices of A-55 are located at 5270 Neil Road, Reno, Nevada,
89502-6503, where the telephone number is (775) 826-8300.
4
<PAGE> 6
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), to
repay approximately $21.8 million of
indebtedness to A-55's principal stockholder
and to satisfy its obligation to pay
approximately $2.1 million in partnership
distributions in connection with the merger
of A-55 L.P. into A-55, Inc. See "Use of
Proceeds."
Listing......................... NASDAQ National Market
Proposed Trading Symbol......... AQVV
- ------------------------------
(1) Excludes 4,000,000 shares of common stock to be reserved for issuance under
A-55's 1999 Stock Option Plan, none of which are currently outstanding.
5
<PAGE> 7
SUMMARY FINANCIAL DATA
You should read the following summary historical 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,
Inc. included in this prospectus.
The merger of A-55, L.P. with and into A-55, Inc. has been accounted for as
entities under common control in a manner similar to a pooling of interests and
is reflected in the financial information contained in this prospectus as having
occurred as of December 31, 1998 with the prior periods restated to reflect the
merger.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996 1997 1998
----- ----- ------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
General and administrative......................... $ 465 $ 534 $ 989 $ 2,082 $ 4,659
Research and development........................... 214 19 185 1,741 2,274
Sales and marketing................................ 94 1 560 624 702
Legal.............................................. -- 244 152 1,038 456
Depreciation and amortization...................... 110 37 261 1,362 1,324
----- ----- ------- -------- --------
Total operating expenses...................... 883 835 2,147 6,847 9,415
----- ----- ------- -------- --------
Operating loss....................................... (883) (835) (2,147) (6,847) (9,415)
Other income (expense), net.......................... 776 (44) (558) (692) (1,600)
----- ----- ------- -------- --------
Net loss............................................. $(107) $(879) $(2,705) $ (7,539) $(11,015)
===== ===== ======= ======== ========
Loss per common share.................................. -- $(.02) $ (.05) $ (.14) $ (.20)
Weighted average common shares......................... 55,500 55,500 55,500 55,500 55,500
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1998
-------------------------
1994 1995 1996 1997 ACTUAL AS ADJUSTED(1)
------ ------- ------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash...................................... $ 77 $ 6 $ 796 $ 784 $ 877 $
Working capital (deficit)................. (625) (1,460) (9,655) (15,963) (28,727)
Total assets....................... 1,235 1,204 5,651 4,677 4,714
Advances from R. W. Gunnerman and related
accrued interest........................ 80 151 8,523 11,387 21,412
Total stockholders' equity (deficit)...... 518 (351) (4,806) (12,344) (25,504)
</TABLE>
- -------------------------
(1) Adjusted to reflect the sale of shares of common stock offered by
A-55 hereby at an assumed initial public offering price of per share
and the anticipated 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 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 for A-55 Clean Fuels and A-55
Additive."
CHANGING TECHNOLOGIES AND CONSUMER DEMANDS MAY RENDER A-55 CLEAN FUELS OBSOLETE
OR UNMARKETABLE
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 CLEAN FUELS HAVE HAD LIMITED COMMERCIAL USE AND MAY HAVE UNDISCOVERED
DEFICIENCIES
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 of A-55 Clean Fuels."
7
<PAGE> 9
A-55 MUST CREATE DEMAND FOR A-55 CLEAN FUELS
A-55 has limited 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. 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--A-55's sales and marketing plans."
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 in 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
A-55's technology is licensed exclusively to A-55 from the inventor, Rudolf
W. Gunnerman, who is the Chairman and Chief Executive Officer of A-55. The
patent rights embodying a portion of the technology 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 other intellectual property protection for
portions of the A-55 Technology."
A-55 HAS NOT PRODUCED A-55 ADDITIVE OR A-55 CLEAN FUELS IN COMMERCIAL QUANTITIES
A-55 has limited 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
8
<PAGE> 10
production yields, quality control 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 of A-55 Clean Fuels and A-55 Additive."
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 be unable to convince refiners that they
should purchase A-55 Additive, and expend the resources 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 for A-55 Clean Fuels and A-55 Additive" and
"Business--Production and distribution of A-55 Clean Fuels and A-55 Additive."
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, customers may 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 under the jurisdiction of 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--A-55's and its customers' operations are
subject to environmental laws and regulations as well as other regulatory
regimes."
9
<PAGE> 11
FUTURE TEST RESULTS MAY DIFFER FROM TEST RESULTS DESCRIBED IN THIS PROSPECTUS
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, 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 of A-55 Clean Fuels."
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--Trends in
the electricity generation industry that A-55 believes will lead to demand for
A-55 Clean Fuels--Increasing Environmental Regulation."
A-55'S SUCCESS MAY DEPEND 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.
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
10
<PAGE> 12
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-55 Clean Fuels. 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 NOx emissions control technology for
boilers in which a portion of the fuel is injected above the main burners to
establish a fuel rich zone where NOx gases produced by the combustion of fuel at
the main burners are converted to harmless gases. This technology 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 for A-55 Clean Fuels and A-55
Additive--A-55's primary target market is the electric generation industry--A-55
Clean Fuels as a reburn fuel to reduce NOx emissions in coal-fired boilers."
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
11
<PAGE> 13
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 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--Competitors of A-55 and A-55 Clean Fuels."
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--A-55's and its customers'
operations are subject to environmental laws and regulations as well as other
regulatory regimes."
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 ( % 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
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."
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
12
<PAGE> 14
are required to secure financing to fund their required initial payments to A-55
and to develop their businesses. Three of the licensees have failed to make,
collectively, $13.0 million in payments due to A-55, resulting in the
termination of one license agreement. 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--A-55's sales and
marketing plans--International Markets."
POSSIBLE STOCK PRICE VOLATILITY
There has not been a public market for the common stock of A-55. 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
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 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
13
<PAGE> 15
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.
In connection with the offering, A-55, 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"). On January 28, 1999, the Predecessor was merged with and into
A-55, Inc., as the surviving entity of such merger (the "Reorganization"). As a
result of the Reorganization, the partners of A-55, L.P. (and, in the case of
one corporate limited partner, its sole stockholder) became 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 A-55's technology.
Approximately $21.8 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 notes payable to R. W. Gunnerman
bears effective interest rates at the prime rate as charged from time to time,
which is currently 7.75% per annum, and is due on demand. Of the total amount of
indebtedness outstanding at January 28, 1999, approximately $9.0 million has
been incurred within the last 12 months. The funds were used to fund product and
market development and other operating expenses. In addition, A-55 intends to
use $2.1 million of the net proceeds of the offering to satisfy its obligations
incurred in connection with the Reorganization to pay distributions to the
former partners of A-55, L.P. 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 December 31, 1998
on (i) a historical basis for A-55 and (ii) a pro forma basis as adjusted to
give effect to the sale by A-55 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 and the unaudited pro forma financial
statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
ACTUAL AS ADJUSTED
------------ -----------
<S> <C> <C>
Cash.............................................. $ 877,000 $
============ ==========
Distributions payable............................. $ 2,145,300
------------
Short-term indebtedness........................... 1,253,300 1,253,300
------------
Advances from R. W. Gunnerman and related accrued
interest due on demand.......................... 21,411,500
------------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, 10,000,000
shares authorized............................ -- --
Common Stock, $0.001 par value, 150,000,000
shares authorized............................ 55,500 --
Additional paid in capital...................... -- --
Retained earnings (accumulated deficit)......... (25,559,900) --
------------ ----------
Total stockholders' equity (deficit).... (25,504,400) --
------------ ----------
Total capitalization.............................. $ (694,300) --
============ ==========
</TABLE>
17
<PAGE> 19
DILUTION
The net tangible book value (deficit) of A-55 as of December 31, 1998,
after giving effect to the Reorganization, was approximately $(25,504,400), or
$( ) per share. Net tangible book value (deficit) per share represents the
amount of total tangible net assets of A-55 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 at
December 31, 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 (deficit) 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 December 31, 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 the total consideration paid to A-55 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,
1996, 1997 and 1998 and as of December 31, 1997 and 1998 have been derived from
the financial statements of A-55 which have been audited by
PricewaterhouseCoopers LLP, independent accountants, included in this
prospectus. The selected financial data for the years ended December 31, 1994
and 1995 and as of December 31, 1994, 1995 and 1996 have been derived from the
financial statements of A-55, which have been audited but are not contained
herein. 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 and the unaudited pro forma
financial statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Expenses:
General and administrative............................. $ 465,000 $ 534,400 $ 989,000 $ 2,081,500 $ 4,658,600
Research and development............................... 214,300 19,600 184,900 1,741,200 2,274,600
Sales and marketing.................................... 94,200 500 559,500 623,800 701,700
Legal.................................................. -- 243,600 152,300 1,038,400 456,200
Depreciation and amortization.......................... 109,700 36,600 261,000 1,361,600 1,324,100
----------- ----------- ----------- ----------- ------------
883,200 834,700 2,146,700 6,846,500 9,415,200
Other income (expense):
Joint venture activities............................... 780,600 (27,400) (383,000) --
Interest and other income.............................. 11,000 2,100 235,000 65,000 17,400
Interest expense....................................... (9,400) (9,800) (7,300) (1,800) (305,900)
Interest expense to related parties.................... (6,000) (9,000) (402,800) (755,200) (1,311,000)
----------- ----------- ----------- ----------- ------------
Net loss................................................... $ (107,000) $ (878,800) $(2,704,800) $(7,538,500) $(11,014,700)
=========== =========== =========== =========== ============
Loss per common share...................................... -- $ (.02) $ (.05) $ (.14) $ (.20)
Weighted average common shares............................. 55,500,000 55,500,000 55,500,000 55,500,000 55,500,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------
1998
---------------------------
AS
1994 1995 1996 1997 ACTUAL ADJUSTED(1)
----------- ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash...................................... $ 77,000 $ 5,700 $ 795,500 $ 783,800 $ 877,000
Working capital (deficit)................. (624,800) (1,459,800) (9,655,100) (15,963,300) (28,726,800)
Total assets.............................. 1,234,500 1,203,800 5,651,300 4,676,600 4,713,800
Advances from R. W. Gunnerman and related
accrued interest........................ 79,700 151,400 8,522,500 11,386,600 21,411,500
Total stockholders' equity (deficit)...... 517,900 (351,100) (4,805,900) (12,344,400) (25,504,400)
</TABLE>
- -------------------------
(1) Adjusted to reflect the sale of shares of common stock offered by
A-55 hereby at an assumed initial public offering price of per share,
and the anticipated 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 mid 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.
Negotiations are currently in progress between A-55 and Vitol S.A., Inc. to
establish a joint venture company that will engage in worldwide sales and
marketing of A-55 Clean Fuels to specified consumers of certain fossil fuels.
See "Business--A-55's sales and marketing channels--Petroleum Refiners, Fuel
Traders and Energy Brokers." Under business terms of the joint venture agreed to
in principle, A-55 would have a controlling interest in the joint venture
company. Consequently, A-55 would be required to report the joint venture
company's activities in the consolidated financial statements of A-55. Such
consolidation could have a material impact on the presentation of A-55's
financial statements. However, there can be no assurance that the negotiations
between A-55 and Vitol will result in a final agreement that incorporates any or
all of the specific terms currently contemplated.
RESULTS OF OPERATIONS
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
General and Administrative. General and administrative expenses increased
$2,577,100 or 124% to $4,658,600 for 1998, from $2,081,500 in 1997, primarily
due to the addition of new employees. A-55's general and administrative payroll
for 1998 increased $975,600 or 73% from 1997. In the summer of 1997, A-55 began
expanding its management personnel. The remaining balance of the increase
between periods of
20
<PAGE> 22
$1,601,500 represents various supporting activities including a $306,700
increase in rent for the Company'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 its 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 incur additional expenses associated with becoming a public company,
including the legal, accounting and administrative costs of complying with SEC
reporting and disclosure requirements, and certain costs related to the
expansion of A-55's board of directors to include independent directors such as
compensation, directors and officers insurance and additional meeting related
travel expenses.
Research and Development. Research and development expenses increased
$533,400 or 31% to $2,274,600 for 1998, from $1,741,200 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 $77,900 or 13%
to $701,700 for 1998 from $623,800 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
plans."
Legal. Legal expenses incurred during 1998 and 1997 consisted of costs
related to patent, general corporate and litigation matters.
