<PAGE>
Filed pursuant to Rule 424(b)(1)
File No. 333-86089
6,000,000 Shares
[Plug Power logo appears here]
Common Stock
----------------
This is an initial public offering of shares of Plug Power Inc. All of the
shares of common stock are being sold by Plug Power.
Before this offering, there has been no public market for the common stock.
The common stock has been approved for quotation on the Nasdaq National Market
under the symbol "PLUG".
See "Risk Factors" on page 8 to read about factors you should consider before
buying shares of the common stock.
----------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
----------------
<TABLE>
<CAPTION>
Per Share Total
--------- -------
<S> <C> <C>
Initial public offering price............................ $15.00 $90,000,000
Underwriting discount.................................... $ 1.05 $ 6,300,000
Proceeds, before expenses, to Plug Power................. $13.95 $83,700,000
</TABLE>
To the extent that the underwriters sell more than 6,000,000 shares of common
stock, the underwriters have the option to purchase up to an additional 900,000
shares from Plug Power at the initial public offering price less the
underwriting discount.
----------------
The underwriters expect to deliver the shares against payment in New York,
New York on November 3, 1999.
Goldman, Sachs & Co.
Hambrecht & Quist
Merrill Lynch & Co.
FAC/Equities
----------------
Prospectus dated October 28, 1999.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and Plug Power's financial statements, the notes to those financial
statements and the other financial information appearing elsewhere in this
prospectus. In addition to historical information, the following summary and
other parts of this prospectus contain forward-looking statements that reflect
our plans, estimates, intentions, expectations and beliefs. Our actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those set forth in the "Risk Factors" section and contained
elsewhere in this prospectus.
Plug Power Inc.
Our Business
We are a leading designer and developer of on-site, electricity generation
systems utilizing proton exchange membrane (PEM) fuel cells for residential
applications. We believe that the electricity our residential fuel cell systems
will provide to homes can be less expensive, more reliable, more efficiently
produced and environmentally cleaner than the electricity provided by the
existing electric utility grid and other power generation technologies. We plan
to bring our first residential fuel cell systems to market in 2001 and to
become the first mass market producer of residential fuel cell systems by
selling 100,000 systems per year by 2003.
Our Product
Our residential fuel cell system will be an appliance, initially about the
size of a refrigerator, that will produce electricity through a clean,
efficient process without combustion. Our system will receive fuel from a
home's existing natural gas line or propane tank, convert the fuel into a
hydrogen-rich stream, and then combine it with oxygen from the air in a
chemical reaction that produces electric power. Our initial residential systems
will be designed to supply 7 kilowatts (kW) of baseload power, 10 kW of peak
power and 15 kW of surge load capacity, which will provide the full electricity
needs of a home, although the home can remain connected to the electric grid
for back-up purposes. To date, we have conducted successful demonstrations of
hydrogen-, methanol-, and natural gas-fueled systems and expect to demonstrate
a propane-fueled system during 2000.
Our Alliance with General Electric Company
General Electric Company has selected Plug Power to be its exclusive supplier
of fuel cell systems for residential and commercial applications under 35 kW.
Together with GE On-Site Power, Inc., a subsidiary of General Electric that
operates within General Electric's GE Power Systems business, we formed GE Fuel
Cell Systems, LLC, a joint venture dedicated to marketing, selling, installing
and servicing Plug Power fuel cell systems. GE Fuel Cell Systems is the
exclusive, global distributor and servicer of our systems (except in four
states assigned to another distributor) and all systems that it sells will be
co-branded with both the General Electric and Plug Power names and trademarks.
We believe that our strength in fuel cell system design and development,
coupled with General Electric's brand name, worldwide sales and distribution
network, service capabilities, and commitment to the commercialization of our
fuel cell technology, will allow us to bring the first and best residential
fuel cell system to market and, by doing so, establish the industry standard
for this new product.
3
<PAGE>
Changes in the Power Industry
Industrialized societies are dependent upon reliable, on-demand electric
power to function. Demand for electricity is expected to continue to grow as
the economies of the United States and other industrialized nations expand,
particularly with the increased reliance on computers and other electronics. At
the same time, developing nations will need additional electricity to improve
their standards of living.
Reliance upon the existing infrastructure has been and continues to be
problematic due to capacity constraints, environmental concerns and other
issues. In addition, utility deregulation is creating new challenges and
opportunities in the electric power industry. This evolving competitive
industry environment coupled with the consumer demand for more reliable,
accessible and competitively priced sources of electric power, is driving
traditional energy providers to develop new strategies and seek new
technologies for electricity generation, transmission, and distribution.
Our Solution
We believe our residential fuel cell systems will offer the following
benefits to energy providers and consumers:
. Electric utilities and rural electric cooperatives will be able to lower
capital expenditures by deploying our systems to meet increasing demand
for electricity rather than expanding, repairing or replacing existing
generation, transmission and distribution infrastructure.
. Natural gas and propane distributors will be able to increase the
utilization of their existing distribution infrastructure, and mitigate
the seasonality of their businesses, by taking advantage of additional
demand for the fuels used by our systems.
. Energy providers will be able to satisfy stricter environmental
regulations by using our fuel cell systems, which will generate
electricity through an efficient chemical process that produces fewer
harmful by-products than conventional combustion-based technologies.
. Consumers will be able to lower their exposure to weather- and capacity-
driven outages by utilizing our on-site systems to provide their
residential electricity, and may also benefit from lower electricity
costs.
Our Strategy
Our business strategy focuses on combining existing fuel cell technology with
improvements in system integration, component design, and manufacturing
processes to achieve the low-cost manufacturing capability necessary to bring
our product to the mass market. The key components of this strategy are:
. Focus on residential applications. We intend to focus on commercializing
our fuel cell systems for the residential mass market, which we believe
is the most accessible market for early fuel cell applications.
. Develop low-cost manufacturing capability and processes. We seek to
develop high-volume manufacturing capability by working closely with a
network of carefully selected suppliers to develop and produce low-cost
components and subsystems, while focusing internally on improving system
design and integration.
. Utilize General Electric's product development expertise and purchasing
capabilities. We believe we can utilize General Electric's engineering,
testing and analytical resources, as well as its purchasing power, to
help us develop a superior product more rapidly and at lower cost.
4
<PAGE>
. Leverage our strategic alliance with General Electric to achieve market
leadership. We believe we can leverage General Electric's brand name and
worldwide marketing, distribution and servicing capability to gain
immediate recognition for our product and achieve market leadership.
. Acquire or license complementary technologies. We regularly review
strategic opportunities to acquire or license technologies that can
advance the development of low-cost system components and subsystems.
. Capitalize on our experience in the residential market to develop other
fuel cell applications, including automotive applications. We believe
that we can build on the experience and knowledge we will gain through
the development of our residential fuel cell systems to develop other
commercial applications of fuel cell technology, including automotive
applications. We have a team of engineers dedicated to developing fuel
cell power systems for automotive applications, but do not anticipate
commercial production until at least 2006.
Additional Equity Financing at Time of Offering
Immediately before this offering and in addition to the shares of common
stock to be sold in this offering, the following current stockholders of Plug
Power will purchase additional shares of common stock as follows:
. Our founding stockholders, Mechanical Technology Incorporated and Edison
Development Corporation (a wholly owned subsidiary of DTE Energy
Company), will purchase an aggregate of 5,466,666 shares of common stock
for a total purchase price of $41.0 million,
. GE On-Site Power, Inc. will purchase 3,000,000 shares of common stock
for $37.5 million and
. Two additional stockholders will purchase an aggregate of 750,000 shares
of common stock for a total purchase price of $6.4 million.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares offered by Plug Power........................ 6,000,000 shares
Common stock to be outstanding after this offering.. 42,208,480 shares(1)
Estimated net proceeds to Plug Power................ $82,880,000
Use of Proceeds..................................... For general corporate
purposes, including
research and product
development,
manufacturing and market
development, capital
expenditures and
potential acquisitions.
See "Use of Proceeds".
Nasdaq National Market symbol....................... "PLUG"
</TABLE>
- --------
(1) The number of shares of our common stock that will be outstanding after
this offering includes 26,991,814 shares outstanding as of September 30,
1999, plus 9,216,666 shares of common stock to be issued upon the exercise
of outstanding warrants and other purchase rights immediately before this
offering as described above under "--Additional Equity Financing at Time of
Offering", plus 6,000,000 shares of common stock to be issued in this
offering. This number excludes up to 900,000 shares of common stock
issuable upon exercise of the overallotment option granted to the
underwriters and up to 7,922,191 shares of common stock reserved for
issuance under our stock option and employee stock purchase plans.
----------------
We were formed as a Delaware limited liability company on June 27, 1997 and
will be merged into a newly-formed Delaware corporation immediately before this
offering. Unless otherwise indicated, all information that we present in this
prospectus for any date or period gives effect to the merger as if it had
occurred on that date or as of the beginning of that period and all references
to capital stock for periods before the merger mean our issued and outstanding
membership interests. Our principal executive offices are located at 968
Albany-Shaker Road, Latham, New York 12110. Our telephone number at that
location is (518) 782-7700 and our Internet address is www.plugpower.com. The
information contained on our website is not incorporated by reference in this
prospectus.
The name Plug Power and our logo are names and trademarks that belong to us.
This prospectus also contains the names of other entities which are the
property of their respective owners.
6
<PAGE>
Summary Financial Data
The tables below present our statement of operations data for the period from
June 27, 1997 (date of inception) to December 31, 1997, the year ended December
31, 1998, and the six month periods ended June 30, 1998 and 1999, and our
balance sheet data at June 30, 1999. The balance sheet information is
presented:
. on an actual basis;
. on a pro forma basis giving effect to the issuance of 533,334 shares of
common stock for $4.0 million pursuant to a September 1999 capital call,
the issuance of 9,216,666 shares of common stock to be issued for $84.9
million upon the exercise of outstanding warrants and other purchase
rights immediately before this offering, and the acquisition of real
estate from Mechanical Technology in July 1999 for $10.9 million (which
includes our assumption of $6.2 million of debt), all as described in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations".
. on a pro forma, as adjusted basis to reflect the pro forma adjustments
described above and the sale of 6,000,000 shares of common stock in this
offering at an initial public offering price of $15.00 per share, after
deducting underwriting discounts and commissions and our estimated
offering expenses.
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------
Period from
June 27,
1997 to Year ended
December 31, December 31,
1997 1998 1998 1999
------------ ------------ ------------ -------------
(Unaudited) (Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Contract revenue........ $ 1,194 $ 6,541 $ 2,549 $ 3,696
Cost of contract
revenue................ 1,227 8,864 3,439 5,118
------- ------- ------------ -------------
Loss on contracts....... (33) (2,323) (890) (1,422)
In-process research and
development............ 4,042 -- -- --
Research and development
expense................ 1,301 4,632 2,154 7,780
General and
administrative
expense................ 630 2,754 1,328 5,600
------- ------- ------------ -------------
Operating loss......... (6,006) (9,709) (4,372) (14,802)
Other income,
principally interest... 103 93 42 218
------- ------- ------------ -------------
Loss before equity in
losses of affiliate... (5,903) (9,616) (4,330) (14,584)
Equity in losses of
affiliate.............. -- -- -- (501)
------- ------- ------------ -------------
Net loss............... $(5,903) $(9,616) $ (4,330) $ (15,085)
======= ======= ============ =============
Basic and diluted net
loss per share......... $ (0.62) $ (0.71) $ (0.40) $ (0.71)
======= ======= ============ =============
Shares used in computing
basic and diluted net
loss per share......... 9,500 13,617 10,865 21,299
======= ======= ============ =============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
------- -------------- -----------
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $17,243 $106,118 $188,998
Working capital.............................. 13,570 102,165 185,045
Total assets................................. 37,233 136,966 219,846
Long-term obligations........................ 155 6,035 6,035
Total stockholders' equity................... 32,306 125,879 208,759
</TABLE>
7
<PAGE>
RISK FACTORS
You should carefully consider the following risks and all other information
contained in this prospectus before purchasing our common stock. If any of the
following risks occur, our business, prospects, results of operations or
financial condition could be harmed. In that case, the trading price of our
common stock could decline, and you could lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of specific factors,
including the risks described below and elsewhere in this prospectus.