Depreciation and Amortization. Depreciation and amortization expense for
1998 consisted of amortization expense totaling approximately $1,186,600 related
to intellectual property obtained in the acquisition of Advanced Fuels in
October 1996 and depreciation expense totaling $137,500. Depreciation and
amortization expense for 1997 consisted of amortization expense totaling
$1,186,600 related to the intellectual property associated with Advanced Fuels
and depreciation expense totaling $175,000. Depreciation expense for 1998
decreased $37,500 from 1997 because certain items became fully depreciated in
1997.
Net loss. The net loss for 1998 totaled ($11,014,700) compared to a net
loss of ($7,538,500) for 1997. The increase in net loss was due primarily to the
factors discussed previously as they impacted the results for 1998.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
General and Administrative. General and administrative expenses increased
$1,092,500 or 111% to $2,081,500 in 1997, from $989,000 in 1996. The increase
was primarily due to the continued growth of A-55 to support the ongoing
development and commercialization of A-55's technology.
Research and Development. A-55's research and development expenses in 1997
increased $1,556,300 from $184,900 in 1996, which primarily represented
incremental costs incurred subsequent to the dissolution of the Advanced Fuels
joint venture in 1996. 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
21
<PAGE> 23
primary operating activity of Advanced Fuels from its inception in July 1994
through its acquisition and dissolution in October 1996.
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.
Legal. Legal expenses in 1997 were approximately $886,100 higher than the
$152,300 incurred during 1996 primarily as a result of A-55 increasing its legal
reserve by $800,000. 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. 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. 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 to support A-55 subsequent to
the acquisition and dissolution of Advanced Fuels.
LIQUIDITY AND CAPITAL RESOURCES
A-55 has incurred losses in each fiscal year since its inception in
November 1992, and at December 31, 1998 had an accumulated deficit of
approximately $24,767,800. 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 December 31,
1998, A-55 funded its operations and product and market development primarily
through cash advances from R. W. Gunnerman of approximately $19.0 million and
participation in the Advanced Fuels joint venture of approximately $2.4 million,
net of contributions, and cash received from international territorial license
deposits of approximately $2.4 million.
A-55 used approximately $8,946,400 of cash to fund operations for 1998,
which primarily related 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
was $457,400. Cash used to fund operations for 1997 represents primarily A-55's
net loss offset by the international territorial license deposits associated
with international technology license agreements and depreciation and
amortization. Cash generated from operations for 1996 represents primarily
Advanced Fuels joint venture activity, partially offset by A-55's net losses.
A-55's cash used for investing activities of approximately $928,000 for
1998 consists of expenditures for fixed assets. The expenditures for fixed
assets primarily related to construction-in-progress for the assembly of the
A-55 Additive mixing plant in Sparks, Nevada. A-55 does not anticipate that the
costs of such construction will exceed
22
<PAGE> 24
$1,000,000, and it has no current material commitments with respect to such
capital expenditures. See "Business--A-55's administrative offices, technical
center and mixing facilities." The investing activities for 1997 and 1996 were
approximately $156,000 and $5,756,000, 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.
A-55's financing activities for 1998 of approximately $9,967,200 consist of
net borrowings of approximately $8,714,000 from R. W. Gunnerman and
approximately $1,253,300 from third parties. The net cash provided by financing
activities for 1997 and 1996 consisted of approximately $2,109,000 and
$6,089,000, 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 less approximately $1,750,000 of partner distributions.
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's
anticipated level of operations over the next 12 months include expenditures
associated with additional personnel in most of its departments including
finance, human resources, business development, sales and marketing, legal and
research and development. It will also include expansion of its research and
development and application engineering capabilities to include, among other
things, additional test programs, testing equipment and consulting and
laboratory services. 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's state of readiness. 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 and anticipates substantial completion of
this assessment by the end of June 1999. However, there can be no assurance that
A-55 will be able to complete its assessment on that schedule. 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's operations are also dependent on the Year 2000 compliance of third
parties that do business with A-55. In particular, A-55 is dependent on third
party suppliers of infrastructure services such as transportation,
telecommunications, electricity, water and banking facilities. In an effort to
determine the extent to which A-55 will be vulnerable to such parties' failure
to resolve their own Year 2000 compliance issues, A-55 has had conversations
with several potential customers and vendors to ascertain their state of
readiness for Year 2000 compliance. For customers and vendors that are public
companies, A-55 has reviewed the state of their readiness for Year 2000
compliance by reviewing their filings with the SEC. A-55 is in the process of
requesting statements of Year 2000 compliance from existing vendors and
customers. 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 is currently
only purchasing information technology systems that are Year 2000 compliant and
obtaining assurances from any new vendors and customers that they are Year 2000
compliant.
The costs to address A-55's Year 2000 issues. 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 for these
tasks. Three employees have been designated to oversee the Year 2000 compliance
effort. A-55 has not hired, or entered into any material contract to hire,
external contractors to assist A-55 in its Year 2000 compliance assessment or
contingency planning. 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.
The risks to A-55 of Year 2000 issues. 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. However, A-55 is
presently unable to assess the likelihood that it will experience significant
operational problems due to unresolved Year 2000 compliance problems of third
parties. Although A-55 is not aware that any known third party Year 2000
compliance problem that may impact its business will not be timely resolved,
A-55 has limited information and no assurance can be made concerning the state
of readiness of Year 2000 compliance by third parties. Failure by third parties
to achieve Year 2000 compliance could have a material impact on A-55's
operations. A-55 expects the most reasonably likely worst case Year 2000
compliance scenarios to include disruptions in the operations of third parties
due to their failure to attain Year 2000 compliance that could cause (i) delays
in the manufacture and delivery of A-55's products, (ii) delays in customers' or
potential customers' ability to adopt a new fuel, and (iii) delays in A-55
receiving payments from its customers. The severity of these possible problems
would depend on the magnitude of the problem and how quickly it could be
corrected or an alternative implemented, which is unknown at this time.
A-55's contingency plans for Year 2000. A-55 is engaged in an ongoing Year
2000 compliance assessment and has not yet finalized any formal contingency
plans. A-55 intends to complete such contingency planning by June 1999. However,
there can be no assurance that A-55 will be able to complete its contingency
planning on that schedule.
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 OF A-55'S BUSINESS
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 family of proprietary formulations 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 competitive, when compared on an energy equivalent
basis, with 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 performed by A-55, as well as by
independent agencies such as the EPA, Tennessee Valley Authority, Southwest
Research Institute and Energy and Environmental Research Corporation,
demonstrate that A-55 Clean Fuels and its related technology 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 and its related
technology 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 5.3 billion gallons of refined petroleum products and 3.0 trillion
cubic feet of natural gas in 1997. 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 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 local fuel distributors and petroleum refiners. A-55
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
25
<PAGE> 27
refiners will also be an important source of the Residues and other refined
petroleum products for fuel consumers that elect to blend their own A-55 Clean
Fuels.
In 1997, the petroleum refining industry supplied approximately 4.6 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, replacing 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 competitive on an energy
equivalent basis with 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 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 operates in the highly competitive combustible fuels market. Unlike
traditional fossil fuels and established NOx reduction technologies, A-55 Clean
Fuels are new and potential customers may hesitate to rely on them before A-55
has demonstrated their long term effectiveness in commercial usage. In addition,
A-55's competitors such as large natural gas, coal and oil companies have
substantial resources and well established modes of production, distribution and
sales, while A-55 has limited experience in production, distribution, sales or
marketing. Further, there can be no assurance that A-55's patent rights will be
sufficient to prevent others from entering the market with competing products.
See "Risk Factors" and "Business--Competitors of A-55 and A-55 Clean Fuels."
DEVELOPMENT OF THE A-55 TECHNOLOGY; A-55'S PRODUCTS
Development of the A-55 Technology. In 1988, A-55's founder, R. W.
Gunnerman, began a decade-long research and development effort with the goal of
creating stable
26
<PAGE> 28
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 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 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 family of
proprietary liquid formulations that allow 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 or 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 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.
27
<PAGE> 29
TRENDS IN THE ELECTRICITY GENERATION INDUSTRY THAT A-55 BELIEVES WILL LEAD TO
DEMAND FOR A-55 CLEAN FUELS
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 the 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
- 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 worldwide energy demand, 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 120%.
28
<PAGE> 30
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).
Deregulation of the 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 1997, 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
29
<PAGE> 31
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.
A-55 believes that in order to satisfy increasing demand for energy
generated by the combustion of fossil fuels, energy producers will continue to
seek new technologies that allow for cost-effective means of burning fossil
fuels in an environmentally responsible manner.
TARGET MARKETS FOR A-55 CLEAN FUELS AND A-55 ADDITIVE
A-55 has identified the target markets discussed below that it believes
will constitute significant sources of demand for its products.
A-55's primary target market is the electricity generation industry
In 1997, electricity generation in the United States was approximately 3.5
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 1997 approximately 71% of electricity
generating capacity in the United States was supplied by boilers and combustion
turbines, which consumed 5.3 billion gallons of petroleum, 900 million short
tons of coal and 3.0 trillion cubic feet of natural gas.
30
<PAGE> 32
The following graph shows the primary energy sources for the net generation
of electricity by electric utilities in the United States in 1997.
U.S. ELECTRIC UTILITY NET GENERATION BY ENERGY SOURCE, 1997
[U.S. ELECTRIC UTILITY NET GENERATION GRAPH]
Source: EIA Electric Power Annual 1997
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 is competitive with the market prices 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.
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.
A-55 Clean Fuels as a substitute for No. 6 fuel oil in generating
electricity. 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
31
<PAGE> 33
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 1997, a total of five states (New York, Connecticut, Massachusetts,
Florida and Hawaii) together received over 80% of the 4.6 billion gallons of the
No. 6 fuel oil delivered to U.S. electric utilities.
The major determinants of the cost of producing No. 6 fuel oil are the
price of its base Residues and the price and the quantity of cutter stock, if
any, required to be blended with the Residues 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 Residues,
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 has a slightly lower Btu content than
most Residues, it significantly improves certain handling and other
characteristics of the fuel. As a result of fuel blending, 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 competitive with No. 6 fuel oil because they derive their Btu content
primarily from the low-cost Residue.
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
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 substantially the same infrastructure as No. 6 fuel oil,
minimizing the cost to utilities of switching to A-55 Clean Fuels.
A-55 Clean Fuels as a substitute for natural gas in generating
electricity. Natural gas represents an important fuel source for the generation
of electricity in the United States. In 1997, the U.S. electricity generation
industry consumed 3.0 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.
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 competitive cost on an energy equivalent basis with
natural gas and that it will have significant flexibility in pricing A-55
Additive for sale to this market.
An example of burning A-55 Clean Fuels in a typical electricity generating
boiler application. A-55 estimates that a single 250 MW oil-fired or dual-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 such boilers
generally serve as peak generating facilities, this example assumes the boiler
would operate at 10% of capacity.
A-55 Clean Fuels as a reburn fuel to reduce NOx emissions in coal-fired
boilers. 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
32
<PAGE> 34
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 "--Competitors of A-55 and A-55 Clean
Fuels--Emissions Control Technologies" and "--Trends in the electricity
generation industry that A-55 believes will lead to demand for A-55 Clean
Fuels--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 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.
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."
The petroleum refining industry as both target market and distribution channel
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.
33
<PAGE> 35
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.
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 competitive
price, when measured on an energy equivalent basis, with 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 for A-55 Clean Fuels
In 1997, 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.
Long-term potential to sell A-55 Clean Fuels in the 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 140 billion gallons of refined petroleum products in
the United States in 1997. 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
34
<PAGE> 36
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 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.
A-55'S BRANDING AND MARKETING 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 international or 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.
A-55'S SALES AND MARKETING PLANS
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 the 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
35
<PAGE> 37
business ventures with petroleum refiners, fuel traders and energy brokers and
their respective customers so that they become integrated with A-55's marketing
efforts.
As a result of its initial direct sales efforts, A-55 has entered into a
fuel supply contract with Northeast Utilities, a leading utility in New England
servicing over 1.7 million customers, to supply A-55 Clean Fuels to its
Montville and Middletown plants in Connecticut. Under the fuel supply contract
A-55 has committed to fulfill an initial order of 15,000 barrels (630,000
gallons) of A-55 Clean Fuels to be delivered on May 1, 1999 to the Montville
plant and an additional order of up to 15,000 barrels to the Middletown plant.
After these initial orders, Northeast Utilities may purchase from A-55 up to
330,000 barrels (approximately 13.9 million gallons) per month of A-55 Clean
Fuels.
A-55 is currently negotiating with Vitol S.A., Inc. to establish a joint
venture company that will engage in the worldwide sales and marketing of A-55
Clean Fuels to electricity generators and other industrial consumers of fuel
oils and other fossil fuels. Vitol and its affiliated companies, as a group, are
among the world's largest traders of petroleum products, buying, shipping and
selling petroleum inventories on a global basis. Because of Vitol's established
relationships with many petroleum refiners and other sources of Residue as well
as with buyers of petroleum products both domestically and internationally, A-55
expects that the joint venture with Vitol would be an important complement to
A-55's own direct sales efforts, especially in international markets. There can
be no assurance that these negotiations will result in any final agreement
between A-55 and Vitol.
Direct Sales. A-55 anticipates that direct sales will be one of 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
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, other fuel traders and energy brokers and plans to utilize this
network to market to potential electricity generator customers. If so, A-55 may
authorize the petroleum refiners, traders and brokers to solicit customers and
initiate preliminary negotiations with customers on behalf of A-55.
A-55 believes that an additional opportunity exists to sell A-55 Clean
Fuels to industrial fuel oils consumers, through local fuel oils distribution
companies, in regions where an electricity generating customer may be burning
substantial quantities of A-55 Clean Fuels. A-55 believes that local fuel
distribution companies are likely to have the terminal facilities, storage
tanks, delivery systems and other physical infrastructure, as well as sales
personnel, to economically blend, distribute and sell A-55 Clean Fuels to
industrial
36
<PAGE> 38
fuel oils consumers. By establishing such "hub and spoke" distribution
arrangements, A-55 believes that it can more rapidly penetrate the market for
industrial fuel oils consumers.
A-55 has entered into a fuel supply contract with Northeast Utilities to
supply A-55 Clean Fuels to its electricity generating plants near Hartford,
Connecticut. Recognizing that Northeast Utilities could be such an "anchor"
customer, A-55 has entered into a memorandum of understanding with Global
Petroleum Corp., a fuel distributor with facilities in nearby New Haven, that
could result in an agreement for the distribution of A-55 Clean Fuels to its
existing and future industrial customers in the Northeastern region of the
United States. There can be no assurance that the current negotiations with
Global Petroleum Corp. will be successful.
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 one of 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. If A-55
and Vitol successfully complete their negotiations to form a joint venture
company with exclusive worldwide distribution rights to sell A-55 Clean Fuels to
electricity generators and other industrial consumers of fuel oils and other
fossil fuels, as described above, A-55 would not grant additional licenses to
foreign licensees beyond those described below for the duration of the joint
venture.
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").
The Australian License (covering Australia, New Zealand and New Guinea) was
entered into 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 recorded as a current liability
pending completion of field tests and the negotiation of a revised payment
schedule. A-55 believes that subject to a successful conclusion to these
37
<PAGE> 39
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 in 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 recorded as a current liability 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. The Russian License required an aggregate $20.0 million
territorial license fee cash payment due in four separate payments, the first of
which was $1.0 million that became due on December 31, 1998. Because A-55 did
not receive any portion of that payment it elected to terminate 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 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.
38
<PAGE> 40
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 OF A-55 CLEAN FUELS
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.
Full-Scale Electric Utility Boiler Testing. In order to demonstrate the
commercial viability of A-55 Clean Fuels in a full-scale electric utility
application and its compatibility with the distribution network, A-55 conducted
tests with two electric utility companies. The first test was a burn of
approximately 13,000 gallons of A-55 Clean Fuels in a 174 MW utility boiler
operated by AmerenCIPS in its Meredosia, Illinois power station. The two-day
test conducted by AmerenCIPS in October 1998 demonstrated that A-55 Clean Fuels
could be handled and burned in the same manner as their existing fuel oil. No
modifications were required to be made to the boiler to "switch" to A-55 Clean
Fuels. The test also demonstrated that A-55 Clean Fuels could be cold-started in
its boiler, that the flame pattern is stable and that the visible smoke
(opacity) is minimized at peak operation.
The second full-scale test was conducted at Commonwealth Edison's Collins
Station electric generating plant located near Chicago, Illinois. The five-day
test, conducted in December 1998, demonstrated that A-55 Clean Fuels can be
blended, transported over considerable distances, and, with only minor boiler
adjustments, successfully burned producing NOx emissions similar to that of
natural gas.
A-55 believes that the successful demonstration of A-55 Clean Fuels at
these two electric utilities is a confirmation of the commercial viability of
A-55 Clean Fuels that will assist A-55 in supporting its marketing efforts in
the utility and industrial sectors.
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.
39
<PAGE> 41
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.
40
<PAGE> 42
Combustion Turbine Testing. Pursuant to a test agreement with the Tennessee
Valley Authority ("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.
41
<PAGE> 43
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 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.
42
<PAGE> 44
COMPETITORS OF A-55 AND A-55 CLEAN FUELS
Competition from 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 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. 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. On the other hand,
regional fuel distributors may view A-55 Clean Fuels as a means to extend their
markets or offer an added product, and 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. In
addition, the reaction of coal suppliers may be at least somewhat favorable
because 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.
Competition from alternative fuels suppliers and other 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
43
<PAGE> 45
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 coal with other fuels such as natural gas,
wood chips or other waste products has been employed in several electricity
generating boilers. Co-firing is a combustion technology that dedicates one or
more of the main burners in a boiler to a fuel cleaner than coal, with the
effect of reducing the overall generation of NOx emissions. 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 for A-55 Clean Fuels and A-55
Additive--A-55's primary target market is the electricity generation
industry--A-55 Clean Fuels as a reburn fuel to reduce NOx emissions in
coal-fired boilers."
PATENTS AND OTHER INTELLECTUAL PROPERTY PROTECTION FOR PORTIONS OF A-55'S
TECHNOLOGY
A-55's technology is licensed exclusively to A-55 from the inventor, R. W.
Gunnerman. The patent rights embodying a portion of the technology 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 has 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's
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
44
<PAGE> 46
protect its intellectual property. In connection with the dissolution in October
1996 of its joint venture with Caterpillar, Inc. ("Caterpillar"), A-55 granted
Caterpillar certain rights to use certain of A-55's 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.
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
45
<PAGE> 47
other party would be entitled to 20% of the lump sum payment. See "--A-55's
current and potential legal proceedings."
A-55'S AND ITS CUSTOMERS' OPERATIONS ARE SUBJECT TO ENVIRONMENTAL LAWS AND
REGULATIONS AS WELL AS OTHER REGULATORY REGIMES
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 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 "--A-55's administrative
offices, technical center and mixing 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,
46
<PAGE> 48
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 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 OF A-55 CLEAN FUELS AND A-55 ADDITIVE
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. In the second quarter
of 1999, A-55 expects to begin producing A-55 Additive at its new mixing plant
located in Sparks, 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
47
<PAGE> 49
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 "--A-55's and its customers'
operations are subject to environmental laws and regulations as well as other
regulatory regimes."
A-55'S ADMINISTRATIVE OFFICES, TECHNICAL CENTER AND MIXING 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."
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 second quarter of
1999, to serve as a template for the construction of other mixing facilities in
the U.S. and abroad.
A-55'S 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.
A-55'S CURRENT AND POTENTIAL 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 A-55's 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 A-55 and R. W. Gunnerman of their obligations under the letter agreement,
including providing him with a license to and disclosure of A-55's technology
for aviation-related applications. 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. 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 A-55's technology to Mr. Schneider. Pursuant to the trial
court's order, A-55 provided Mr. Schneider with a license to and disclosure of
A-55's technology for aviation-related applications. The trial court also
required the posting of a bond for damages in the amount of $1,000,000 that it
held Mr. Schneider suffered as a result of A-55's failure to disclose A-55's
technology to him, 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 have appealed the trial court's judgment with respect to the trial
court's determination of the amount of damages, and that appeal is pending.
There can be no assurance that the ultimate outcome of this matter will be
favorable to A-55.
48
<PAGE> 50
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 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. The
Illinois court has stayed its proceedings and, concluding that it lacked
jurisdiction to compel arbitration in Colorado, granted A-55 time to file a
petition to compel arbitration in Colorado. Recently, A-55 filed a petition to
compel arbitration in the Colorado federal district court, and Caterpillar has
filed a motion to stay the arbitration pending a ruling on A-55's petition to
compel arbitration. Both motions are currently pending before the Colorado
Court, and the arbitrator selected by both parties has set July 19 - August 6,
1999 as the dates for the hearing of the arbitration. No assurance can be given
that the ultimate outcome of this matter will be favorable to A-55.
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.
49
<PAGE> 51
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and senior employees of A-55 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..................... 50 President
Daniel J. Klaich..................... 48 Executive Vice President, Secretary and
Director
Peter W. Gunnerman................... 32 President, Business Development Division and
Director
Patrick M. Grimes.................... 32 Chief Financial Officer
Dr. William C. Tao................... 41 President, Power Markets Division
Dr. Thomas M. Houlihan............... 59 Senior Vice President, Power Markets
Division
Alexander J. Paior................... 52 Senior Vice President, Business Development
Division
</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 traded 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 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 degree from the University of
50
<PAGE> 52
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 President
of the Business Development Division) 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 at Berkeley 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.
Alexander J. Paior has served as Senior Vice President of the Business
Development Division since December 1998, and prior to that he 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 its Asset Management Task Force 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.
Officers are elected annually by the board of directors and serve at the
discretion of the board. The board of directors of A-55 has three members, each
of whom are employees of A-55. 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 three non-employee
directors to the board of directors within ninety
51
<PAGE> 53
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.
A-55 is dependent on the active participation of its principal executive
officers and 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 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
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, 1998 to its Chief Executive Officer and each of its four
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.................................. 1998 $348,461
Chief Executive Officer
Thomas N. Harvey..................................... 1998* 159,616
Daniel J. Klaich..................................... 1998 158,769
Executive Vice President
Peter W. Gunnerman................................... 1998 158,769
President, Business Development Division
Dr. William C. Tao................................... 1998+ 113,539
</TABLE>
- -------------------------
* For employment from May 1, 1998.
+ For employment from July 1, 1998.
COMPENSATION OF DIRECTORS
Directors of A-55 have not received cash for services provided as board or
committee members; however, A-55 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.
52
<PAGE> 54
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 an option to
purchase 150,000 shares of the common stock at a per share exercise price equal
to the offering price, such option 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 C. 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. Dr. 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 has an option to purchase from R.W. Gunnerman shares, which
represents 2% of the total shares of the common stock of A-55 outstanding
immediately prior to the offering, at a per share price equal to 90% of the
initial public offering price. Such option vests 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.
1999 STOCK OPTION PLAN
A-55 intends to adopt a stock option plan (the "1999 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
1999 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 1999 Stock Option Plan will also
provide for the grant of stock options that will be immediately exercisable to
purchase vested and unvested shares of common stock, the latter being subject to
repurchase by A-55 upon termination of the employment or services relationship
between the holder and A-55. The maximum number of shares of common stock that
may be issued under the 1999 Stock Option Plan will not exceed, in the
aggregate, 4,000,000 shares of common stock. 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 1999 Stock Option Plan also provides that all unvested options and
unvested shares will immediately vest prior to a change of control of A-55.
53
<PAGE> 55
The compensation committee will administer the 1999 Stock Option Plan and select
the individuals who will receive awards and establish the terms and conditions
of such awards.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Pursuant to the provisions of the Delaware General Corporation Law, A-55
has adopted provisions in its certificate of incorporation (the "Certificate")
which provide that directors of A-55 shall not be personally liable for monetary
damages to A-55 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 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 to indemnify its officers and directors, and
permits A-55 to indemnify its other agents, by bylaws, agreements or otherwise,
to the full extent permitted under Delaware law. A-55 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 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--A-55's
current and potential 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
On January 28, 1999 the Reorganization was effective. Pursuant to the
Reorganization, the partnership interests in A-55, L.P. were converted into all
of the shares of common stock of A-55, Inc. All such partnership interests
outstanding were converted on the same conversion ratio, and Messrs. R. W.
Gunnerman, Daniel J. Klaich and Peter W. Gunnerman received, respectively,
shares representing 78.7%, 3.0% and 3.0% of the total shares of A-55, Inc. See
"Principal Stockholders."