We have only been in business for a short time and your basis for evaluating us
is limited
We were formed in June 1997 to further the research and development of
residential fuel cell systems. We do not expect to have a commercially viable
product until at least 2001. Accordingly, there is only a limited basis upon
which you can evaluate our business and prospects. An investor in our common
stock should consider the challenges, expenses and difficulties that we will
face as a development stage company seeking to develop and manufacture a new
product.
We have incurred losses and anticipate continued losses through at least 2003
As of June 30, 1999, we had an accumulated deficit of $30.6 million. We have
not achieved profitability and expect to continue to incur net losses until we
can produce sufficient revenues to cover our costs. We expect the cost to
produce our pre-commercial systems during 1999 and 2000 to be higher than their
sales price under the terms of our distribution arrangements with GE Fuel Cell
Systems and Edison Development. Futhermore, even if we achieve our objective of
bringing our first commercial product to market in 2001, we anticipate that we
will continue to incur losses until we can cost-effectively produce and sell
our residential fuel cell systems to the mass market, which we do not expect to
occur until after 2002. Even if we do achieve profitability, we may be unable
to sustain or increase our profitability in the future. See "Selected
Historical Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
We may never complete the research and development of a commercially viable
residential fuel cell system
We do not know when or whether we will successfully complete research and
development of a commercially viable residential fuel cell system. We have
produced and are currently demonstrating a number of test and evaluation
systems and are continuing our efforts to decrease the costs of our systems'
components and subsystems, improve their overall reliability and efficiency,
and ensure their safety. However, we must complete substantial additional
research and development on our systems before we will have a commercially
viable product. In addition, while we are conducting tests to predict the
overall life of our systems, we will not have run our systems over their
projected useful life prior to commercialization. See "Business--Product
Development and Commercialization Process".
A mass market for residential fuel cell systems may never develop or may take
longer to develop than we anticipate
Fuel cell systems for residential use represent an emerging market, and we do
not know whether our targeted distributors and resellers will want to purchase
them or whether end-users will want to use them. If a mass market fails to
develop or develops more slowly than we anticipate, we may be unable to recover
the losses we will have incurred to develop our product and may be unable to
achieve profitability. The development of a mass market for our systems may be
impacted by many factors which are out of our control, including:
. the cost competitiveness of fuel cell systems;
8
<PAGE>
. the future costs of natural gas, propane and other fuels used by our
systems;
. consumer reluctance to try a new product;
. consumer perceptions of our systems' safety;
. regulatory requirements; and
. the emergence of newer, more competitive technologies and products.
We have no experience manufacturing residential fuel cell systems on a
commercial basis
To date, we have focused primarily on research and development and have no
experience manufacturing fuel cell systems for the residential market on a
commercial basis. We are currently constructing a 51,000 square foot
manufacturing facility and are continuing to develop our manufacturing
capability and processes. We do not know whether or when we will be able to
develop efficient, low-cost manufacturing capability and processes that will
enable us to meet the quality, price, engineering, design and production
standards or production volumes required to successfully mass market our
residential fuel cell systems. Even if we are successful in developing our
manufacturing capability and processes, we do not know whether we will do so in
time to meet our product commercialization schedule or to satisfy the
requirements of our distributors or customers. See "Business--Manufacturing".
We are heavily dependent on our relationship with GE Fuel Cell Systems and
General Electric's commitment to develop the residential fuel cell market
Substantially all of our revenue for the foreseeable future will be derived
from sales of our products to GE Fuel Cell Systems. We have granted to GE Fuel
Cell Systems exclusive worldwide rights to market, distribute, install and
service Plug Power fuel cell systems designed for residential and commercial
applications under 35 kW (other than the states of Illinois, Indiana, Michigan
and Ohio, in which Edison Development has exclusive distribution rights). Under
our distribution agreement, we will sell our systems directly to GE Fuel Cell
Systems, which, in turn, will seek to sell them to selected resellers. We are
also obligated under an amendment to our agreement to purchase $12.0 million of
technical support services from General Electric during the next three years.
Our distribution agreement expires in 2009, although General Electric may
terminate the agreement earlier if, among other reasons, we fail to do any of
the following:
. remain in material compliance with the development schedule toward a
January 1, 2001 product release;
. produce competitive commercial fuel cell systems;
. meet commercial production and cost requirements;
. produce systems that comply with regulatory requirements; or
. obtain all necessary approvals and certifications for our systems.
Our ability to sell our systems to the mass market is heavily dependent upon
General Electric's worldwide sales and distribution network and service
capabilities. Even though we own a minority interest in GE Fuel Cell Systems,
we cannot control its operations or business decisions. Any change in our
relationship with General Electric, whether as a result of market, economic, or
competitive pressures, including any decision by General Electric to alter its
commitment to our fuel cell technology in favor of other fuel cell
technologies, to develop fuel cell systems targeted at different markets than
ours or to focus on different energy product solutions could harm our potential
earnings by depriving us of the benefits of General Electric's worldwide sales
and distribution network and service capabilities. See "Business--Our Strategy"
and "Business--Distribution and Marketing".
9
<PAGE>
We may not meet our product development and commercialization milestones
We have established internal product development and commercialization
milestones and dates for achieving development goals related to technology and
design improvements. We use these internal milestones to assess our progress
toward developing a commercially viable residential fuel cell system. For
example, we established a milestone date of June 1998 for powering a home with
a hydrogen-fueled residential fuel cell system and established a milestone date
of October 1998 for demonstrating a methanol-fueled system and a natural gas-
fueled system. While we successfully powered a three-bedroom home in June 1998
using a hydrogen-fueled system, our demonstration of the methanol-fueled system
did not occur until November 1998 and our demonstration of the natural gas-
fueled system did not occur until December 1998, in each case due to our
increased focus during that period on growing our work force and expanding our
physical plant and scope of operations. Neither of these delays, nor any other
missed milestone, has had any material impact on our commercialization schedule
to date. While we have been aggressive in setting our internal milestones and
have been generally successful in meeting them, if we do experience delays in
meeting our development goals or if our systems exhibit technical defects or
are unable to meet cost or performance goals, including power output, useful
life and reliability, our commercialization schedule could be delayed beyond
2001. In such event, potential purchasers of our initial commercial systems may
choose alternative technologies and any delays could allow potential
competitors to gain market advantages. We cannot guarantee that we will
successfully achieve our milestones in the future. See "Business--Product
Development and Commercialization Process".
We are dependent on third party suppliers for the development and supply of key
components for our products
While we have recently entered into relationships with suppliers of our key
components, we do not know when or whether we will secure relationships with
suppliers of all required components and subsystems for our fuel cell systems,
or whether such relationships will be on terms that will allow us to achieve
our objectives. Our business, prospects, results of operations, or financial
condition could be harmed if we fail to secure relationships with entities who
will supply the required components for our systems.
Once we establish relationships with third party suppliers, we will rely on
them to provide components for our fuel cell systems. A supplier's failure to
develop and supply components in a timely manner, or to supply components that
meet our quality, quantity or cost requirements, or our inability to obtain
substitute sources of these components on a timely basis or on terms acceptable
to us, could harm our ability to manufacture our fuel cell systems. In
addition, to the extent the processes that our suppliers use to manufacture
components are proprietary, we may be unable to obtain comparable components
from alternative suppliers.
We face intense competition and may be unable to compete successfully
The markets for electricity are intensely competitive. There are many
companies engaged in all areas of traditional and alternative electric power
generation in the United States, Canada and abroad, including, among others,
major electric, oil, chemical, natural gas, and specialized electronics firms,
as well as universities, research institutions and foreign government-sponsored
companies. These firms are engaged in forms of power generation such as solar
and wind power, reciprocating diesel engines and microturbines as well as grid-
supplied electricity. Many of these entities have substantially greater
financial, research and development, manufacturing and marketing resources than
we do.
There are a number of companies located in the United States, Canada, and
abroad that are developing PEM fuel cell technology. We also compete with
companies that are developing applications, residential and otherwise, using
other types of fuel cells. Some of our competitors are
10
<PAGE>
much larger than we are. If these larger competitors decide to focus on the
development of residential fuel cell systems, they have the manufacturing,
marketing, and sales capabilities to complete research, development and
commercialization of a commercially viable residential fuel cell system more
quickly and effectively than we can. See "Business--Competition".
Changes in government regulations and electric utility industry restructuring
may affect demand for our fuel cell systems
The market for electricity generation products is heavily influenced by
federal and state governmental regulations and policies concerning the electric
utility industry. The loosening of current regulatory standards could deter
further investment in the research and development of alternative energy
sources, including fuel cells, and could result in a significant reduction in
the potential market demand for our products. We cannot predict how the
deregulation and restructuring of the industry will affect the market for
residential fuel cell systems. See "Business--Changes in the Power Industry".
Our business may become subject to future government regulation which may
impact our ability to market our product
We do not believe that our product will be subject to existing federal and
state regulations governing traditional electric utilities and other regulated
entities. We do believe that our product and its installation will be subject
to oversight and regulation at the local level in accordance with state and
local ordinances relating to building codes, safety, pipeline connections and
related matters. Such regulation may depend, in part, upon whether a fuel cell
system is placed outside or inside a home. At this time, we do not know which
jurisdictions, if any, will impose regulations upon our product. We also do not
know the extent to which any existing or new regulations may impact our ability
to distribute, install and service our product. Once our product reaches the
commercialization stage and we begin distributing our systems to our target
early markets, federal, state or local government entities or competitors may
seek to impose regulations. Any new government regulation of our product,
whether at the federal, state or local level, including any regulations
relating to installation and servicing of our products, may increase our costs
and the price of our systems, and may have a negative impact on our revenue and
profitability, and therefore, harm our business, prospects, results of
operations, or financial condition.
Utility companies could place barriers on our entry into the marketplace
Utility companies commonly charge fees to industrial customers for
disconnecting from the grid, for using less electricity, or for having the
capacity to use power from the grid for back up purposes. Though these fees are
not currently charged to residential users, it is possible that utility
companies could in the future charge similar fees to residential customers. The
imposition of such fees could increase the cost to residential customers of
using our systems and could make our systems less desirable, thereby harming
our revenue and profitability.
Alternatives to our technology could render our systems obsolete prior to
commercialization
Our system is one of a number of alternative energy products being developed
today as supplements to the electric grid that have potential residential
applications, including microturbines, solar power and wind power, and other
types of fuel cell technologies. Improvements are also being made to the
existing electric transmission system. Technological advances in alternative
energy products, improvements in the electric grid or other fuel cell
technologies may render our systems obsolete.
11
<PAGE>
The hydrocarbon fuels on which our systems rely may not be readily available or
available on a cost-effective basis
Our systems' ability to produce electricity depends on the availability of
natural gas and propane. If these fuels are not readily available to the mass
market or if their prices are such that electricity produced by our systems
costs more than electricity provided through the grid, our systems would be
less attractive to potential users.