A-55's 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.
54
<PAGE> 56
At January 28, 1999, A-55 had notes payable and related accrued interest of
approximately $21.8 million to R. W. Gunnerman pursuant to several promissory
notes payable to R. W. Gunnerman. The notes are payable on demand and bear
interest at 7.75% per annum. In addition, in connection with the Reorganization,
A-55 has agreed to pay partner distributions of approximately $2.1 million, of
which approximately $944,700 will be paid to R. W. Gunnerman, Daniel J. Klaich,
Peter W. Gunnerman and Alex Prior, each of whom is an officer of A-55. A-55
intends to repay all of such amounts 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
against R. W. Gunnerman, A-55, L.P. and A-55, Inc. brought by an individual who
had advanced $1.5 million to A-55 for refundable marketing fees and who had
entered into a separate business transaction with R. W. Gunnerman, R. W.
Gunnerman agreed to repay the individual $11.5 million, of which $2.0 million
has been paid. The remaining $9.5 million is payable by R. W. Gunnerman 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 outstanding voting stock in A-55.
R. W. Gunnerman has stated his intent to repay the remaining $9.5 million
obligation with a portion of the proceeds of the offering that will be used by
A-55 to repay the notes payable to him. Of R. W. Gunnerman's total settlement
payments, $1.5 million relates to the repayment to the individual of the
refundable marketing fees that he had advanced to A-55, and the remaining $10
million relates to repaying the individual amounts previously received by R. W.
Gunnerman in their separate business transaction. Consequently, in September
1998, R. W. Gunnerman assumed A-55's $1.5 million liability for the refundable
marketing fees and A-55 increased its obligations to R. W. Gunnerman by the same
amount.
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.
During 1998, A-55 paid Starbright Charter, Inc. approximately $595,800. 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.
55
<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information about the beneficial
ownership of A-55 common stock as of December 31, 1998, and as adjusted to
reflect the sale by A-55 of the shares offered upon the completion of the
offering (i) by each person who is known by A-55 to own beneficially more than
five percent (5%) of the outstanding shares of common stock, (ii) by each of
A-55's directors, (iii) by each of the Named Executive Officers, and (iv) by all
directors and executive officers as a group. The table gives effect to the
Reorganization. Except as otherwise indicated, A-55 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)................ 43,676,885 78.7% %
Daniel J. Klaich...................... 1,665,000 3.0
Peter W. Gunnerman.................... 1,665,000 3.0
All directors and executive officers
as a group (9 persons).............. 47,561,885 85.7% %
</TABLE>
- -------------------------
(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Includes 555,000 shares held by RWG, Inc., a Nevada corporation and general
partner of the Predecessor, of which R. W. Gunnerman is the sole
stockholder.
56
<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon consummation of the offering, A-55 will have authorized capital stock
of 160,000,000 shares consisting of 150,000,000 shares of common stock, $0.001
par value, and 10,000,000 shares of preferred stock, $0.001 par value. As of
January 28, 1999, giving effect to the Reorganization, 55,500,000 shares of
common stock were outstanding, held by 97 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, 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 10,000,000 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, 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 by means of a tender
offer, proxy contest, merger or otherwise and to protect the continuity of
A-55'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 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
57
<PAGE> 59
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, even though such an attempt might be
beneficial to A-55 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, or of attempting to change the composition or policies of
the board, even though such attempts might be beneficial to A-55 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 (the "Notice Procedure"). The
Notice Procedure provides that, subject to the rights of any holders of
preferred stock, only persons who are
58
<PAGE> 60
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 prior to the meeting at which directors are to be elected will be
eligible for election as directors of A-55. 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 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 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 and its stockholders.
DELAWARE LAW
A-55 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's transfer agent and registrar for its common stock is Continental
Stock Transfer & Trust Company.
59
<PAGE> 61
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.
Upon consummation of the offering, A-55 will have outstanding an aggregate
of shares of common stock, assuming (i) the issuance of
shares of common stock offered by A-55 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 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 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. Under Rule 144(k), a person who is not deemed to have been an affiliate of
A-55, 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's stockholders (including A-55's executive officers and
directors), who in the aggregate beneficially own shares of common
stock of A-55, 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 ("DLJ").
Prior to the offering, A-55 intends to enter into a registration rights
agreement with DLJ pursuant to which DLJ may, in certain circumstances, cause
A-55 to effect a registration under the Securities Act of shares of A-55 common
stock acquired by DLJ in connection with its agreement to serve as financial
advisor to A-55, or to include such shares in a public offering of securities by
A-55. DLJ cannot cause such a registration or sell its shares of A-55 common
stock in any offering by A-55 within 180 days of this offering.
60
<PAGE> 62
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 and Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, are acting as representatives (the "Representatives"),
each has severally agreed to purchase, and A-55 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........
Dain, Rauscher Wessels.....................................
--------
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
Representatives.
A-55 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. The following table shows the
per share and total underwriting discounts and commissions to be paid to the
Underwriters by A-55, assuming both no exercise and full exercise of the
Underwriters' over-allotment option.
<TABLE>
<CAPTION>
FULL
NO EXERCISE EXERCISE
----------- -------------
<S> <C> <C>
Per share....................................... $ $
Total........................................... $ $
</TABLE>
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
61
<PAGE> 63
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.
A-55 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 Representatives 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 Representatives have 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 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 Representatives. 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
62
<PAGE> 64
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, DLJ has entered into an agreement
to serve as financial advisor to A-55. 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 hereby will be
passed upon for A-55 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, Inc. as of December 31, 1997 and 1998, and the
related statements of operations, stockholders' capital (deficit) and cash flows
for each of the three years in the period ended December 31, 1998, and the
period from November 1, 1992 (inception) through December 31, 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.
63
<PAGE> 65
ADDITIONAL INFORMATION
A-55 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 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 intends to furnish its stockholders with annual reports containing
financial statements for each fiscal year audited by independent auditors.
64
<PAGE> 66
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
A-55, INC.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-2
Balance Sheets as of December 31, 1997 and 1998............. F-3
Statements of Operations for the period from November 1,
1992 (inception) to December 31, 1998 and for the years
ended December 31, 1996, 1997 and 1998.................... F-4
Statements of Stockholders' Equity (Deficit) for the period
from November 1, 1992 (inception) to December 31, 1995 and
for the years ended December 31, 1996, 1997 and 1998...... F-5
Statements of Cash Flows for the period from November 1,
1992 (inception) to December 31, 1998 and for the years
ended December 31, 1996, 1997 and 1998.................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of A-55, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of A-55, Inc. (a
development stage enterprise) at December 31, 1997 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 and the period from November 1, 1992 (inception) through
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the management of A-55,
Inc.; 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 discussed in Note 1 to the financial statements, on January 28, 1999,
A-55, L.P. was merged with and into the surviving entity, A-55, Inc. (the
"Reorganization"). The Reorganization has been accounted for as entities under
common control in a manner similar to a pooling of interests and has been
reflected in the financial statements as having occurred as of the date of
inception of A-55, L.P.
The accompanying financial statements have been prepared assuming that
A-55, Inc. will continue as a going concern. As discussed in Note 1 to the
financial statements, A-55, Inc. is a development stage enterprise that has
suffered recurring losses from operations and has a net capital deficit. This
raises substantial doubt about A-55, Inc.'s ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Sacramento, CA
January 28, 1999
F-2
<PAGE> 68
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash.............................................. $ 783,800 $ 877,000
Inventories....................................... 97,700 76,600
Other current assets.............................. 18,400 11,600
Deferred offering costs........................... 157,800 526,200
------------ ------------
Total current assets.................... 1,057,700 1,491,400
Property and equipment, net....................... 1,443,500 2,233,600
Intellectual property, net........................ 2,175,400 988,800
------------ ------------
$ 4,676,600 $ 4,713,800
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable.......................... $ 482,500 $ 1,313,000
Accrued liabilities............................. 2,737,200 3,825,700
Territorial license deposits.................... 2,414,700 2,414,700
Short-term indebtedness......................... -- 1,253,300
Advances from Stockholder and related accrued
interest..................................... 11,386,600 21,411,500
------------ ------------
Total current liabilities............... 17,021,000 30,218,200
Commitments and contingencies (Note 10)
Stockholders' deficit:
Preferred stock, $0.001 par value, 10,000,000
shares authorized, no shares issued and
outstanding.................................. -- --
Common stock, $0.001 par value, 150,000,000
shares authorized, 55,500,000 shares issued
and
outstanding.................................. 55,500 55,500
Additional paid-in capital...................... 1,353,200 --
Deficit accumulated during development stage.... (13,753,100) (25,559,900)
------------ ------------
Total stockholders' deficit............. (12,344,400) (25,504,400)
------------ ------------
$ 4,676,600 $ 4,713,800
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 69
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, NOVEMBER 1, 1992
---------------------------------------- (INCEPTION) TO
1996 1997 1998 DECEMBER 31, 1998
----------- ----------- ------------ -----------------
<S> <C> <C> <C> <C>
Expenses:
General and
administrative......... 989,000 2,081,500 4,658,600 10,570,000
Research and
development............ 184,900 1,741,200 2,274,600 4,725,900
Sales and marketing....... 559,500 623,800 701,700 1,985,700
Legal..................... 152,300 1,038,400 456,200 2,067,200
Depreciation and
amortization........... 261,000 1,361,600 1,324,100 3,278,200
----------- ----------- ------------ ------------
2,146,700 6,846,500 9,415,200 22,627,000
Other income (expense):
Joint venture
activities............. (383,000) -- -- 370,200
Interest income and
other.................. 235,000 65,000 17,400 336,000
Interest expense.......... (7,300) (1,800) (305,900) (336,300)
Interest expense to
related parties........ (402,800) (755,200) (1,311,000) (2,510,700)
----------- ----------- ------------ ------------
Net loss.................... $(2,704,800) $(7,538,500) $(11,014,700) $(24,767,800)
=========== =========== ============ ============
Loss per common share....... $(.05) $(.14) $(.20)
Weighted average common
shares.................... 55,500,000 55,500,000 55,500,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 70
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING TOTAL
-------------------- PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY(DEFICIT)
---------- ------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at November 1,
1992 (inception)....... -- $ -- $ -- $ -- $ --
Sale of common stock... 8,491,500 8,500 4,912,900 -- 4,921,400
Issuance of common
stock to R.W.