Our residential fuel cell systems use flammable fuels which are inherently
dangerous substances
Our residential fuel cell systems will utilize natural gas or propane in a
catalytic reaction which produces less heat than a typical gas furnace. While
our fuel cell system does not use these fuels in a combustion process, natural
gas and propane are flammable fuels that could leak in a home and combust if
ignited by another source. These dangers are present in any home appliance that
uses natural gas or propane such as a gas furnace, stove or dryer. Since our
fuel cell systems are a new product, any accidents involving our systems or
other fuel cell-based products could impede demand for our products.
We may be unable to raise additional capital to complete our product
development and commercialization plans
Our product development and commercialization schedule could be delayed if we
are unable to fund our research and development activities or the development
of our manufacturing capabilities. We expect that the net proceeds of this
offering, together with the proceeds from our issuance of shares to current
stockholders in September 1999 and immediately before the closing of this
offering and all other existing sources of capital, will be sufficient to fund
our activities through the end of 2001. We believe it is likely we will need to
raise additional funds to achieve full commercialization of our product. We do
not know whether we will be able to secure additional funding, or funding on
terms acceptable to us, to pursue our commercialization plans through the mass
market stage. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
We may have difficulty managing the expansion of our operations
We are undergoing rapid growth in the number of our employees, the size of
our physical plant and the scope of our operations. For example, we began with
22 employees in June 1997 and expect to have approximately 300 by the end of
1999. Such rapid expansion is likely to place a significant strain on our
senior management team and other resources. Our business, prospects, results of
operations or financial condition could be harmed if we encounter difficulties
in effectively managing the budgeting, forecasting and other process control
issues presented by such a rapid expansion.
We face risks associated with our plans to market, distribute and service our
products internationally
We intend to market, distribute, and service our residential fuel cell
systems internationally through GE Fuel Cell Systems. We have limited
experience developing, and no experience manufacturing, our products to comply
with the commercial and legal requirements of international markets. Our
success in those markets will depend, in part, on GE Fuel Systems' ability to
secure relationships with foreign resellers and our ability to manufacture
products that meet foreign regulatory and commercial requirements. In addition,
our planned international operations are subject to other inherent risks,
including potential difficulties in enforcing contractual obligations and
intellectual property rights in foreign countries and fluctuations in currency
exchange rates.
12
<PAGE>
We may not be able to protect important intellectual property
PEM fuel cell technology was first developed in the 1950s and we do not
believe we can achieve a significant proprietary position on the basic
technologies used in fuel cell systems. However, our ability to compete
effectively against other fuel cell companies will depend, in part, on our
ability to protect our proprietary technology, systems designs and
manufacturing processes. We do not know whether any of our pending patent
applications will issue or, in the case of patents issued or to be issued, that
the claims allowed are or will be sufficiently broad to protect our technology
or processes. Even if all our patent applications are issued and are
sufficiently broad, they may be challenged or invalidated. We could incur
substantial costs in prosecuting or defending patent infringement suits. While
we have attempted to safeguard and maintain our proprietary rights, we do not
know whether we have been or will be completely successful in doing so.
Further, our competitors may independently develop or patent technologies or
processes that are substantially equivalent or superior to ours. If we are
found to be infringing third party patents, we do not know whether we will be
able to obtain licenses to use such patents on acceptable terms, if at all.
Failure to obtain needed licenses could delay or prevent the development,
manufacture or sale of our fuel cell systems.
We rely, in part, on contractual provisions to protect our trade secrets and
proprietary knowledge. These agreements may be breached, and we may not have
adequate remedies for any breach. Our trade secrets may also be known without
breach of such agreements or may be independently developed by competitors. Our
inability to maintain the proprietary nature of our technology and processes
could allow our competitors to limit or eliminate any competitive advantages we
may have and prevent us from being the first company to commercialize
residential fuel cell systems, thereby harming our business prospects. See
"Business--Proprietary Rights".
Our government contracts could restrict our ability to effectively
commercialize our technology
Under some of our contracts, government agencies can require us to obtain or
produce components for our systems from sources located in the United States
rather than foreign countries. Our contracts with government agencies are also
subject to the risk of termination at the convenience of the contracting
agency, potential disclosure of our confidential information to third parties,
and the exercise of "march-in" rights by the government. March-in rights refer
to the right of the United States government or government agency to exercise
its non-exclusive, royalty-free, irrevocable worldwide license to any
technology developed under contracts funded by the government if the contractor
fails to continue to develop the technology. The implementation of restrictions
on our sourcing of components or the exercise of march-in rights could harm our
business, prospects, results of operations, or financial condition.
Our existing stockholders will control all matters requiring a stockholder vote
Upon the completion of this offering, Edison Development, Mechanical
Technology, and GE On-Site Power will retain approximately 77.4% of our
outstanding stock. If all of these stockholders were to vote together as a
group, they would have the ability to exert significant influence over our
Board of Directors and its policies. For instance, these stockholders would be
able to control the outcome of all stockholder votes, including votes
concerning director elections, charter and by-law amendments and possible
mergers, corporate control contests and other significant corporate
transactions. See "Principal Stockholders" and "Description of Capital Stock".
13
<PAGE>
Our future plans could be harmed if we are unable to attract or retain key
personnel
We have attracted a highly skilled management team and specialized workforce,
including scientists, engineers, researchers, and manufacturing and marketing
professionals. Based on our planned expansion, we will require a significant
increase in the number of our employees and outside contractors. Our future
success, therefore, will depend, in part, on attracting and retaining
additional qualified management and technical personnel. We do not know whether
we will be successful in hiring or retaining qualified personnel. Our inability
to hire qualified personnel on a timely basis, or the departure of key
employees, could harm our expansion and commercialization plans.
There has been no prior public market for our common stock
Before this offering, there has been no public market for our common stock.
Although our common stock will be quoted on the Nasdaq National Market, an
active trading market for our shares may not develop or be sustained following
this offering. Purchasers in this offering may not be able to resell their
shares at prices equal to or greater than the initial public offering price.
The initial public offering price was determined through negotiations between
us and the underwriters and may not be indicative of the market price for these
shares following this offering. See "Underwriting".
We may be subject to litigation if our stock price is volatile
The stock market has, from time to time, experienced extreme price and volume
fluctuations. Many factors may cause the market price for our common stock to
decline, perhaps substantially, following this offering, including:
. failure to meet our product development and commercialization
milestones;
. demand for our common stock;
. revenues and operating results failing to meet the expectations of
securities analysts or investors in any quarter;
. downward revisions in securities analysts' estimates or changes in
general market conditions;
. technological innovations by competitors or in competing technologies;
. investor perception of our industry or our prospects; or
. general technology or economic trends.
In the past, companies that have experienced volatility in the market price
of their stock have been the subject of securities class action litigation. We
may be involved in a securities class action litigation in the future. Such
litigation often results in substantial costs and a diversion of management's
attention and resources and could harm our business, prospects, results of
operations, or financial condition.
Provisions of Delaware law and of our charter and by-laws may make a takeover
more difficult
Provisions in our certificate of incorporation and by-laws and in the
Delaware corporate law may make it difficult and expensive for a third party to
pursue a tender offer, change in control or takeover attempt which is opposed
by our management and Board of Directors. Public stockholders who might desire
to participate in such a transaction may not have an opportunity to do so. We
also have a staggered Board of Directors which makes it difficult for
stockholders to change the composition of the Board of Directors in any one
year. These anti-takeover provisions could substantially impede the ability of
public stockholders to benefit from a change in control or change our
management and Board of Directors. See "Description of Capital Stock".
14
<PAGE>
You will suffer immediate and substantial dilution
The initial public offering price per share will be substantially higher than
the net tangible book value per share immediately after the offering. If you
purchase common stock in this offering, you will incur dilution of $10.05 per
share from the price per share you paid based on pro forma as adjusted net book
value at June 30, 1999. We also have a large number of outstanding stock
options to purchase our common stock with exercise prices significantly below
the initial public offering price of the common stock. To the extent these
options are exercised, there will be further dilution. See "Dilution" and
"Principal Stockholders".
Future sales of our common stock could adversely affect our stock price
Substantial sales of our common stock in the public market following this
offering, or the perception by the market that such sales could occur, could
lower our stock price or make it difficult for us to raise additional equity
capital in the future. After this offering, we will have 42,208,480 shares of
common stock outstanding. Of these shares, the 6,000,000 shares sold in this
offering will be freely tradeable. All the remaining 36,208,480 shares are
subject to 180-day lock-up agreements. Up to 25,049,850 shares may be available
for sale in the public market 180 days after the date of this prospectus.
In addition, after this offering, we also intend to register 5,671,191 shares
of common stock for issuance under our stock option and grant plan and
1,000,000 shares of common stock under our employee stock purchase plan. As of
September 30, 1999, options to purchase 3,377,189 shares of common stock were
issued and outstanding, of which options to purchase 1,220,782 shares have
vested. See "Underwriting" and "Shares Eligible for Future Sale".
We cannot predict if future sales of our common stock, or the availability of
our common stock for sale, will harm the market price for our common stock or
our ability to raise capital by offering equity securities.
We may experience Year 2000 compliance problems
Our product development activities are dependent upon the use of computer
systems. As a result, we are vulnerable to the "Year 2000" issue which means
that our computer systems could fail or create erroneous data as a result of
misinterpreting the year designation "00" on January 1, 2000. We have completed
a review and evaluation of the potential impact of this issue on our computer
systems and believe that all of our material computer systems will function
properly although we can give no assurance in this regard. We have also
completed a review and assessment to identify all other time dependent systems
and have determined that all systems critical to our business have been
verified to be Year 2000 compliant. We have not fully assessed the state of
Year 2000 readiness of our suppliers and customers and do not know whether Year
2000 related difficulties of third parties could have a material impact on our
business, prospects, results of operations, or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
We will have broad discretion as to the use of the net proceeds from this
offering
Our Board of Directors and our management will have broad discretion over the
use of the net proceeds of this offering. Investors will be relying on the
judgment of our Board of Directors and our management regarding the application
of the net proceeds of this offering. See "Use of Proceeds".
15
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of 6,000,000 shares of
our common stock in this offering will be $82.9 million, at an initial public
offering price of $15.00 per share, after deducting underwriting discounts and
commissions and our estimated offering expenses. We will also receive proceeds
of $84.9 million from the issuance of 9,216,666 shares of common stock upon the
exercise of outstanding warrants and other purchase rights immediately before
this offering. We estimate that our total net proceeds of $167.8 million will
be used as follows:
. approximately $20.0 million will be used for manufacturing equipment,
facilities and other capital expenditures in support of
commercialization activities during 1999 and 2000; and
. approximately $147.8 million will be used for general corporate
purposes, including working capital, funds for operations, research and
product development, market development and capital expenditures after
the year 2000 and potential acquisitions.
Pending their use, we will invest these proceeds in government securities and
other short-term, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the
expansion of our business and do not expect to pay any dividends in the
foreseeable future.
Payment of future cash dividends, if any, will be at the discretion of our
Board of Directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs and
plans for expansion.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis;
. on a pro forma basis giving effect to the issuance of 533,334 shares of
common stock for $4.0 million pursuant to a September 1999 capital call,
the issuance of 9,216,666 shares of common stock to be issued for $84.9
million upon the exercise of outstanding warrants and other purchase
rights immediately before this offering and the acquisition of real
estate from Mechanical Technology in July 1999 for $10.9 million (which
includes our assumption of $6.2 million of debt), all as described in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations".