Gunnerman........... 43,678,500 43,700 (43,700) -- --
Issuance of common
stock for
compensation........ 3,330,000 3,300 1,320,700 -- 1,324,000
Distributions.......... -- -- (3,086,700) -- (3,086,700)
Net loss............... -- -- -- (3,509,800) (3,509,800)
---------- ------- ----------- ------------ ------------
Balance at December 31,
1995................... 55,500,000 55,500 3,103,200 (3,509,800) (351,100)
Distributions.......... -- -- (1,750,000) -- (1,750,000)
Net loss............... -- -- -- (2,704,800) (2,704,800)
---------- ------- ----------- ------------ ------------
Balance at December 31,
1996................... 55,500,000 55,500 1,353,200 (6,214,600) (4,805,900)
Net loss............... -- -- -- (7,538,500) (7,538,500)
---------- ------- ----------- ------------ ------------
Balance at December 31,
1997................... 55,500,000 55,500 1,353,200 (13,753,100) (12,344,400)
Distributions.......... -- -- (1,353,200) (792,100) (2,145,300)
Net loss............... -- -- -- (11,014,700) (11,014,700)
---------- ------- ----------- ------------ ------------
Balance at December 31,
1998................... 55,500,000 $55,500 $ -- $(25,559,900) $(25,504,400)
========== ======= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 71
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, 1992
YEARS ENDED DECEMBER 31, (INCEPTION) TO
---------------------------------------- DECEMBER 31,
1996 1997 1998 1998
----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $(2,704,800) $(7,538,500) $(11,014,700) $(24,767,800)
Adjustments to reconcile net loss to net
cash provided by (used for) operating
activities:
Depreciation and amortization............ 261,000 1,361,600 1,324,100 3,278,200
Receivables from Advanced Fuels offset
against purchase price of joint
venture............................... (331,900) -- -- (331,900)
Equity in loss of joint venture.......... 1,133,000 -- -- 3,430,200
Loss on disposal of property &
equipment............................. -- 24,400 -- 28,000
Compensation expense for common stock
interests issued to employees......... -- -- -- 1,324,000
Changes in operating assets and
liabilities:
Inventories........................... -- (97,700) 21,100 (76,600)
Other current assets.................. 5,800 (11,800) 6,800 (11,600)
Deferred offering costs............... -- (157,800) (368,400) (526,200)
Trade accounts payable................ 126,300 342,600 830,500 1,313,000
Accrued interest...................... 336,000 755,200 1,311,000 2,403,800
Accrued liabilities................... 1,632,000 942,400 (1,056,800) 1,680,400
Territorial license deposits.......... -- 2,414,700 -- 2,414,700
----------- ----------- ------------ ------------
Net cash (used for) provided by
operating activities................ 457,400 (1,964,900) (8,946,400) (9,841,800)
----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ (88,100) (155,700) (927,600) (2,968,800)
Contributions to joint venture............. -- -- -- (990,000)
Purchase of joint venture.................. (5,668,100) -- -- (5,668,100)
----------- ----------- ------------ ------------
Net cash used for investing
activities.......................... (5,756,200) (155,700) (927,600) (9,626,900)
----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock....................... -- -- -- 4,921,400
Distributions.............................. (1,750,000) -- -- (4,836,700)
Short-term debt, net....................... -- 1,253,300 1,253,300
Advances from Stockholder, net............. 7,838,600 2,108,900 8,713,900 19,007,700
----------- ----------- ------------ ------------
Net cash provided for financing
activities.......................... 6,088,600 2,108,900 9,967,200 20,345,700
----------- ----------- ------------ ------------
Net change in cash......................... 789,800 (11,700) 93,200 877,000
Cash, beginning of period.................. 5,700 795,500 783,800 --
----------- ----------- ------------ ------------
Cash, end of period........................ $ 795,500 $ 783,800 $ 877,000 $ 877,000
=========== =========== ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Distributions payable...................... $ 2,145,300 $ 2,145,300
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 72
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS
ORGANIZATION AND REORGANIZATION
A-55, Inc. (A-55) was incorporated in Delaware in July 1997 and began
conducting the operations of A-55 in January 1999. Prior to January 1999, all of
the operations had been conducted through A-55, L.P., a Nevada limited
partnership formed in January 1994, and its predecessor, a Delaware partnership
formed in November 1992 (inception) also under the name A-55, L.P. The
activities of A-55, Inc. prior to January 1999 were limited to the planning for
an initial public offering (the "Offering") as discussed in Note 2. On January
28, 1999, A-55, L.P. (the Nevada limited partnership) was merged with and into
the surviving entity A-55, Inc. (the "Reorganization"). In connection with the
Reorganization, the partners of A-55, L.P. became 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. The Reorganization has
been accounted for as entities under common control in a manner similar to a
pooling of interests and has been reflected in the financial statements as
having occurred as of the date of inception of A-55, L.P. In conjunction with
the Reorganization, A-55, L.P. declared certain partner distributions totaling
approximately $2.1 million.
NATURE OF OPERATIONS
A-55 develops, produces, and markets environmental technology related to
cost competitive clean fuels (the "A-55 Technology"). A-55 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's
proprietary additive which allows for the stable blend of almost any petroleum
product with water to create clean fuels that are both cost competitive to use
and environmentally cleaner than many fossil fuels used today. A-55'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).
BASIS OF PRESENTATION
The financial statements have been prepared assuming A-55 will continue as
a going concern. A-55 is a development stage enterprise that has incurred
operating losses and negative cash flows from operations since inception and has
a stockholders' deficit of $25,504,400 at December 31, 1998. Operations to date
have been substantially financed through advances from the principal
stockholder. A-55 will need continued cash advances, additional capital, and/or
improved operating results to continue as a going concern.
A-55 is currently working with investment banking firms to raise additional
equity capital through the planned Offering. Proceeds from this Offering will be
utilized to repay existing financing obligations, provide working capital to
support operating activities, fund implementation efforts for customers, and
expand sales and marketing efforts to increase the customer base.
F-7
<PAGE> 73
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PLANNED OFFERING AND DEFERRED OFFERING COSTS
A-55 has incurred costs totaling $157,800 and $526,200 at December 31, 1997
and 1998, respectively, in connection with the planned Offering. 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 expensed in the period in
which a decision has been made to terminate the Offering.
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.
STOCK-BASED COMPENSATION
A-55 accounts for stock-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 No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of A-55 stock and the amount an employee must pay to acquire the
stock.
REVENUE RECOGNITION AND TERRITORIAL LICENSE DEPOSITS
A-55 has entered into territorial license agreements for foreign
distribution rights to its clean fuel technology. Each of these license
agreements requires the licensee to make certain up front cash payments to A-55
in the form of territorial license deposits. Under the terms of each of the
license agreements, license deposit payments are not refundable; however, should
A-55 be unable to meet its obligations under a license agreement, such
territorial license deposits could be returned to the licensee. Revenue from
each territorial license agreement is recognized when the licensee and A-55 have
completed all of their respective applicable initial contractual obligations
under the license agreement and collection of unpaid territorial license
deposits is reasonably assured.
EARNINGS PER SHARE
A-55 has presented earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Basic
earnings per share is determined by dividing net income by the weighted average
number of common shares outstanding during the year. Dilutive earnings per share
have not been presented as there were no dilutive potential common shares
outstanding among the periods presented.
F-8
<PAGE> 74
A-55, INC.
(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 the A-55 Technology.
INCOME TAXES
Subsequent to the Reorganization, A-55 is assessed corporate income taxes
for federal and state purposes. Income taxes are computed using the 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. A-55 reviews its deferred
tax assets and records a valuation allowance if it believes that there is
substantial doubt that the future tax benefits related to the assets will be
realized.
Prior to the Reorganization, A-55 was considered a Partnership under the
U.S. Internal Revenue Code. Accordingly, A-55's income, deductions, and credits
were reported on the income tax returns of the individual partners and,
therefore, no provision for federal or state income taxes was made.
ADVERTISING
A-55 expenses the costs of advertising the first time advertising takes
place. Advertising expense for the years ended December 31, 1996, 1997 and 1998
were not significant.
INVENTORIES
Inventories consist primarily of fuel and 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, 1996, 1997 and 1998
was $63,200, $175,000, and $137,500, respectively.
INTELLECTUAL PROPERTY
Intellectual property represents the fair value of the rights to Advanced
Fuels' aqueous fuel technology re-acquired by A-55 in October 1996 (Note 4).
Intellectual property is being amortized on a straight-line basis over three
years. Amortization expense was
F-9
<PAGE> 75
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$197,800 for the year ended December 31, 1996 and $1,186,600 for the years ended
December 31, 1997 and 1998.
INVESTMENT IN AFFILIATES
A-55 records investments in affiliates in which it owns less than 20% under
the cost method. Investments in affiliates in which A-55 owns between 20 - 50%
and has the ability to exercise significant influence over operating and
financial policies of the investee company are accounted for under the equity
method. A-55 adjusts the carrying amount of its investments under the equity
method to recognize its share of the earnings or losses of the investee
subsequent to the date of investment and to reflect its share of changes in the
investee capital accounts. A-55 reviews its investments in affiliates to
determine whether events or changes in circumstances indicate that the carrying
amount of the investment may not be recoverable, and records a valuation
allowance if appropriate.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
3. BALANCE SHEET COMPONENTS
The components of certain balance sheet captions are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Property and equipment, net:
Land and improvements....................... $ 513,800 $ 513,800
Buildings and improvements.................. 628,800 628,800
Machinery and equipment..................... 435,300 810,600
Office furniture and equipment.............. 194,200 214,400
Construction-in-progress.................... -- 532,100
---------- ----------
1,772,100 2,699,700
Less -- accumulated depreciation.............. (328,600) (466,100)
---------- ----------
$1,443,500 $2,233,600
========== ==========
Accrued liabilities:
Refundable marketing fees................... $1,500,000 $ --
Distributions payable....................... -- 2,145,300
Legal....................................... 1,000,000 1,000,000
Compensation and benefits................... 148,800 450,100
Other....................................... 88,400 230,300
---------- ----------
$2,737,200 $3,825,700
========== ==========
</TABLE>
In 1996, A-55 received $1,500,000 from an individual who signed a one year
agreement to represent A-55 in marketing its aqueous fuel technology. Under the
F-10
<PAGE> 76
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
agreement, A-55 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, the developer of the A-55 Technology, who is the majority
stockholder in A-55 (R. W. Gunnerman), assumed the liability to refund these
marketing fees, and the Advances from Stockholder were increased accordingly
(Note 5).
As discussed in Note 1, A-55 declared certain partner distributions in
conjunction with the Reorganization. The distributions have been reflected as a
payable at December 31, 1998 and were recorded against additional paid in
capital and the deficit accumulated during the development stage.
4. ADVANCED FUELS JOINT VENTURE
In July 1994, A-55 formed a joint venture, Advanced Fuels, LLC (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 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 contributed an additional $490,000
cash to Advanced Fuels.
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 cash to A-55 of $750,000 for the
year ended December 31, 1996.
A-55 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 $1,133,000 for the year ended December 31, 1996. A significant portion
of the expenses incurred by Advanced Fuels were paid by A-55 with subsequent
reimbursement received from Advanced Fuels. These transactions are not included
in A-55's statements of operations except to the extent losses were allocated by
the joint venture. Total Advanced Fuels expenses funded by A-55 were $1,170,000
for the year ended December 31, 1996.
In October 1996, A-55, 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
acquired all tangible assets of Advanced Fuels. Advanced Fuels' liabilities to
A-55 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 sell
(but not license) gasoline- or naphtha-based aqueous fuels,
F-11
<PAGE> 77
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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. At
December 31, 1997 and 1998 no amounts were payable or receivable under the
royalty agreement or lump sum payment agreement.
A-55 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
of $331,900 of receivables from Advanced Fuels, reduced by the reversal of
A-55'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.
The above joint venture activity has been reflected as "joint venture
activities" in the statements of operations as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996
------------------
<S> <C>
Equity in net loss of joint venture............. $1,133,000
Consulting revenues earned from joint venture... (750,000)
----------
$ 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.
F-12
<PAGE> 78
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ADVANCES FROM STOCKHOLDER AND RELATED ACCRUED INTEREST
A-55 has borrowing arrangements with R. W. Gunnerman (Stockholder), to
provide funding for the general operations of A-55. Advances from Stockholder
and the related accrued interest consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Advances, partially secured by land and buildings
with a book value of $1,025,200 at December 31,
1998, bearing interest at prime (7.75% at December
31, 1998) and repayable on demand................. $10,293,800 $19,007,700
Accrued interest on advances........................ 1,092,800 2,403,800
----------- -----------
$11,386,600 $21,411,500
=========== ===========
</TABLE>
Subsequent to December 31, 1998, A-55 has received $400,000 of additional
advances from R. W. Gunnerman. These advances are repayable on demand and bear
interest at prime.
In connection with the settlement in October 1998 of certain litigation
against R. W. Gunnerman and A-55 brought by the individual who had advanced $1.5
million to A-55 for refundable marketing fees (Note 3) and who had entered into
a separate business transaction with R. W. Gunnerman, R. W. Gunnerman agreed to
repay the individual $11.5 million, of which $2.0 million has been paid. The
remaining $9.5 million is payable by R. W. Gunnerman on or before April 30,
1999, and is secured by real property owned by R. W. Gunnerman as well as
security interest in 51% of the outstanding voting stock in A-55. Of R. W.
Gunnerman's settlement payments, $1.5 million relates to the repayment to the
individual of the refundable marketing fees that he had advanced to A-55, and
the remaining $10 million relates to repaying the individual amounts previously
received by R. W. Gunnerman in their separate business transaction.
Consequently, in September 1998 R. W. Gunnerman assumed A-55's $1.5 million
liability for the refundable marketing fees and A-55 increased its obligations
to R. W. Gunnerman by the same amount. Accordingly, all future obligations under
the settlement are the responsibility of R. W. Gunnerman and therefore, no
allocation to A-55 of the amounts repaid is necessary.
Estimation of the fair value of advances from Stockholder is not considered
practicable due to the relationships involved.
6. SHORT-TERM INDEBTEDNESS
In September 1998, A-55 borrowed approximately $990,000 from a third party
under a note payable, partially secured by real property, due in March 1999. The
proceeds received were net of loan fees of $510,000 which are being amortized
over the six-month term of the note. The note bears interest at prime plus 2.5%.