. on a pro forma, as adjusted basis to reflect the pro forma adjustments
described above and the sale of 6,000,000 shares of common stock in this
offering at an initial public offering price of $15.00 per share, after
deducting underwriting discounts and commissions and our estimated
offering expenses.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Capital lease obligations...................... $ 246 $ 246 $ 246
Note payable................................... -- 6,160 6,160
-------- -------- --------
Total debt.................................... 246 6,406 6,406
-------- -------- --------
Stockholders' equity:
Class A membership interest, no par value,
40,000,000 shares authorized, 26,458,480
shares issued and outstanding............... --
Class B membership interest, no par value,
3,000,000 shares authorized, none issued.... --
Membership interest subscribed............... (4,698)
Preferred stock, $0.01 par value per share;
5,000,000 shares authorized, none issued and
outstanding, actual, pro forma, and pro
forma as adjusted........................... -- --
Common stock, $0.01 par value per share;
95,000,000 shares authorized; none issued
and outstanding, actual; 36,208,480 shares
issued and outstanding, pro forma; and
42,208,480 shares issued and outstanding,
pro forma, as adjusted...................... 362 422
Paid-in capital................................ 67,608 156,121 238,941
Deficit accumulated during the development
stage......................................... (30,604) (30,604) (30,604)
-------- -------- --------
Total stockholders' equity .................... 32,306 125,879 208,759
-------- -------- --------
Total capitalization......................... $ 32,552 $132,285 $215,165
======== ======== ========
</TABLE>
17
<PAGE>
DILUTION
As of June 30, 1999, we had a pro forma net tangible book value of $125.9
million, or $3.48 per share of common stock. Pro forma net tangible book value
per share is equal to our total tangible assets less total liabilities, divided
by the pro forma number of shares of our outstanding common stock. After giving
effect to the sale of the 6,000,000 shares of common stock offered hereby at an
initial public offering price of $15.00 per share, and after deducting
underwriting discounts and commissions and our estimated offering expenses, our
pro forma net tangible book value as adjusted, as of June 30, 1999, would have
been $208.8 million, or $4.95 per pro forma share of common stock. This
represents an immediate increase in pro forma net tangible book value as
adjusted of $1.47 per share to our existing stockholders and an immediate
dilution of $10.05 per share to new investors in this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $15.00
Pro forma net tangible book value per share before this
offering........................................................ $3.48
Increase per share attributable to this offering................. 1.47
-----
Pro forma net tangible book value per share after this offering.... 4.95
------
Dilution per share to new investors................................ $10.05
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999, the
difference between existing stockholders and new investors with respect to the
number of shares of common stock purchased, the total consideration paid and
the average price per share paid. If the underwriters' over-allotment option is
exercised in full, the percentage of the total number of shares of common stock
held by existing stockholders will decrease from 85.8% to 84.0% of the total
number of shares of common stock outstanding after the offering, and the
percentage of the total number of shares of common stock held by new investors
will increase from 14.2% to 16.0% of the total number of shares of common stock
outstanding after the offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 36,208,480 85.8% $156,482,964 63.5% $ 4.32
New investors............. 6,000,000 14.2 90,000,000 36.5% 15.00
---------- ----- ------------ -----
Total................... 42,208,480 100.0% $246,482,964 100.0%
========== ===== ============ =====
</TABLE>
The table excludes:
. up to 900,000 shares that may be issued by us pursuant to the
underwriters' overallotment option;
. 3,377,189 shares of common stock issuable upon exercise of stock options
outstanding at September 30, 1999 at a weighted average exercise price
of $4.98 per share;
. 2,561,002 shares of common stock available for future grant under our
1999 stock option plan as of September 30, 1999 (plus an additional
984,000 shares of common stock to become available for future grant
under our 1999 stock option plan as a result of this offering); and
. 1,000,000 shares of common stock reserved for purchase after this
offering under our employee stock purchase plan.
To the extent these shares are issued, there will be further dilution to new
investors. See "Management" and the notes to our financial statements included
elsewhere in this prospectus.
18
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following tables present selected historical financial data for the
period from June 27, 1997 (date of inception) through December 31, 1997, the
year ended December 31, 1998 and the six month periods ended June 30, 1998 and
1999. The balance sheet data as of December 31, 1997 and 1998 and the statement
of operations data for the period from inception through December 31, 1997 and
for the year ended December 31, 1998 have been derived from financial
statements (including those set forth elsewhere in this prospectus) that have
been audited by PricewaterhouseCoopers LLP, independent accountants. The
statement of operations data for the six month periods ended June 30, 1998 and
1999 and the balance sheet data as of June 30, 1999 are derived from our
unaudited financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of our results of operations and financial condition for
those periods. The data for the six-month period ended June 30, 1999 are not
necessarily indicative of results for the year ending December 31, 1999 or any
future period.
<TABLE>
<CAPTION>
Period from
June 27, 1997 to Year ended
December 31, December 31, Six months ended June 30,
---------------- ------------ -----------------------------
1997 1998 1998 1999
---------------- ------------ ------------ -------------
(Unaudited) (Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Contract revenue........ $ 1,194 $ 6,541 $ 2,549 $ 3,696
Cost of contract
revenue................ 1,227 8,864 3,439 5,118
------- ------- ------------ -------------
Loss on contracts....... (33) (2,323) (890) (1,422)
In-process research and
development............ 4,042 -- -- --
Research and development
expense................ 1,301 4,632 2,154 7,780
General and
administrative
expense................ 630 2,754 1,328 5,600
------- ------- ------------ -------------
Operating loss......... (6,006) (9,709) (4,372) (14,802)
Other income,
principally interest... 103 93 42 218
------- ------- ------------ -------------
Loss before equity in
losses of affiliate... (5,903) (9,616) (4,330) (14,584)
Equity in losses of
affiliate.............. -- -- -- (501)
------- ------- ------------ -------------
Net loss.............. $(5,903) $(9,616) $(4,330) $(15,085)
======= ======= ============ =============
Basic and diluted net
loss per share......... $ (0.62) $ (0.71) $ (0.40) $ (0.71)
======= ======= ============ =============
Shares used in computing
basic and diluted net
loss per share......... 9,500 13,617 10,865 21,299
======= ======= ============ =============
<CAPTION>
December 31, June 30,
------------------------- -------------
1997 1998 1999
------------ ------------ -------------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................ $ 3,080 $ 3,993 $ 17,243
Working capital.......................... 2,667 2,692 13,570
Total assets............................. 4,847 8,093 37,233
Long-term obligations.................... -- -- 155
Total stockholders' equity............... 3,597 5,493 32,306
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Plug Power's
financial statements, the notes to those financial statements and other
financial information appearing elsewhere in this prospectus. In addition to
historical information, the following discussion and other parts of this
prospectus contain forward-looking statements that reflect our plans,
estimates, intentions, expectations and beliefs. Our actual results could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those set forth in the "Risk Factors" section and contained
elsewhere in this prospectus.
Plug Power was formed in June 1997 as a Delaware limited liability company.
Immediately before this offering, we will merge into a newly-formed Delaware
corporation and all of our outstanding equity interests will be converted on a
one-for-one basis into shares of common stock. Unless otherwise indicated, all
information that we present in this prospectus for any date or period gives
effect to the merger as if it had occurred on such date or as of the beginning
of such period and all references to capital stock in this prospectus for
periods prior to the merger mean our issued and outstanding membership
interests.
Overview
Plug Power is a leading designer and developer of on-site, electricity
generation systems utilizing proton exchange membrane (PEM) fuel cells for
residential applications. GE Fuel Cell Systems, LLC, a joint venture 75% owned
by General Electric's GE Power Systems business and 25% owned by Plug Power,
will market, sell, service, and install our product.
Plug Power was formed in June 1997 as a joint venture to further the
development of fuel cells for electric power generation in residential and
other applications. Through September 30, 1999, our existing stockholders in
the aggregate have contributed $45.9 million in cash and $25.5 million in other
contributions, consisting of in-process research and development, real estate,
other in-kind contributions and a 25% interest in GE Fuel Cell Systems. Five of
our eight existing stockholders have committed to invest an additional $84.9
million in cash upon the exercise of outstanding warrants and purchase
commitments immediately before the closing of this offering. Since inception,
we have devoted substantially all of our resources toward the development of
our PEM fuel cell systems.
We are a development stage company and expect to bring our first commercial
product to market in 2001. Through June 30, 1999, we derived all of our revenue
from government research and development contracts. Substantially all of these
government contracts relate to PEM fuel cell research and development with a
focus on automotive applications. We believe most of the technology developed
under these government contracts is easily transferable to residential fuel
cell applications.
Since our inception in June 1997, we have raised capital through the issuance
of equity, formed strategic alliances with suppliers of key components,
developed distributor and customer relationships, and entered into development
and demonstration programs with electric utilities, government agencies and
other energy providers. In 1999, we expect to produce approximately 50 test and
evaluation systems which will be installed in laboratory and field locations
for field and market testing. Based on the system performance and market data
provided by these field trials, we will determine the final design of our first
pre-commercial product. During 2000 we expect to manufacture approximately 500
pre-commercial residential fuel cell systems to further our field testing
activities and prepare for commercial production, which is planned to begin in
2001. We do not expect significant product sales until after we begin
commercial production.
20
<PAGE>
From inception through June 30, 1999 we incurred losses of $30.6 million. We
expect to continue to incur losses as we expand our product development and
commercialization program and prepare for the commencement of manufacturing
operations. We expect that losses will fluctuate from quarter to quarter and
that such fluctuations may be substantial as a result of, among other factors,
the number of systems we produce and install for internal and external testing,
the related service requirements necessary to monitor those systems and
potential design changes required as a result of field testing. There can be no
assurance that we will manufacture or sell residential fuel cell systems
successfully or ever achieve or sustain product revenues or profitability.
Results of Operations
Comparison of the Six Months Ended June 30, 1998 and June 30, 1999
Revenues. Through June 30, 1999, our revenues have been derived exclusively
from cost reimbursement government contracts relating to the research and
development of PEM fuel cell technology. These contracts provide for the
partial recovery of direct and indirect costs from the specified government
agency, generally requiring us to absorb from 25% to 50% of contract costs
incurred. Contract revenues increased from $2.5 million for the six months
ended June 30, 1998 to $3.7 million for the six months ended June 30, 1999. As
of June 30, 1999, we have three ongoing government contracts which we expect
will produce approximately $7.6 million in contract revenue over the next eight
quarters.
We expect to continue to pursue government contracts that relate to the
further development and commercialization of PEM fuel cells and have been
awarded several additional contracts totaling $16.5 million that commenced in
the quarter ending September 30, 1999 and continue through 2003. These are also
cost reimbursement contracts in which the specific government agency will
reimburse us for 50% of the costs we incur. As a result, we will report a loss
on these contracts. We expect to continue to incur losses on future government
contracts awarded while developing proprietary information that we expect will
enhance our ability to commercialize our PEM fuel cell systems.
We expect to begin manufacturing pre-commercial residential fuel cell systems
during 2000. All users of these systems will be expected to participate in
field trials and evaluations designed to test system performance, market
conditions and customer preferences, including usage patterns, fuel
availability, buying criteria, and regulatory matters. We intend to use this
data to achieve optimal product design and speed commercialization and mass
market acceptance. The information obtained from the field test results will be
used to improve the design and performance of the commercial units planned for
production and sale in the year 2001. GE Fuel Cell Systems has committed to
purchase from us, on a take or pay basis, 485 of the pre-commercial residential
fuel cell systems prior to December 31, 2000. The total sales price for these
units will be approximately $10.3 million.
Cost of revenues. Cost of contract revenues includes compensation and
benefits for the engineering and related support staff, fees paid to outside
suppliers for subcontracted components and services, fees paid to consultants
for services provided, materials and supplies used and other general overhead
costs directly allocable to specific government contracts. Cost of contract
revenue was $3.4 million for the six months ended June 30, 1998 as compared to
$5.1 million for the six months ended June 30, 1999. This increase relates to
the additional staff and related support costs necessary to earn the additional
contract revenue as reported. The result was a loss on contracts of $890,000
for the six months ended June 30, 1998 compared to a loss on contracts of $1.4
million for the six months ended June 30, 1999.
We expect the cost to produce our initial systems to be higher than their
sales price under the terms of our distribution arrangements with GE Fuel Cell
Systems and Edison Development. We expect to continue to experience costs in
excess of product sales until we achieve higher production levels, which we do
not expect will occur until after 2002.
21
<PAGE>
Research and Development. Research and development expense includes
compensation and benefits for the engineering and related staff, expenses for
contract engineers, materials to build prototype units, fees paid to outside
suppliers for subcontracted components and services, supplies used, facility
related costs, such as computer and network services and other general overhead
costs. Research and development expenses increased from $2.2 million for the
six months ended June 30, 1998 to $7.8 million for the six months ended June
30, 1999. The increase was a result of the growth of Plug Power's research and
development activities focused on residential PEM fuel cell systems.
We expect to significantly increase our spending on research and development
in the future in order to bring our residential PEM fuel cell systems to the
marketplace by 2001. Beyond 2001, we plan to continue development activities
related to performance improvements of the residential PEM fuel cell system and
to develop other commercial PEM fuel cell applications.
General and Administrative. General and administrative expense includes
compensation, benefits and related costs in support of our general corporate
functions, including general management, finance and accounting, human
resources, business development, information and legal services. General and
administrative expenses increased from $1.3 million for the six months ended
June 30, 1998 to $5.6 million for the six months ended June 30, 1999. The
increase was primarily due to a $2.3 million charge for non-cash stock-based
compensation and a $1.9 million write-off of deferred rent, both further
explained below. We expect general and administrative expenses to increase in
future years as we prepare for expected increased sales volume.
The $2.3 million charge for non-cash stock-based compensation represents the
aggregate fair value of stock granted to Mechanical Technology. Our original
formation agreements provided for Mechanical Technology to earn non-cash
credits relating to services it rendered prior to our formation in connection
with securing future government contracts. Upon our formation, Mechanical
Technology contributed its fuel cell operations to Plug Power and we received
the right to these government contracts if ever awarded in the future. When
these contracts were awarded to us, Mechanical Technology earned the non-cash
credits, entitling it to receive 2,250,000 shares of common stock with a fair
value at the time of grant of $2.3 million. Accordingly, we recognized $2.3
million in non-cash stock-based compensation expense during the first six
months of 1999.
In June 1999, we entered into a real estate purchase agreement with
Mechanical Technology to acquire our current facility, a portion of which we
previously leased from them. As a result, we wrote off deferred rent expense in
the amount of $1.9 million. We originally recorded $2.0 million for deferred
rent in October 1998, representing the value of a ten-year lease agreement with
Mechanical Technology at favorable lease rates. See "Liquidity and Capital
Resources--Capital Contributions by Initial Investors".
Other Income. Other income consists principally of interest income earned on
our cash and cash equivalents. Other income increased from $41,000 for the six
months ended June 30, 1998 to $218,000 for the six months ended June 30, 1999.
The increase was due to interest earned on higher balances of cash and cash
equivalents available during the six months ended June 30, 1999.
Equity in losses of affiliate. Equity in losses of affiliate of $500,448 is
our proportionate share of the losses of GE Fuel Cell Systems ($31,698) and
goodwill amortization ($468,750) for the period ended June 30, 1999, which we
account for under the equity method of accounting. See "Liquidity and Capital
Resources--GE Fuel Cell Systems".
Income Taxes. No benefit for federal and state income taxes is reported in
the financial statements, since before the merger, which will occur immediately
before the closing of this offering, we had elected to be taxed as a
partnership. Therefore, for the periods presented, the federal and state income
tax benefits of our losses were recorded by our stockholders. Subsequent to our
merger into a C corporation immediately before the closing of this offering, we
will account for
22
<PAGE>
income taxes in accordance with Statement of Financial Accounting Standards No.
109 (SFAS 109), "Accounting for Income Taxes", and expect to be subject to an
effective tax rate of 40%. Had we applied the provisions of SFAS 109 since
inception, the deferred tax asset generated, primarily from net operating loss
carryforwards, would have been offset by a full valuation allowance. We believe
any tax benefit resulting from expected operating losses occurring after our
conversion to a C corporation will also have a full valuation allowance.
Comparison of the Period from June 27, 1997 (Date of Inception) to December
31, 1997 and the Year Ended December 31, 1998
Revenues. Our revenues during this period were derived exclusively from cost
reimbursement government contracts relating to the development of PEM fuel cell
technology. These contracts provide for the partial recovery of direct and
indirect costs from the specified government agency, generally requiring us to
absorb from 25% to 50% of contract costs incurred. Contract revenues increased
from $1.2 million for the period from inception through December 31, 1997 to
$6.5 million for the year ended December 31, 1998. This increase was due to
twelve months of activity in 1998 compared to six months in the period from
inception through December 31, 1997, combined with increased government
contract activities.
Cost of revenues. Cost of contract revenue includes compensation and benefits
for the engineering and related support staff, fees paid to outside suppliers
for subcontracted components and services, fees paid to consultants for
services provided, materials and supplies used and other directly allocable
general overhead costs allocated to specific government contracts. Cost of
contract revenue was $1.2 million for the period from inception through
December 31, 1997 as compared to $8.9 million for the year ended December 31,
1998. This increase in costs was due to twelve months of activity in 1998
compared to six months in the period from inception through December 31, 1997,
combined with the additional staff and related support costs necessary to earn
the additional contract revenue as reported. The result was a loss on contracts
of $33,000 for the year ended December 31, 1997 compared to a loss on contracts
of $2.3 million for the year ended December 31, 1998.
Research and Development. Research and development expense includes
compensation and benefits for the engineering and related staff, expenses for
contract engineers, materials to build prototype units, fees paid to outside
suppliers for subcontracted components and services, supplies used, facility
related costs, such as computer and network services and other general overhead
costs. Research and development expenses increased from $1.3 million in the
period from inception through December 31, 1997 to $4.6 million for the year
ended December 31, 1998, an increase of $3.3 million. This increase was related
to Plug Power's research and development activities focused on residential PEM
fuel cell systems in the year ended December 31, 1998 over that expensed for
the period from inception through December 31, 1997.
At inception, we recorded a $4.0 million in-process research and development
expense related to Mechanical Technology's initial equity contribution. Two
unaffiliated parties, Edison Development and Mechanical Technology, negotiated
at arm's length to form Plug Power and determined that the total value of the
in-process research and development, fixed assets, and trained workforce
contributed by Mechanical Technology was $4.8 million. Accordingly, we have
allocated the investment as follows (in thousands):
<TABLE>
<S> <C>
In-process research and development $4,043
Fixed assets 357
Trained workforce 350
</TABLE>
The in-process research and development contributed by Mechanical Technology
upon our formation related exclusively to the development of PEM fuel cells and
fuel cell systems. This project was the only one in process when it was
contributed and was in its early stages of development.
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The Mechanical Technology contribution included research and test results
related to the validation of initial plate and flow field designs, as well as
cooling and humidification schemes and initial designs regarding systems
integration. This initial work provided the framework to facilitate our
continuing efforts to commercialize the technology.
At the time of Mechanical Technology's contribution, neither the cost nor the
time required to complete this project and its successful commercialization was
known. We have produced and are currently demonstrating a number of test and
evaluation systems and are continuing our efforts to decrease the cost of our
system's components and subsystems, improve its overall reliability and
efficiency, and ensure its safety. We must complete substantial additional
research and development on our fuel cell systems and secure relationships with
suppliers of our required components and subsystems before we will have a
commercially viable product. As of June 30, 1999, we have spent in excess of
$13.0 million on this project, and we expect to spend an additional $60.0
million to $70.0 million on research and development related to the
commercialization of the residential fuel systems prior to the end of 2001,
when we plan to bring our first fuel cell systems to market.
The amount allocated to the in-process research and development contributed
to us by Mechanical Technology represents its estimated fair value based on the
negotiations of the two parties and is consistent with its value under the cost
valuation approach. Under the cost valuation approach, value is measured by
quantifying the cost of replacing the future service capability of the acquired
property without considering the amount of economic benefits that can be
achieved, or the time period over which they might continue.
The contributed in-process research and development was early development
stage property, which did not and currently does not have commercial viability
or any alternative future use and which will require substantial additional
expenditures to commercialize. Accordingly, we charged the assigned value to
operations at the time of contribution.
General and Administrative. General and administrative expense includes
compensation, benefits and related costs in support of our general corporate
functions, including general management, finance and accounting, human
resources, business development, information and legal services. General and
administrative expenses increased from $630,000 for the period from inception
through December 31, 1997 to $2.8 million for the year ended December 31, 1998.
The increase was due to twelve months of activity in 1998 compared to six
months in the period from inception through December 31, 1997, combined with
increased personnel cost and general expenses associated with expanding
operations.
Other Income. Other income consists principally of interest income earned on
our cash and cash equivalents. Other income was $103,000 for the period from
inception through December 31, 1997 and $93,000 for the year ended December 31,
1998.
Income Taxes. No benefit for federal and state income taxes is reported in
the financial statements, since before the merger, which will occur immediately
before the closing of this offering, we had elected to be taxed as a
partnership. Therefore, for the periods presented, the federal and state income
tax benefits of our losses were recorded by our stockholders. Subsequent to our
conversion from a limited liability company to a C corporation, we will account
for income taxes in accordance with SFAS 109. Had we applied the provisions of
SFAS 109 since inception, the deferred tax asset generated, primarily from net
operating loss carryforwards, would have been offset by a full valuation
allowance.
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Liquidity and Capital Resources
Summary
Our cash requirements depend on numerous factors, including completion of our
product development activities, ability to commercialize our residential fuel
cell systems, market acceptance of our systems and other factors. We expect to
devote substantial capital resources to continue our development programs
directed at commercializing our fuel cell systems for worldwide residential
use, to hire and train our production staff, develop and expand our
manufacturing capacity, begin production activities and expand our research and
development activities. We believe that our current cash balances, the proceeds
we will receive in connection with the exercise by five of our eight existing
stockholders of warrants and other purchase rights immediately before the
closing of this offering, and the net proceeds from this offering will provide
us with sufficient capital to fund operations through 2001.
We have financed our operations through June 30, 1999 primarily from the sale
of equity which has provided us cash of $41.9 million. We anticipate incurring
substantial additional losses over at least the next several years.
As of June 30, 1999, we had cash and cash equivalents totaling $17.2 million.
As a result of our purchase of real estate from Mechanical Technology, we were
required to escrow $6.2 million of the $17.2 million in cash to secure the debt
assumed on the purchase. Since inception, net cash used in operating activities
has been $16.4 million and cash used in investing activities has been $8.2
million. For the reasons stated above, we expect that our cash requirements
will increase in future periods.