The balance of $1,253,300 at December 31, 1998 is comprised of the net proceeds
received and the amortized portion of the loan fees incurred. In October 1998,
A-55 transferred the loan proceeds to R.W. Gunnerman as a reduction to the
Advances from R.W. Gunnerman.
F-13
<PAGE> 79
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. TERRITORIAL LICENSE AGREEMENTS
During the year ended December 31, 1997, A-55 entered into three
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) one covering the Russian Federation (the "Russian License"). Each of these
licenses provides for payment to A-55 of certain territorial license deposits
and an on-going royalty which ranges from .5% to 1.0% of the sales in the
applicable territory. The Russian License required an aggregate $20.0 million
territorial license fee cash payment due in four separate payments, the first of
which was $1.0 million and was due on December 31, 1998. Because A-55 did not
receive any portion of that payment, it elected to terminate the Russian
License. Additionally, A-55 is granted a 30% ownership interest in the licensee
corporation. The territorial license deposits under 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 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 licenses have
been recorded as a current liability pending the completion of the field tests
and negotiation of the revised payment schedule. The Australian License expires
upon the expiration of the last patent to expire underlying the A-55 Technology
filed in the designated license territory. 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 in the United States or in either North or South
Korea.
At December 31, 1997 and 1998, A-55 had a 30% equity ownership in A-55
Australia Limited (Australia), an Australian corporation which was formed by the
Australian Licensee. The value of the equity investment in Australia, received
upon its formation in 1997 is not significant. To date, there has been no
significant income or equity in Australia. No licensee entities have been
established by the Korean licensee.
No royalties have been paid under any of the licenses.
8. STOCK OPTIONS
OPTIONS GRANTED BY R. W. GUNNERMAN
In July 1998, R.W. Gunnerman granted a key employee of A-55 the option to
purchase from R.W. Gunnerman up to a two percent common stock interest in A-55,
at a purchase price equal to ten percent below the Offering price of A-55'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 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 will be adjusted proportionately.
F-14
<PAGE> 80
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In January 1996, R. W. Gunnerman granted a key employee the option to
purchase a three-quarter percent common stock interest in A-55, owned by R. W.
Gunnerman, for $750,000. Management believes that the fair market value of this
three-quarter percent common stock 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 common stock interest. In September 1997, R.
W. Gunnerman granted another key employee the option to purchase a one percent
common stock interest in A-55, owned by R. W. Gunnerman, for $5,000,000. In
management's judgement, the fair market value of this common stock 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 common
stock interest in A-55, owned by R. W. Gunnerman, for $3,000,000. In
management's judgment, the fair market value of this common stock interest on
the date of grant was $3,000,000. The option vested immediately and expires ten
years from the date of grant.
A-55 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 interests
approximated exercise price on the date of grant. Had compensation costs for the
years ended December 31, 1996, 1997 and 1998 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's net loss would have been increased to
the pro forma amount indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Net loss:
As reported........... $2,704,800 $7,358,500 $11,014,700
Pro forma............. $2,738,000 $7,655,100 $11,423,700
</TABLE>
The fair values 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 6%,
dividend rate of 0% and weighted average expected option life of 2 years.
Minimum value option-pricing models require the input of highly subjective
assumptions, which are subject to change from time to time.
1999 STOCK OPTION PLAN
A-55 intends to adopt a stock option plan (the "1999 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
1999 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 1999 Stock
F-15
<PAGE> 81
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Option Plan will also provide for the grant of stock options that will be
immediately exercisable to purchase vested and unvested shares of common stock,
the latter being subject to repurchase by A-55 upon termination of the
employment or services relationship between the holder and A-55. The maximum
number of shares of common stock that may be issued under the 1999 Stock Option
Plan will not exceed, in the aggregate, 4,000,000 shares of common stock. 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 1999 Stock Option Plan will provide that all unvested
options and unvested shares will immediately vest prior to a change of control
of A-55. The compensation committee will administer the 1999 Stock Option Plan
and select the individuals who will receive awards and will establish the terms
and conditions of such awards.
Pursuant to an employment agreement, A-55 will, upon completion of the
Offering, grant an option to purchase 150,000 shares of A-55's common stock to a
key 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's common stock. A-55
intends to grant this option under the provisions of the 1999 Stock Option Plan.
9. INCOME TAXES
No provision or benefit for income taxes has been recognized for any of the
periods presented as A-55 has incurred net operating losses for income tax
purposes and has no carry-back potential. Deferred tax assets consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Depreciation and amortization....... $ 373,700 $ 688,800
Research and development credits.... 212,800 362,800
Accrued legal expenses.............. 350,000 350,000
Refundable marketing fees........... 525,000 --
Compensation accruals............... 11,600 122,300
Related party accrued interest...... 382,600 841,300
Territorial license deposits........ 845,100 845,100
----------- -----------
2,700,800 3,210,300
Less: valuation allowance........... (2,700,800) (3,210,300)
----------- -----------
Net deferred tax asset.............. $ -- $ --
=========== ===========
</TABLE>
Based on a number of factors, including the lack of a history of profitable
operations, management believes that there is substantial doubt A-55 will be
able to realize its deferred tax assets, and therefore, has recorded a full
valuation allowance at December 31, 1997 and 1998.
F-16
<PAGE> 82
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
During April 1997, A-55 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.................................... $ 736,200
1999.................................... 736,200
2000.................................... 368,100
----------
$1,840,500
==========
</TABLE>
Rent expense under the operating lease totaled $0, $441,000 and $736,200
for the years ended December 31, 1996, 1997 and 1998, respectively. A-55
believes that the amounts paid for such facilities do not exceed the fair value
rental thereof.
PROFESSIONAL SERVICES
A-55 has entered into an agreement with an entity that will provide
financial advisory services to A-55 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 up to 1.6 percent common stock of A-55 from R. W. Gunnerman.
EMPLOYMENT ARRANGEMENTS
A-55 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, 1997 or
1998.
LEGAL PROCEEDINGS
A-55 and R. W. Gunnerman are named defendants in a lawsuit instituted by
Richard J. Schneider (the "Plaintiff") on March 29, 1995 in which the Plaintiff
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
lawsuit, the Plaintiff seeks, among other things, specific performance by A-55
and R. W. Gunnerman of their obligations under the letter agreement, including
providing him with a license to and disclosure of A-55's technology for
aviation-related applications. 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, A-55 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.
F-17
<PAGE> 83
A-55, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
After a hearing on November 25, 1997, the trial court granted the Plaintiff's
motion, requiring the posting of a bond for damages in the amount of $1,000,000
that it held the Plaintiff suffered as a result of A-55's failure to disclose
A-55's technology to him, and requiring A-55 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'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 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, ordering that the
formulation of A-55 Additive be disclosed to the Plaintiff; however, the
appellate court reversed the damages award and the matter was remanded to the
trial court for an evidentiary hearing to determine the issue of damages. On
October 12, 1998, the trial court again entered judgment in favor of the
Plaintiff in the amount of $1,000,000. A-55 has disclosed the A-55 Technology to
the Plaintiff and provided him with a license to and disclosure of A-55's
technology for aviation-related applications. A-55 and R. W. Gunnerman have to
appealed the trial court's judgment with respect to the trial court's
determination of the amount of damages, and that appeal is pending. There can be
no assurance that the ultimate outcome of this matter will be favorable to A-55.
In early 1998, A-55 learned that Caterpillar had received title by
assignment to four United States patents related to the use of aqueous fuel in
internal combustion engines. A-55 believes that these patents cover inventions
developed by R. W. Gunnerman and should have been assigned to A-55 under the
terms of the Advanced Fuels dissolution agreement between A-55 and Caterpillar.
In April 1998, Caterpillar filed suit in federal district court in Peoria,
Illinois against A-55, 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 with respect to its suit and no amounts have been
recorded in the financial statements related to the future outcome of this
matter.
11. RELATED PARTY TRANSACTIONS
In addition to the related party transactions addressed in Notes 4, 5 and
8, A-55, during the year ended December 31, 1998, paid $595,800 in travel
expenses to a corporation wholly owned by R. W. Gunnerman. No travel expenses to
this entity were incurred prior to 1998. A-55 believes that the amounts paid for
such services do not exceed the fair market value thereof.
F-18
<PAGE> 84
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
A-55, INC.
SHARES OF COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
DONALDSON, LUFKIN & JENRETTE
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
------------------------
DLJDIRECT INC.
- --------------------------------------------------------------------------------
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> 85
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> 86
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 on January 28, 1999, the partnership interests
in A-55, L.P., and in the case of one corporate limited partner in A-55,
L.P., the shares of that corporation's sole stockholder, were converted
into all of the shares of common stock of A-55, Inc. then outstanding (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., as
amended.
3.1 Amended and Restated Certificate of Incorporation of A-55,
Inc., as amended.
3.2+ Amended and Restated Bylaws of A-55, Inc.
4.1 Form of A-55, Inc.'s common stock certificate.
4.2* Registration Rights Agreement between Donaldson, Lufkin &
Jenrette Securities Corporation and A-55, Inc.
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.
</TABLE>
II-2
<PAGE> 87
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
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.
10.14+ 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* 1999 Stock Option Plan.
10.20++ Fuel Purchase Agreement by and between A-55, Inc. and
Northeast Utilities, dated as of February 3, 1999.
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
++ Portions omitted pursuant to a request for confidential treatment
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> 88
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> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 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 26th day of February, 1999.
A-55, Inc.
By: *
--------------------------------------
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>
* Chief Executive February 26, 1999
- ----------------------------------------------------- Officer and
Rudolf W. Gunnerman Chairman of the
Board (principal
executive officer)
/s/ PATRICK M. GRIMES Chief Financial February 26, 1999
- ----------------------------------------------------- Officer (principal
Patrick M. Grimes financial and
accounting
officer)
/s/ DANIEL J. KLAICH Director February 26, 1999
- -----------------------------------------------------
Daniel J. Klaich
* Director February 26, 1999
- -----------------------------------------------------
Peter W. Gunnerman
*By: /s/ DANIEL J. KLAICH
------------------------------------------------
Daniel J. Klaich
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 90
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., as
amended.
3.1 Amended and Restated Certificate of Incorporation of A-55,
Inc., as amended.
3.2+ Amended and Restated Bylaws of A-55, Inc.
4.1 Form of A-55, Inc.'s common stock certificate.
4.2* Registration Rights Agreement between Donaldson, Lufkin &
Jenrette Securities Corporation and A-55, Inc.
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.
10.14+ 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.
</TABLE>
<PAGE> 91
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
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* 1999 Stock Option Plan.
10.20++ Fuel Purchase Agreement by and between A-55, Inc. and
Northeast Utilities, dated as of February 3, 1999.
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
++ Portions omitted pursuant to a request for confidential treatment.
<PAGE> 1
EXHIBIT 2.1
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (this "Agreement") is entered into as of July
31, 1998 between A-55, L.P., a Nevada limited partnership (the "Partnership"),
and A-55, Inc., a Delaware corporation (the "Corporation").
BACKGROUND
A. The Partnership is a Nevada limited partnership governed by a
Restated Agreement of Limited Partnership dated as of January 3, 1994, as
amended by First, Second, Third, Fourth, Fifth and Sixth Amendments effective as
of January 26, 1994, January 1, 1995, February 23, 1995, April 1, 1996,
September 16, 1997, and January 1, 1998 respectively (collectively, the
"Partnership Agreement").
B. RWG, Inc., a Nevada corporation, is the sole general partner of the
Partnership (the "General Partner"), and the Partnership's limited partners
consist of Class A, Class B and Class C limited partners (collectively, the
"Limited Partners"). (The General Partner and the Limited Partners are referred
to, collectively, as the "Partners" and, individually, as a "Partner." The
partnership interest of each Partner, whether a general partnership interest or
a Class A, Class B or Class C limited partnership interest, is referred to as a
"Partnership Interest.")
C. The Corporation is a newly-organized Delaware corporation. Its only
outstanding shares of stock are 50 shares of common stock, all of which are
owned by the Partnership.
D. The parties intend that the Partnership merge with and into the
Corporation (the "Merger") pursuant to the terms and conditions set forth herein
and the applicable provisions of Delaware and Nevada law, and that upon the
Merger's Effective Date (as defined below), all of the Partners of the
Partnership will become stockholders of the Corporation. The shares of the
Corporation's common stock to be received by such persons pursuant to the Merger
will not be registered under federal or state securities laws and will therefore
be restricted shares subject to a stock legend restricting the transfer of such
shares.