Capital Contributions by Initial Investors
Plug Power was formed in June 1997 as a joint venture between Mechanical
Technology and Edison Development. At formation, Mechanical Technology
contributed assets related to its fuel cell program, including intellectual
property, 22 employees, equipment, and the right to receive government
contracts for research and development of PEM fuel cell systems, if awarded.
Edison Development contributed or committed to contribute $9.0 million in cash,
expertise in distributed power generation and marketplace presence to
distribute and sell stationary fuel cell systems.
In June 1999 we entered into a real estate purchase agreement with Mechanical
Technology to acquire approximately 36 acres of land, two commercial buildings,
and a residential building located in Latham, New York. This property is the
location of our current facilities and we are presently constructing our new
production facility at this site.
As part of the real estate transaction with Mechanical Technology, we assumed
a $6.2 million letter of credit issued by KeyBank National Association for the
express purpose of servicing $6.2 million of debt related to Industrial
Development Revenue Bonds issued by the Town of Colonie Industrial Development
Agency. As consideration for the purchase, we issued 704,315 shares of common
stock to Mechanical Technology, valued at $6.67 per share. The transaction
closed in July 1999 and a receivable for membership interests of $4.7 million
was recorded as shares subscribed as of June 30, 1999. In connection with this
transaction, we wrote off deferred rent expense in the amount of $1.9 million
during the first six months of 1999. This deferred rent expense related to a
10-year facilities lease, at a favorable lease rate, on one of the purchased
buildings. In connection with the July 1999 closing, we agreed to lease some of
the office and manufacturing space back to Mechanical Technology on a short-
term basis.
In June 1999, Edison Development purchased 704,315 shares of common stock for
$4.7 million in cash under provisions of our original formation documents that
allowed Edison Development and Mechanical Technology to maintain equal
ownership percentage in Plug Power. This equity contribution was recorded as of
June 30, 1999.
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<PAGE>
As of June 30, 1999, Mechanical Technology had made aggregate cash
contributions of $4.5 million plus non-cash contributions of $9.5 million and
we had a receivable for membership interests from Mechanical Technology of $4.7
million, while Edison Development had made aggregate cash contributions of
$18.7 million.
Capital Calls
In January 1999, we entered into an agreement with Mechanical Technology and
Edison Development. Pursuant to this agreement, we have the right to require
Edison Development and Mechanical Technology to contribute $7.5 million each in
1999 and $15.0 million each in 2000 in exchange for which each will receive
common stock valued at $7.50 per share. The agreement terminates on the earlier
of December 31, 2000 or upon an initial public offering of our shares at a
price greater than $7.50 per share. The agreement permits Mechanical Technology
and Edison Development to contribute any funds not previously called by us on
the termination date in exchange for shares at a price of $7.50 per share. In
September 1999, we made a capital call of $4.0 million, and Mechanical
Technology and Edison Development each contributed $2.0 million in cash in
exchange for 266,667 shares of common stock. Mechanical Technology and Edison
Development have committed to contribute the remaining $41.0 million
immediately before this offering in exchange for an aggregate of 5,466,666
shares of common stock.
GE Fuel Cell Systems
In February 1999, we entered into an agreement with GE On-Site Power to
create GE Fuel Cell Systems, a joint venture owned 75% by GE On-Site Power and
25% by Plug Power, which is dedicated to marketing, selling, installing, and
servicing Plug Power residential fuel cell systems on a worldwide basis (other
than in the states of Illinois, Indiana, Michigan and Ohio). See "Business--
Distribution and Marketing".
In connection with the formation of GE Fuel Cell Systems, we issued 2,250,000
shares of our common stock to GE On-Site Power in exchange for a 25% interest
in GE Fuel Cell Systems. Of these, 750,000 shares vested immediately and the
remaining 1,500,000 shares vested in August 1999. As of the date of issuance of
such shares, we capitalized $11.3 million, the fair value of the shares issued,
under the caption "Investment in affiliate" in our financial statements.
We also issued a warrant to GE On-Site Power to purchase 3,000,000 additional
shares of common stock at a price of $12.50 per share. GE On-Site Power has
committed to exercise this warrant immediately before this offering for a total
exercise price of $37.5 million in cash.
General Electric has agreed to provide capital to GE Fuel Cell Systems, in
the form of loans, to fund GE Fuel Cell Systems' commitment to purchase 485
pre-commercial systems during the period ending December 31, 2000. General
Electric has also agreed to provide additional capital, in the form of a loan
not to exceed $8.0 million, to fund GE Fuel Cell Systems' ongoing operations.
Southern California Gas Company
In April 1999, Southern California Gas Company purchased 1,000,000 shares of
common stock for $6.7 million and agreed to spend $840,000 for market research
and services related to distributed power generation technologies, including
PEM fuel cell systems. In the event Southern California Gas does not expend
these amounts by April 2002, up to 111,851 previously issued shares may be
returned. Additionally, Southern California Gas received warrants to purchase
an additional 350,000 shares of common stock at an exercise price of $8.50 per
share. Southern California Gas has committed to exercise these warrants
immediately before this offering for a total exercise price of $3.0 million in
cash.
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<PAGE>
Private Investors
In February 1999, two investors, including Michael J. Cudahy, a director of
Plug Power, purchased 1,500,000 shares of common stock for a total of $10.0
million. In addition, Mr. Cudahy received a warrant to purchase 400,000 shares
of common stock at a price of $8.50 per share. Mr. Cudahy has committed to
exercise this warrant immediately before this offering for a total exercise
price of $3.4 million in cash. In April 1999 an unrelated investor purchased
299,850 common shares for $2.0 million.
Line of Credit
In October 1999, we entered into a loan agreement for a $6.0 million line of
credit from KeyBank, National Association. The line of credit bears interest at
the prime rate in effect from time to time, matures upon the earlier of the
closing of this offering or November 30, 1999, and is collateralized by an
assignment of our right to call capital from Mechanical Technology and Edison
Development.
Year 2000 Readiness Disclosure
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998. The protections of this Act do not apply to claims
under the anti-fraud provisions of the federal securities laws.
Introduction
The Year 2000 issue relates to the various problems that may result from the
improper processing of dates and date-sensitive calculations by computers and
other machinery as the year 2000 is approached and reached. These problems
arise from hardware and software unable to distinguish dates in the "2000s"
from dates in the "1900s" and from other sources such as the use of special
codes and conventions in software that make use of date fields. These problems
could result in a system failure or miscalculations causing disruptions of
operations, including a temporary inability to process transactions, send
invoices or engage in other normal business activities. The Year 2000 issue may
pose additional problems due to the fact that Year 2000 is a leap year and some
computers and programs may fail to recognize the extra day.
Our State of Readiness
We have completed a review and evaluation of the potential impact that the
change in the date to the Year 2000 will have on our computer systems. As a
result of this review, we have determined that all of our major computer
systems are able to recognize and appropriately process dates commencing in the
Year 2000. Our computer systems are based upon commercial personal computer-
based software packages. All such software packages have been examined for
their compliance and appropriate upgrades are being purchased and installed.
Existing personal computer systems that are not Year 2000 compliant are
scheduled for replacement prior to October 1999. We have also completed a
review and assessment to identify all other computer-related systems and time
dependent processes and have determined that all of our business critical
systems have been verified to be Year 2000 compliant. New systems acquired
during 1999 have also been reviewed to verify that they are Year 2000
compliant.
Cost to Address Year 2000 Issues
Our historical costs to assess our Year 2000 readiness have been negligible.
We are not currently able to estimate the final aggregate cost of addressing
the Year 2000 issue because funds may be required as a result of future
findings. The majority of the costs required to complete our
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<PAGE>
Year 2000 compliance process will be incurred as part of our normal capital
asset acquisition program and would have been incurred without consideration of
Year 2000 issues. We do not expect these costs to have an adverse effect on our
business and financial results.
Risks Presented by Year 2000 Issues
Computer systems are also used to operate and monitor our fuel cell systems.
However, due to the early stage of commercialization of our fuel cell systems,
any potential failures of our test and evaluation systems related to the Year
2000 are not expected to have a material impact on our product development or
commercialization schedule. During mid-1999, all key suppliers received a copy
of our Year 2000 compliance questionnaire. To date approximately 40% have
replied that they are or will be compliant prior to Year 2000. We are re-
contacting suppliers that have not yet responded. We plan to have responses
from all key suppliers by October 1999. We ask all new suppliers to confirm
their Year 2000 compliance. We are contacting all suppliers of equipment and
services that may be date- and time-sensitive to verify that their products and
equipment will meet with Year 2000 standards. We are unable to fully assess the
state of Year 2000 readiness of our suppliers and customers. Given our current
development state and our pilot scale production volumes, we do not anticipate
that Year 2000 related difficulties in third parties will have a material
impact on our business activities or prospects.
Our Contingency Plans
We do not have, but we will continue to evaluate the need for, a contingency
plan for business risks that might result from Year 2000-related events. As we
progress with our Year 2000 readiness plan and identify specific risk areas, we
intend to implement appropriate remedial actions and contingency plans.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosure about Segments
of an Enterprise and Related Information." SFAS 131 establishes new standards
for the way companies report information about operating segments in annual
financial statements. The disclosures prescribed by SFAS 131 are effective for
the year ended December 31, 1998. We do not believe we operate in more than
one segment.
Quantitative and Qualitative Disclosures About Market Risk
We invest our excess cash in interest-bearing, investment-grade securities
that we hold for the duration of the term of the respective instrument. We do
not utilize derivative financial instruments, derivative commodity instruments
or other market risk sensitive instruments, positions or transactions in any
material fashion. Accordingly, we believe that, while the investment-grade
securities we hold are subject to changes in the financial standing of the
issuer of such securities, we are not subject to any material risks arising
from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive
instruments.
Forward-looking Statements
This prospectus contains forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they discuss our
future expectations, contain projections of our future results of operations or
of our financial condition or state other "forward-looking" information. We
believe that it is important to
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<PAGE>
communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control and
that may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, and actual results
may differ materially from those discussed as a result of various factors,
including product development delays, changing environmental and governmental
regulations, the ability to attract and retain employees and business partners,
future levels of government funding, competition from other manufacturers of
fuel cell systems and from other existing and advanced power technologies,
evolving markets for generating electricity and power, the ability to provide
the capital required for product development, operations and marketing, and
Year 2000 readiness. These factors should be considered carefully and readers
should not place undue reliance on our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in the "Risk Factors" section and elsewhere is this prospectus
could harm our business, operating results and financial condition.
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BUSINESS
Overview
We are a leading designer and developer of on-site, electricity generation
systems utilizing proton exchange membrane (PEM) fuel cells for residential
applications. Our goal is to become the first mass market producer of
residential fuel cell systems by selling 100,000 of our systems per year by
2003. The continued growth in demand for electric power, coupled with the
ongoing deregulation of the electric industry, is creating a market opportunity
for a variety of distributed, or on-site, generation technologies. We believe
that the electricity our residential fuel cell systems will provide to homes
can be less expensive, more reliable, more efficiently produced and
environmentally cleaner than the electricity provided by the existing electric
utility grid and other power generation technologies. We intend to leverage our
strategic alliances with General Electric Company and other leading energy
companies, as well as with selected product component suppliers, to achieve
leadership in residential fuel cell system design, manufacturing, and sales.
Our Product
Our residential fuel cell system will be an appliance, initially about the
size of a refrigerator, that will produce electricity through a clean,
efficient process without combustion. Our system will receive fuel from a
home's existing natural gas line or propane tank, convert the fuel into a
hydrogen-rich stream, and then combine it with oxygen from the air in a
chemical reaction that produces electric power. Our initial residential systems
will be designed to supply 7 kW of baseload power, 10 kW of peak power, and
15 kW of surge load capacity, which will provide the full electricity needs of
a home, although the home can remain connected to the electric grid for back-up
purposes. We plan to bring our first residential fuel cell systems to market in
2001, and, by 2003, we expect to offer different model sizes designed to meet
the specific power needs of various market segments.
Our Investors
We were formed in June 1997 as a joint venture between Mechanical Technology
Incorporated and Edison Development Corporation to further the development of
fuel cells for electric power generation in residential and other applications.
Mechanical Technology is a manufacturer of advanced test and measurement
products for commercial and military customers and an early developer of fuel
cell technology. Edison Development is a subsidiary of DTE Energy Company, a
diversified energy company involved in the development and management of
energy-related businesses and services and the parent company of Detroit
Edison, Michigan's largest electric utility.
At formation, Mechanical Technology contributed its fuel cell business,
including 22 people, intellectual property, equipment, facilities and
government contracts and grants related to automotive fuel cell research, while
Edison Development contributed cash, expertise in distributed generation and
the marketplace presence to distribute and sell fuel cell systems for
residential applications. Based in part on Mechanical Technology's
contributions, we have been awarded approximately $40.0 million in federal and
state government contracts related to PEM fuel cell research and development,
substantially all of which are focused on automotive applications. We believe
most of the basic technology developed under these government contracts can be
leveraged to further our residential fuel cell development and
commercialization program.
To date, our current stockholders, including Edison Development and
Mechanical Technology, in the aggregate have contributed $45.9 million in cash
and $25.5 million in other contributions, consisting of in-process research and
development, real estate, other in-kind contributions and a 25% interest in GE
Fuel Cell Systems. Five of our eight existing stockholders have committed to
invest an additional $84.9 million in cash upon the exercise of outstanding
warrants and purchase rights
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immediately before the closing of this offering. In addition to Edison
Development and Mechanical Technology, our current stockholders include:
. GE On-Site Power, Inc., a subsidiary of General Electric Company that
operates within General Electric's GE Power Systems business, one of the
world's leading suppliers of power generation technology, energy
services, and energy management systems; and
. Southern California Gas Company, a subsidiary of Sempra Energy and the
nation's largest regulated natural gas distribution utility in terms of
customers served.
Our Alliance with General Electric Company
General Electric has selected Plug Power to be its exclusive supplier of fuel
cell systems for residential and commercial applications under 35 kilowatts
(kW). In February 1999, we entered into an agreement with GE On-Site Power to
create GE Fuel Cell Systems, LLC, a joint venture owned 75% by GE On-Site Power
and 25% by Plug Power, which is dedicated to marketing, selling, installing and
servicing Plug Power fuel cell systems. Except for distribution rights we
granted to Edison Development for the states of Illinois, Indiana, Michigan,
and Ohio, GE Fuel Cell Systems is the exclusive global distributor and servicer
of our systems. We believe that our strength in fuel cell system design and
development, coupled with General Electric's brand name, worldwide sales and
distribution network, service capabilities, and commitment to the
commercialization of our fuel cell technology, will allow us to bring the first
and best residential fuel cell system to market and, by doing so, establish the
industry standard for this new product.
Product Development
We plan to achieve mass market distribution of our residential fuel cell
systems by 2003, which we define as manufacturing and selling 100,000 units or
more in a single year. To date, we have achieved the following major milestones
along our product development and commercialization schedule:
<TABLE>
<CAPTION>
Date Milestone
---- ---------
<C> <S>
June 1998 Powered a three-bedroom home with a hydrogen-fueled
residential fuel cell system
November 1998 Demonstrated a methanol-fueled residential fuel cell system
December 1998 Selected to design and manufacture 80 test and evaluation
residential fuel cell systems for the State of New York for
installation at various test sites over the next two years
December 1998 Demonstrated a natural gas-fueled residential fuel cell
system
February 1999 Entered into agreement with GE On-Site Power to distribute
and service our residential fuel cell systems
June 1999 Began construction of a state-of-the-art, 51,000 square foot
manufacturing facility in Latham, New York
June 1999 Hired our 250th employee, up from 22 employees at inception
August 1999 Powered a three-bedroom home with a residential fuel cell
system connected to its existing natural gas pipeline
September 1999 Filed our 50th patent application relating to fuel cell
technology, system designs and manufacturing processes
</TABLE>
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Changes in the Power Industry
Industrialized societies are dependent upon reliable, on-demand electric
power. Worldwide, electricity consumption has grown rapidly in response to
economic development. Uses for electricity have grown as all segments of
society have taken advantage of its general availability, reliability and
convenience, particularly as movement towards service-based economies increases
the reliance on computers and other electronics. According to the United States
Department of Energy, electricity consumption in the United States has grown
tenfold during the second half of the century, from approximately 300 million
kilowatt-hours in 1949 to more than three billion kilowatt-hours in 1997.
Demand for electricity is expected to continue to grow as the economies of
the United States and other industrialized nations expand. At the same time,
developing nations will need additional electricity and, in some cases, basic
energy infrastructure to improve their standards of living. The Department of
Energy reports that developing nations account for approximately 85% of the
world population, but only 46% of the world's fossil fuel electricity
consumption. Nearly two billion people in the world, approximately 35% of the
global population, still do not have electricity.
Historically, demand growth has been met by expansion of the existing
infrastructure, including additional investments in centralized generating
plants, high-voltage transmission lines and distribution wires. Reliance upon
this infrastructure has been and continues to be problematic for a number of
reasons. First, according to the Department of Energy, capacity reserve margins
have decreased from 33% in 1982 to 15% in 1997, indicating the increased
potential for power outages during peak periods. Second, some areas of the
country are experiencing capacity constraints and weather-related outages due
to the nature of the existing transmission and distribution system. Finally,
there is difficulty in finding suitable locations for additional generating
plants and transmission towers, because of environmental concerns regarding
emissions from generating plants and local zoning laws.
Utility deregulation is creating new challenges and opportunities in the
electric power industry in the United States and internationally. Due in part
to regulatory changes designed to encourage competition, vertically integrated
utilities are being separated into their generation, transmission and
distribution components. New entrants have become significant participants in
the generation of electricity as the industry moves toward open competition. In
the United States, regulatory organizations at the federal, state and local
level are revising how electric service is provided. Customers in many states
have or will soon have the chance to choose their electricity provider.
Internationally, in countries such as the United Kingdom where deregulation of
the electric industry has already occurred, industrial and commercial customers
have been the primary beneficiaries of increased competition, while residential
consumers have generally not benefited.
The evolving competitive industry environment, coupled with consumer demand
for more reliable, more accessible and more competitively priced sources of
electric power, is driving traditional energy providers to develop new
strategies and seek new technologies for electricity generation, transmission
and distribution.
Plug Power's Solution
We believe our residential fuel cell systems will enable electric utilities
and other energy suppliers to meet increasing residential electricity demand in
a cost-effective, reliable, efficient and environmentally friendly manner while
avoiding the costs and problems associated with installing and maintaining
traditional generation, transmission, and distribution infrastructure. We
believe residential consumers who acquire or utilize our systems will benefit
from potential cost savings, as well as from high reliability and efficiency.
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Benefits to Energy Providers
We believe our systems will offer the following benefits to natural gas and
propane distributors, rural electric cooperatives, electric utilities, and
other energy providers:
. Lower Capital Costs and Decreased Investment Risk. Our residential fuel
cell systems will be installed on-site and will supply power directly to
a home's electric system. Consequently, electric utilities can employ
our fuel cell systems to decrease capital expenditures by deferring or
eliminating the expansion, repair or replacement of generation,
transmission and distribution assets.
. Better Utilization of Existing Fuel Distribution Infrastructure. Use of
our natural gas- and propane-fueled systems will increase consumption of
these fuels over the course of the year, enabling distributors of these
fuels to better utilize their existing assets and mitigate the
seasonality of their businesses.
. Environmental Benefits. Energy providers are facing increasing
governmental pressures to provide environmentally clean power generation
systems. Fuel cell systems generate electricity through a chemical
process that produces water, useable heat, some carbon dioxide and
negligible levels of other pollutants as by-products. By contrast,
conventional power plants burn fossil fuels to create electricity,
emitting sulfur and nitrogen oxides, relatively higher levels of carbon
dioxide, particulate matter, unburned hydrocarbons and heat pollution.
Benefits to Residential Consumers
We believe our systems will offer the following benefits to residential
consumers:
. Potential Savings. Due to our system's high energy efficiency and on-
site location, we expect that, following the beginning of mass market
production of our residential fuel cell systems, the cost of electricity
to consumers (including the consumer's cost to purchase the system and
pay for routine maintenance and periodic replacement parts over the
system's estimated 15- to 20-year life) who purchase our system
directly, or who utilize a system purchased by an energy provider, will
be equal to or less than residential grid rates in many regions.
. Better Reliability. Our residential fuel cell system will generate
electricity at the home. As a result, it will not be as susceptible to
weather-related or capacity-driven outages, which are inherent problems
for traditional central generation and/or transmission and distribution
systems.
. Higher Efficiency. Fuel cells convert fuel directly into electricity
through an on-site chemical reaction. By contrast, a typical central
generation combustion process requires a series of steps, each of which
results in energy losses. As a result, fuel cells can deliver
electricity to a home more efficiently than the grid.
. Co-Generation Potential. Our systems will produce heat as a by-product.
In the future, we plan to modify our basic system to use that excess
heat to supplement traditional residential hot water and space heating
systems, thereby significantly increasing total system efficiency and
providing expected cost savings for consumers.
Our Strategy
Our business strategy focuses on combining existing fuel cell technology with
improvements in system integration, component design, and manufacturing
processes to achieve the low-cost manufacturing capability necessary to bring
our product to the mass market. The key components of this strategy are:
. Focus on residential applications. We have selected the residential
market as our primary focus because we believe it will be the first mass
market in which fuel cell products
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will be economically viable. We also chose the residential market
because of its large size, industry trends favoring distributed
generation, and the range of benefits our fuel cell systems can provide
to energy providers and consumers. We intend to continue to leverage our
experience gained under government contracts and grants for research and
development on automotive applications to further the development of our
residential systems. We believe we can achieve manufacturing cost
reductions that will make our systems commercially viable by the end
of 2001.
. Develop low-cost manufacturing capability and processes. We have focused
our efforts on utilizing technology and designs that are conducive to
low-cost mass manufacturing. Our strategy is to create a network of
selected suppliers who, with our help, can design and develop subsystems
and components that meet our cost, performance and quality
specifications. Based on our commercialization schedule, we believe that
we can purchase our components in larger volumes from these suppliers
beginning in 2000, which should further lower costs. Internally, we will
focus on overall system design, component and subsystem integration,
final assembly and quality control. We have nearly completed
construction of a 51,000 square foot manufacturing facility that will
enable us to develop our manufacturing capabilities and implement more
efficient manufacturing processes as we move toward the
commercialization stage.
. Utilize General Electric's product development expertise and purchasing
capabilities. Under our product development agreement with General
Electric, we will consult with appliance manufacturing and plant design
experts from General Electric to complete the design of our first
commercial system. To enhance our ability to meet General Electric's
quality control standards, we will also purchase technical support
services from General Electric in the areas of engineering, testing,
manufacturing and quality control services. We believe this
collaboration will provide us with the engineering, testing and
analytical resources to develop a superior product more rapidly. We will
also be able to utilize General Electric's purchasing power to lower our
component costs.