NOW, THEREFORE, the parties hereby agree as follows:
-1-
<PAGE> 2
1. The Merger.
(a) Effective Date. The Partnership will be merged with and into
the Corporation effective as of the date (the "Effective Date") that this
Agreement or a certificate of merger is filed with the Delaware Secretary of
State. Upon the Effective Date, the separate existence of the Partnership will
cease, and the Corporation will be the surviving entity of the Merger.
(b) Consummation. This Agreement or a certificate of merger will
be filed with the Delaware Secretary of State by the officers of the Corporation
at such date as will be determined by the Corporation's Board of Directors on or
prior to the date of consummation of the Corporation's initial public offering
of its common stock.
2. Representations and Warranties.
(a) Partnership. The Partnership represents and warrants to the
Corporation as follows:
(i) The Partnership has been duly formed and is validly
existing in good standing as a limited partnership under the laws of the State
of Nevada.
(ii) The execution and delivery of this Agreement, and
the consummation of the transactions contemplated hereby, have been duly
authorized by all necessary partnership action.
(b) Corporation. The Corporation represents and warrants to the
Partnership as follows:
(i) The Corporation has been duly organized and is
validly existing in good standing as a corporation under the laws of the State
of Delaware.
(ii) The execution and delivery of this Agreement, and
the consummation of the transactions contemplated hereby, have been duly
authorized by all necessary corporate action.
(iii) The shares of common stock to be issued to the
Partners in connection with the Merger will be validly issued, fully paid and
nonassessable.
3. Conversion of Partnership Interests Into Shares.
(a) General. On the Effective Date, by virtue of the Merger, and
without any further action by any Partner, (i) each Partner's Partnership
Interest in the Partnership
-2-
<PAGE> 3
outstanding immediately prior to the Effective Date will be converted into
shares of common stock of the Corporation pursuant to the terms set forth in
this Section 3, and (ii) the 50 shares of common stock currently issued and
outstanding in the name of the Partnership will be cancelled, and no additional
shares or securities will be issued, and no payments will be made, in respect
thereof.
(b) Number of Shares. The total number of shares into which all
the Partnership Interests will be converted will be determined by the
Corporation prior to the Effective Date. Immediately after the Effective Date,
the Corporation's only issued and outstanding shares of stock will be the shares
of common stock issued in the Merger (the "Shares").
(c) Apportionment of Shares Among Partners. The number of Shares
to be received by each Partner will be determined in accordance with the terms
of the Partnership Agreement, including the distribution provisions of Section
10.03 of the Partnership Agreement. The Partnership contemplates that prior to
the Effective Date, it will have made cash distributions to the Partners of a
sufficient amount to satisfy the "Priority Return" (as defined in the
Partnership Agreement), such that any further distributions would be distributed
to the Partners in proportion to their respective "Participation Percentages"
(as defined in the Partnership Agreement). In such case, immediately after the
Effective Date, each Partner would own that number of Shares determined by
multiplying the total number of Shares outstanding immediately after the
Effective Date by such Partner's Participation Percentage in the Partnership.
(d) Example. This example is based on the assumptions that (i)
before the Effective Date, the Partnership will have made sufficient cash
distributions to the Partners to satisfy the Priority Return, and (ii) the
Corporation determines that it wishes to have 100,000,000 Shares issued and
outstanding immediately after the Effective Date. In such case, a Partner with a
Participation Percentage of 1.543648% in the Partnership immediately before the
Effective Date would, by virtue of the Merger, have his Partnership Interest
converted into 1,543,648 Shares, which would represent 1.543648% of the issued
and outstanding stock of the Corporation immediately after the Effective Date.
4. Corporate Matters.
(a) Certificate of Incorporation. The Corporation's Certificate
of Incorporation as it exists on the Effective Date will be the Certificate of
Incorporation of the Corporation immediately after the Effective Date,
-3-
<PAGE> 4
unless and until it is amended or repealed in accordance with the provisions
thereof and of Delaware law.
(b) Bylaws. The Bylaws of the Corporation as they exist on the
Effective Date will be the Bylaws of the Corporation immediately after the
Effective Date, unless and until they are amended or repealed in accordance with
the provisions thereof.
(c) Directors and Officers. The directors and officers of the
Corporation immediately after the Effective Date will be the same as they are
immediately before the Effective Date.
5. Transfer, Conveyance and Assumption. As of the Effective Date, the
Corporation will continue in existence as the surviving entity, and all of the
assets and property of whatever kind and character of the Partnership will vest
in the Corporation; thereafter, the Corporation, as the surviving entity, will
be liable for all of the liabilities and obligations of the Partnership, and any
claim or judgment against the Partnership may be enforced against the
Corporation, as the surviving entity.
6. Termination. If the Effective Date does not occur on or before
December 31, 1998, this Agreement will terminate and be of no further force and
effect.
7. Miscellaneous.
(a) Further Action. Each party agrees to use reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement. In particular, the parties will
file whatever documents are required by Delaware and Nevada law to effectuate
the Merger.
(b) Amendments. This Agreement may be amended before the
Effective Date if, and only if, such amendment is in writing and signed by the
parties to this Agreement.
(c) Integration. All prior agreements, contracts, promises,
representations and statements, if any, between the parties are merged into this
Agreement, and this Agreement will constitute the entire understanding between
the parties with respect to the subject matter hereof.
(d) Successors and Assigns. This Agreement will be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
-4-
<PAGE> 5
(e) Governing Law. This Agreement will be construed in
accordance with and governed by the laws of the State of Delaware, without
giving effect to principles of conflicts of law.
(f) Counterparts. This Agreement may be signed in any number of
counterparts, each of which will be an original, with the same effect as if the
signatures were upon the same document.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed by their respective authorized representatives as of the date set
forth above.
A-55, L.P., a Nevada limited partnership
By: RWG, Inc., a Nevada corporation,
its sole general partner
By: /s/ Rudolf W. Gunnerman
-----------------------------
Rudolf W. Gunnerman
President
By: /s/ Daniel J. Klaich
-----------------------------
Daniel J. Klaich
Secretary
A-55, INC., a Delaware corporation
By: /s/ Rudolf W. Gunnerman
-----------------------------
Rudolf W. Gunnerman
Chief Executive Officer
By: /s/ Daniel J. Klaich
-----------------------------
Daniel J. Klaich
Secretary
-5-
<PAGE> 6
AMENDMENT NO. 1
TO
AGREEMENT OF MERGER
THIS AMENDMENT NO. 1 TO AGREEMENT OF MERGER (this "Amendment") is
entered into as of December 30, 1998 between A-55, L.P., a Nevada limited
partnership (the "Partnership"), and A-55, Inc., a Delaware corporation (the
"Corporation").
BACKGROUND
A. The parties previously entered into an Agreement of Merger dated as
of July 31, 1998 (the "Merger Agreement"). (Capitalized terms not otherwise
defined in this Amendment will have the meanings set forth in the Merger
Agreement.)
B. The parties wish to extend the termination of the Merger Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
1. Section 6 of the Merger Agreement is hereby amended and restated as
follows:
If the Effective Date does not occur on or before January 31, 1999,
this Agreement will terminate and be of no further force and effect.
2. All other terms of the Merger Agreement remain in full force and
effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed by their respective authorized representatives as of the date set
forth above.
A-55, L.P., a Nevada limited partnership
By: RWG, Inc., a Nevada corporation, its
sole general partner
By: /s/ DANIEL J. KLAICH
-------------------------------
Daniel J. Klaich
Secretary
A-55, INC., a Delaware corporation
By: /s/ DANIEL J. KLAICH
-------------------------
Daniel J. Klaich
Secretary
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
A-55, INC.
A-55, Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies as follows:
1. The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on July 14, 1997,
under the name, A-55, Incorporated. A certificate of Amendment of Certificate of
Incorporation was filed with the Secretary of State of Delaware on July 24,
1998, to change the Corporation's name to A-55, Inc.
2. Pursuant to Sections 242 and 245 of the Delaware General Corporation
Law, this Amended and Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the Corporation's Certificate of
Incorporation.
3. The terms and provisions of this Amended and Restated Certificate of
Incorporation have been duly adopted pursuant to the provisions of Sections 242
and 245 of the Delaware General Corporation Law.
4. The text of the Certificate of Incorporation of the Corporation, as
amended, is hereby restated and further amended to read in its entirety as
follows:
FIRST. The name of the Corporation is A-55, Inc.
SECOND. The address of the Corporation's registered office in the State
of Delaware is 15 East North Street, Dover, County of Kent. The name of its
registered agent at that address is Incorporating Services, Ltd.
THIRD. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH. The Corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock". The total
-1-
<PAGE> 2
number of shares which the corporation shall have the authority to issue is
10,000 shares of capital stock divided into (a) 9,000 shares of Common Stock
having a par value of $0.001 per share, and (b) 1,000 shares of Preferred Stock
having a par value of $0.001 per share.
FIFTH. The Preferred Stock of the Corporation may be issued from time to
time in one or more series. Subject to the restrictions prescribed by law, the
Board of Directors is authorized to fix by resolution or resolutions the number
of shares of any series of Preferred Stock and to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock and, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series of Preferred Stock, to
increase (but not above the total number of authorized shares of Preferred
Stock) or decrease (but not below the number of shares of any such series then
outstanding) the number of shares of any such series subsequent to the issue of
shares of that series.
The authority of the Board of Directors with respect to each
series of Preferred Stock shall include, but not be limited to, determination of
the following: (a) the number of shares constituting that series and the
distinctive designation of that series; (b) the dividend rate on the shares of
that series and the relative rights of priority, if any, of payment of dividends
on shares of that series; (c) whether that series shall have voting rights in
addition to the voting rights provided by law, and if so, the terms of such
voting rights; (d) whether that series shall have conversion privileges, and if
so, the terms and conditions of such privilege, including provision for
adjustment of the conversion rate in such events as the Board of Directors shall
determine; (e) whether that series shall be subject to redemption, the terms and
conditions of any such redemption, including the date or dates upon or after
which such series shall be redeemable, and the amount per share payable in case
of redemption, which amount may vary under different conditions and at different
redemption dates; (f) whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and if so, the terms and the
amount of such sinking funds; (g) the rights of the shares of that series in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series; and (h) any other relative rights, preferences and limitations
of that series.
SIXTH. The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal bylaws of the corporation, but the
-2-
<PAGE> 3
stockholders may make additional bylaws and may alter or repeal any bylaw
whether adopted by them or otherwise.
SEVENTH. Elections of directors need not be by written ballot except
and to the extent provided in the bylaws of the Corporation.
The directors shall be divided into three classes (I, II, III).
The number of directors comprising each class (assuming no vacancy in any class)
shall be as nearly equal in number as possible based upon the number of
directors comprising the entire Board of Directors. The Board shall, at or
before the first meeting of the Board of Directors following the time of filing
of this Amended and Restated Certificate of Incorporation with the Secretary of
State of the State of Delaware (the "Effective Time"), designate the class to
which each director then serving shall be a member. The initial terms of the
directors in Class I shall extend until the first annual meeting of stockholders
following the Effective Time; the initial term of directors in Class II shall
extend until the second annual meeting of the stockholders following the
Effective Time; and the initial terms of the directors in Class III shall extend
until the third annual meeting of stockholders following the Effective Time. 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.
Subject to the rights of the holders of any class or series of
Preferred Stock then outstanding, newly created directorships resulting from any
increase in the number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or any other cause may be filled by the Board of Directors (and not by
the stockholders unless there are no directors then 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. A director elected to fill a newly created directorship or other
vacancy shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor has been elected and qualified.
EIGHTH. A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation
-3-
<PAGE> 4
Law of Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit. Neither the amendment nor repeal of this Article
EIGHTH, nor the adoption of any provision of the Certificate of Incorporation or
bylaws or of any statute inconsistent with this Article EIGHTH, shall eliminate
or reduce the effect of this Article EIGHTH in respect of any acts or omissions
occurring, or any causes of action, suits or claims that, but for this Article
EIGHTH, would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
NINTH. The Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provision contained herein, and other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted, in the manner now or hereafter prescribed by law, and
all rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other person whomsoever by or pursuant to the
Certificate of Incorporation in its present form or as hereafter amended are
granted, subject to the rights reserved in this Article NINTH.
TENTH. Subject to the rights, if any, of holders of any class or series
of Preferred Stock then outstanding, (i) stockholders are not permitted to call
a special meeting of stockholders or to require the Board of Directors or
officers of the Corporation to call such a special meeting, (ii) a special
meeting of stockholders may only be called by a majority of the Board of
Directors, by the Chief Executive Officer or by a committee duly empowered by
the Board of Directors to call a special meeting, (iii) the business permitted
to be conducted at a special meeting of stockholders shall be limited to matters
properly brought before the meeting by or at the direction of the Board of
Directors, and (iv) any action required or permitted to be taken by the
stockholders must be taken at a duly called and convened annual meeting or
special meeting of stockholders and cannot be taken by consent in writing;
provided, however, that the provisions of the foregoing clause (iv) shall not
apply prior to the consummation of an initial underwritten public offering of
the Corporation's Common Stock that is registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, (an "IPO").
-4-
<PAGE> 5
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be duly executed by Thomas N. Harvey its
President and Daniel J. Klaich its Secretary this 31st day of July, 1998.
A-55, INC.
/s/ Thomas N. Harvey
------------------------------------
Thomas N. Harvey, President
/s/ Daniel J. Klaich
------------------------------------
Daniel J. Klaich, Secretary
-5-
<PAGE> 6
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
A-55, INC.
A-55, Inc., a corporation organized and existing under, and by virtue
of, the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that:
1. The Board of Directors of the Corporation by resolution dated as of
January 26, 1999, has adopted the following amendment to its Amended and
Restated Certificate of Incorporation of the Corporation:
RESOLVED, that Article FOURTH of the Corporation's Amended and
Restated Certificate of Incorporation is hereby amended in its entirety
to read as follows:
FOURTH. The Corporation is authorized to issue two classes of stock
to be designated, respectively, "Common Stock" and "Preferred Stock".
The total number of shares which the corporation shall have the
authority to issue is 160,000,000 shares of capital stock divided into
(a) 150,000,000 shares of Common Stock having a par value of $0.001 per
share, and (b) 10,000,000 shares of Preferred Stock having a par value
of $0.001 per share.
2. The stockholder of the Corporation has, by its written consent,
adopted the preceding amendment to the Amended and Restated Certificate of
Incorporation in accordance with the provisions of Sections 228 and 242 of the
General Corporate Law of the State of Delaware.
IN WITNESS WHEREOF, the corporation has caused this Certificate to be
executed by its President and by its Secretary, as of the 26th day of January,
1999.
A-55, INC.
By: /s/ Thomas N. Harvey
-------------------------------
Thomas N. Harvey, President
By: /s/ Daniel J. Klaich
-------------------------------
Daniel J. Klaich, Secretary
<PAGE> 1
Exhibit 4.1
[A-55 LOGO]
A-55, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 001066 10 5
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.001 PAR VALUE OF
A-55,INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid unless countersigned by the Transfer Agent and registered by the
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ DANIEL J. KLAICH [A-55 /s/ RUDOLF W. GUNNERMAN
---------------------------- CORPORATE ---------------------------
DANIEL J. KLAICH SEAL] RUDOLF W. GUNNERMAN
SECRETARY CHAIRMAN OF THE BOARD
<PAGE> 2
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ...................Custodian...............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act........................................
in common (State)
UNIF TRF MIN ACT -- .............Custodian (until age.........)
(Cust)
....................under Uniform Transfers
(Minor)
to Minors Act..............................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,___________________________hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated________________________
X_______________________________________________
X_______________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
NOTICE: FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed
By___________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 10.20
A-55, INC.
FUEL PURCHASE AGREEMENT
PARTIES
This fuel agreement is entered into between A-55, Inc. ("Seller") whose
corporate address is 5270 Neil Road, Reno, NV 89502-6503 and Northeast Utilities
("Buyer") whose corporate address is 107 Selden Street, Berlin, CT 06037.
INTRODUCTION
Buyer is a Fortune 500 company and one of the 20 largest utility systems in the
United States. Buyer is New England's leading utility, providing electricity to
over 1.7 million customers. A commitment to environmental protection is
consistent with Buyer's corporate mission. Buyer uses approximately 12 million
bbl/year of residual fuel oil.
Seller has developed and markets A-55(R) Clean Fuels that are a direct
replacement for residual fuel oil. A-55 Clean Fuels create less oxides of
nitrogen and particulate pollution and are easier and safer to handle than
residual fuel oil.
AGREEMENT
1. QUANTITY AND QUALITY - Buyer agrees to purchase and Seller agrees to
provide an initial quantity of 15,000 bbl of A-55(R) Clean Fuels to be
delivered on or about May 1, 1999 in accordance with Buyer's specifications
which are attached as part of this agreement. At Buyer's discretion, Buyer
will purchase and Seller agrees to provide an additional quantity of 10,000
- 15,000 bbl of A-55(R) Clean Fuels under similar terms and conditions as
those of the initial quantity. Buyer reserves the right to reject said
deliveries should these specifications not be met.
2. DELIVERY - Seller will supply the initial quantity of 15,000 bbl of A-55(R)
Clean Fuels to Buyer's Montville Station located in Montville, Connecticut
and the additional quantity of 10,000 -15,000 bbl of A-55(R) Clean Fuels to
Buyer's Middletown Station. All fuel deliveries will be delivered in a
manner consistent with facility fuel delivery and storage procedures. All
fuels deliveries to Buyer's facilities will be via barge. Seller will,
whenever possible, utilize Buyer's barges for fuel deliveries. Seller
maintains the right to nominate third party barges that Buyer may accept or
deny at its discretion.
3. PRICE - Buyer agrees to purchase the initial quantities of A-55(R) Clean
Fuels at a price * .
4. CALIBRATION - Seller agrees to supply additional technical data regarding
the Collins Station burn as well as conduct burner tip calibrations at its
Technical Facility located in Reno, NV to Buyer's satisfaction prior to the
delivery of the initial quantities of fuel. All costs associated with data
exchange and calibrations will be
* Material has been omitted pursuant to a request for confidential
treatment; this material has been filed separately with the SEC.
<PAGE> 2
borne solely by Seller and Seller agrees to allow Buyer-appointed
representatives to observe burner tip calibrations.
5. ONGOING QUANTITIES - At Buyer's sole discretion, Buyer agrees to purchase
and Seller agrees to supply on going volumes of A-55(R) Clean Fuels (up to
330,000 bbl/month) at a price * .
6. INSPECTION - An independent inspector will be mutually agreed upon by Buyer
and Seller. Quality will be based upon vessel composite (top, middle &
bottom) at a point and time of delivery. Inspector shall perform quantity
measurements at time of barge loading. Bottoms shall be taken into account
for billing purposes. The cost of inspection will be shared equally by Buyer
and Seller. Inspector will invoice Buyer and Seller separately.
7. PAYMENT TERMS - *
8. OPTIONAL DELIVERY TERMS - Buyer and Seller agree to mutually investigate the
possibility of blending ongoing quantities of A-55(R) Clean Fuels at the
Buyer's facility in a manner consistent with a procedural plan which must be
agreed to by both parties in writing.
9. FORCE MAJEURE - No failure or omission in performance by either party shall
be deemed a breach of this Agreement not create any liability for damages
one party to the other to the extent caused by acts of war (declared or
undeclared), revolution or riot; acts (including inaction) of governmental
or military authority, accidents of navigation, loss of fuel oil due to
sinking or to governmental taking of vessels; accidents to or closing of
harbors, docks or other aids to or adjuncts of shipping or navigation;
strikes, lockouts, or other labor disturbances; mechanical failure or
stoppage of equipment at Buyer's facility which prevents the use of No. 6
residual fuel oil as boiler fuel, but only in the proportion that each such
facility's fuel oil requirement bears to the total contract requirements; or
any other similar or dissimilar cause beyond the reasonable control of the
party so affected which prevents or restricts performance; provided however,
that commercial impracticability shall not be considered an event of force
majeure. Should any of the foregoing events occur, the party affected
thereby shall promptly notify the other in writing as to the estimated
effects thereof and shall use its best efforts to eliminate such cause
affecting its future performance.
10. WARRANTY - Seller warrants good title to all products sold under this
Agreement. Seller warrants that all products sold under this Agreement
conform to the specifications set forth herein. Seller warrants that the
products sold under this Agreement shall be free from all previously
incurred taxes, liens, claims or other charges.
* Material has been omitted pursuant to a request for confidential
treatment; this material has been filed separately with the SEC.
2
<PAGE> 3
11. TITLE/RISK OF LOSS - Title and risk of loss with respect to the product
shall pass from seller to buyer at the time the product passes Buyer's
outboard flange at the delivery point which for purposes of this agreement
will be the Buyer's barge, or other mutually designated barge. Buyer and
Seller shall exercise due care and comply fully with all applicable
statues, rules, regulations, orders, and directives of any governmental
authority, federal, state or local relating thereto in the delivery of the
fuel.
12. INSURANCE - Seller agrees to obtain and maintain during the term of this
agreement sufficient insurance to protect buyer from all damage and harm
related to Seller's performance under this agreement, including but not
limited to Worker's Compensation Insurance, General Liability or Commercial
Liability Insurance, Vehicle Insurance, Maritime Insurance, and
Environmental Liability Insurance consistent with the amounts required under
OPA 90 et. seq. Furthermore, Seller shall ensure that such insurance
coverages are sufficient to comply with the indemnifications contained in
the INDEMNIFICATION AND LIMITATION OF LIABILITY clause of this Agreement.
13. INDEMNIFICATION AND LIMITATION OF LIABILITY - Seller agrees to protect,
defend and hold harmless Buyer, its parent, affiliates, subsidiaries,
officers, directors and employees against any liabilities whatsoever
(including court costs and attorney's fees related to any claim, pretrial,
trial or appellate proceeding), resulting from or in connection with the
negligent performance, nonperformance, or delay in performance of Seller's
obligations under this Agreement by Seller, its employees or subcontractors.
Buyer agrees to protect, defend and hold harmless Seller, its parent,
affiliates, subsidiaries, officers, directors and employees against any
liabilities whatsoever (including court costs and attorney's fees related to
any claim, pretrial, trial or appellate proceeding), resulting from or in
connection with the negligent performance, nonperformance, or delay in
performance of Buyer's obligations under this agreement by Buyer, its
employees or subcontractors.
Neither Buyer nor Seller shall have any liability to the other for any
special or consequential damages arising out of a failure in their
respective performance hereunder.
14. NOTICES - Any notices or communications to be given under this Agreement
shall be in writing and shall be deemed duly given or made if sent by
facsimile, telex, delivered by hand, or if sent by mail, upon deposit by
mail with all postage fully paid.
15. STRICT PERFORMANCE - Failure of either party to insist in any one instance
or more upon strict performance of any of the terms or conditions of this
Agreement, or to exercise any right or privilege herein conferred, shall
not be construed as a waiver
3
<PAGE> 4
of such terms, conditions, rights or privileges, but the said Agreement
shall continue and remain in full force and effect.
16. LAW - This Agreement shall be governed by the laws of the State of
Connecticut and any litigation in connection with this contract shall be
brought in a court of competent jurisdiction in the State of Connecticut.
17. CONFIDENTIALITY - Except to the extent that disclosure of information
contained in this Agreement is required by law or governing regulatory
authority, the contents of this Agreement shall remain confidential and
shall not be disclosed or released by either party without written consent
of the other party.
18. TRANSFER - It is understood that Seller may transfer this agreement to a
third party with Buyer's written consent.
This agreement is entered into on this 3rd day of February, 1999.
Seller Buyer
/s/ PETER W. GUNNERMAN /s/ JODY TENBROCK
- -------------------------- --------------------------
Peter W. Gunnerman Jody TenBrock
President, Business Development Division Manager - Fuels
A-55, Inc. Northeast Utilities Systems
<PAGE> 5
NORTHEAST UTILITIES SERVICE COMPANY
AND
A-55, INC.
* RESIDUAL FUEL OIL SPECIFICATIONS
*
* Material has been omitted pursuant to a request for confidential
treatment; this material has been filed separately with the SEC.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-65429 of A-55, Inc. on Form S-1 of our report dated January 28, 1999,
relating to the financial statements of A-55, Inc., 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
February 26, 1999