. Leverage our strategic alliance with General Electric to achieve market
leadership. We believe our strategic alliance with General Electric
gives us a substantial competitive advantage by providing an immediate
worldwide marketing, distribution and servicing capability. GE Fuel Cell
Systems is developing a global network of qualified resellers who will
distribute our systems to consumers, co-branded with both the General
Electric and Plug Power brand names. We believe that this co-branding
strategy will give us immediate recognition in the market and speed
consumer acceptance of our systems. Once in the market, GE Fuel Cell
Systems' coordination of the installation, servicing and maintenance of
our systems will also be an important factor in developing consumer
confidence in a new, high-technology product. As a result, we expect to
achieve our goals of being the first company to bring a residential fuel
cell system to market and to become the market leader.
. Acquire or license complementary technologies. Our goal is to
manufacture the best residential fuel cell system as quickly as
possible, whether we develop components and subsystems internally or
obtain them from third party suppliers. Accordingly, we regularly review
strategic opportunities to acquire or license technologies that can
advance the development of low-cost system components and subsystems.
. Capitalize on our experience in the residential market to develop other
fuel cell applications, including automotive applications. We believe
that the fuel cell technology, system designs and manufacturing
processes that we develop and acquire during the course of
commercializing our initial residential systems can be leveraged to
develop and commercialize other fuel cell applications, including
automotive applications, combined heat and power applications, and
emergency back-up systems. Our existing automotive program, which is
funded primarily by government contracts and grants, consists
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of a team of 32 engineers and technicians focused on developing the
smaller, more powerful, lower cost and lighter weight fuel cell systems
that exhibit the rapid start-up and quick response necessary for
automotive applications. Just as we have used our automotive research to
enhance the development of the basic technologies of our residential
systems, we believe that mass production of residential systems will
give us the manufacturing experience and economies of scale needed to
address these technological challenges and produce commercial automotive
systems. We do not anticipate commercial production of automotive
systems until at least 2006 and expect that contract revenues related to
development of our initial automotive systems will be less than 10% of
our total revenues in 2001 and less than 5% of our total annual revenues
in 2002 through 2006.
Product Development and Commercialization Process
We are implementing our product development plan in four phases. Our cash
requirements during this time period will depend on numerous factors, including
the progress of our product commercialization activities, and the pace at which
we hire and train our production staff, develop and expand our manufacturing
capacity and expand our research and development activities. We believe that
our current cash balances, the proceeds from the exercise of warrants and other
purchase rights immediately before the closing of this offering, and the net
proceeds from this offering will provide us with sufficient capital to fund
operations through 2001.
. Phase 1--Research, Development and Engineering. Our 56,000 square foot
research and development facility, one of the largest fuel cell
development laboratories in the world, contains over 70 test stations
where we conduct design optimization and verification testing, rapid-
aging testing, failure mode and effects analysis, multiple technology
evaluations, and endurance testing in our effort to accelerate the
development and commercialization of our fuel cell systems. Since our
inception, we have shown considerable progress in our product
development, including demonstrating laboratory systems running on
methanol and natural gas and powering a three-bedroom home with a
residential fuel cell system fueled from the home's existing natural gas
line. Through the end of 1999, we will focus on developing and testing
residential fuel cell systems, both in the laboratory and at selected
test sites, to obtain data that can help us advance the design and
construction of low-cost systems. We will also be selecting suppliers to
provide components and subsystems for our pre-commercial and commercial
systems on a long-term basis. During 1999, we expect to produce
approximately 50 natural gas-fueled test and evaluation systems built to
varying specifications in order to test different system design
elements. These systems will be evaluated in our laboratories and at
selected test sites. Based on the data we obtain from these field
trials, we will determine the final design of our pre-commercial
product.
. Phase 2--Pre-Commercial Testing. In early 2000, we expect to begin
small-scale production of our pre-commercial systems. GE Fuel Cell
Systems has committed to purchase 485 of these systems and is expected
to place them with its local market distribution partners. All of these
partners will be expected to participate in field trials and evaluations
designed to test system design and performance, as well as customer
preferences. We intend to use this data to optimize product design and
speed commercialization and mass market acceptance. During this period
we also expect to complete development of a propane-fueled system.
. Phase 3--Manufacturing and Commercialization. In 2001, we intend to
begin producing our first commercial fuel cell systems for residential
use. These systems will include any necessary modifications identified
during pre-commercial testing. During this period, we also intend to
expand our manufacturing capabilities, beginning large scale commercial
production while continuing to refine our low-cost manufacturing
processes. By 2003, we believe we will be manufacturing over 100,000
systems per year.
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<PAGE>
. Phase 4--Next Generation Models. In 2003, when we expect to have
achieved mass market production of our basic systems, we intend to
produce new models offering enhanced features, including models with co-
generation capabilities. In July 1999, we entered into a Collaboration
Agreement with Joh. Vaillant GmbH u. Co. to develop a residential
combined heat and power system for commercial introduction in Europe.
Vaillant is a leading European heating technology company and offers its
customers a complete range of products for central heating and hot
water. The Collaboration Agreement is contingent upon the successful
negotiation and execution of supply and distribution arrangements, as
well as product development arrangements, among Plug Power, Vaillant,
and GE Fuel Cell Systems.
Manufacturing
Our goal is to mass manufacture reliable and safe residential fuel cell
systems at the lowest cost. We have made, and expect to continue to make,
technological improvements that reduce the cost to produce our systems. We are
focusing our efforts on overall system design, component and subsystem
integration, assembly, and quality control processes. We have also begun to
establish a manufacturing infrastructure by hiring assembly and related support
staff, installing a new management information system, and developing our
manufacturing processes, including defining work centers and related
responsibilities. In December 1999, we expect to complete construction of our
new 51,000 square foot manufacturing facility, adjacent to our development
laboratories, that will allow us to begin large-scale manufacturing of our pre-
commercial and initial commercial systems.
We plan to utilize third-party suppliers who, with our assistance, can
design, develop and/or manufacture subsystems and components that achieve our
cost and reliability targets. We plan to perform significant quality testing
before we integrate any third-party subsystems and components into our final
assembled fuel cell system. We will also take advantage of General Electric's
volume purchasing capabilities to procure low-cost parts and components. As we
move toward the commercialization stage we will begin to shift our focus from
research and development to high volume production.
Based on our commercialization plan, we anticipate that our existing
facilities and our new manufacturing plant will provide sufficient capacity
through 2001, and that we will need to develop or build additional capacity in
order to achieve mass market production by 2003.
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<PAGE>
Distribution and Marketing
Plug Power will serve as GE Fuel Cell Systems' exclusive worldwide supplier
of fuel cell systems designed for residential and commercial applications under
35kW. We believe that most residential applications and many small commercial
applications require less than 35kW. GE Fuel Cell Systems will have the
exclusive worldwide rights to market, distribute, install and service our
systems (other than in the states of Illinois, Indiana, Michigan and Ohio, in
which Edison Development will be our exclusive distributor). Under this
arrangement, we will sell our systems directly to GE Fuel Cell Systems, which,
in turn, will utilize General Electric's worldwide sales and distribution
network to identify qualified resellers who can distribute and service these
systems. Plug Power systems sold through GE Fuel Cell Systems will be co-
branded with both the General Electric and Plug Power names and trademarks, and
may also carry the brand of the local reseller.
The following chart summarizes how we expect GE Fuel Cell Systems to
distribute our residential fuel cell systems to consumers:
[A chart appears with a graphic depiction of the Plug Power and GE Fuel Cell
Systems distribution with Plug Power at the top of the chart;
GE Fuel Cell Systems, LLC (Distributor) on the next level; Natural Gas
Distributors, Propane Distributors, Rural Electric Cooperatives, Electric
Utilities and New Market Entrants listed as Resellers on the next level;
and on the final level a box captioned "Markets" under which are listed (i)
Early Target Markets (2001-2002) of Homes serviced by rural electric
cooperatives, Homes in urban and suburban load packets, High-consumption
households, Owners and builders of remote homes and Dissatisfied utility
customers, and (ii) Mass Markets (2003 and beyond) of homes utilizing natural
gas, new homes and homes in countries with inadequate or no existing electric
power infrastructure. Each of these boxes is connected by downward arrows to
the next level.]
Targeted Resellers
We expect that GE Fuel Cell Systems' resellers will have, on a regional and
local basis, pre-existing customer bases, billing and service capabilities,
brand recognition, market credibility, and regulatory expertise. Through the
use of these qualified resellers, we believe that GE Fuel Cell Systems will be
able to quickly penetrate multiple markets, avoid costly investment in sales
and support resources, leverage its sales organization, and accelerate the
technology acceptance process.
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Potential resellers include the following:
. Natural Gas Distributors. By marketing our natural gas-fueled
residential fuel cell systems within their distribution territories, we
believe natural gas distributors can increase overall gas consumption
and pipeline utilization, enabling them to develop stronger customer
relationships, mitigate the seasonality of their business and enhance
their overall revenue stream.
. Propane Distributors. Propane distributors also should be able to
leverage their existing infrastructure to increase revenue and mitigate
seasonality. Since propane is generally delivered by truck to a
widespread customer base, the potential for increasing the number of
customers serviced and/or the amount of propane distributed per delivery
route should decrease distributors' marginal service costs.
. Rural Electric Cooperatives. Generally, rural electric cooperatives
serve a geographically dispersed customer base. We expect that our on-
site, residential fuel cell systems will enable these cooperatives to
meet their service obligations to customers without incurring the
substantial cost of extending, maintaining or replacing electricity
distribution lines.
. Electric Utilities. Electric utilities can selectively install on-site
fuel cell systems to meet increased electricity demand in remote areas
or in urban and suburban areas referred to as "load pockets," which
suffer from frequent capacity-driven outages. By doing so, they can
reduce the costs associated with installing and operating new
infrastructure or modifying or repairing existing infrastructure.
. New Market Entrants. The ongoing deregulation of the electric utility
industry and the accompanying introduction of consumer choice are
spawning new market entrants into the retail electric market, including
gas and power marketers, unregulated affiliates of utilities, appliance
distributors, and energy service companies. As these new market entrants
seek to achieve a market presence, we expect that the relatively low
capital cost and ease of installation of our fuel cell systems will make
this distributed form of electricity supply particularly attractive.
Potential resellers will be required to purchase fuel cell systems only from
GE Fuel Cell Systems and to commit to minimum purchase requirements. To date,
GE Fuel Cell Systems has entered into memoranda of understanding with potential
resellers, including NJR Energy Holdings Corporation, an affiliate of New
Jersey Natural Gas Company, and Flint Energies, a Georgia-based rural electric
cooperative. We expect GE Fuel Cell Systems to enter into similar arrangements
with selected resellers around the world.
GE Fuel Cell Systems will focus on creating brand and product awareness at
the consumer level through media advertising, trade shows and other mass
marketing channels. Resellers are expected to augment this effort through local
advertising, mass mailings, catalog sales, educational seminars, promotional
pricing for systems or fuel, and bundled service offerings. Resellers may also
work with building contractors, financial institutions and other intermediaries
to create cost-effective programs to reach consumers.
Targeted Early Markets
Together with GE Fuel Cell Systems, we have conducted a preliminary
evaluation of target markets and potential customers, taking into account such
factors as average household electricity usage, ability to pay, power
availability and quality, availability of fuel, the prices of electricity and
natural gas, penetration of competing distributed generation technologies, new
capacity requirements and the cost of new capacity additions. Based on this
evaluation, we intend to target the following market segments during 2001 and
2002 for our first commercial fuel cell systems, which we estimate will be
priced to the consumer between $7,000 and $10,000, subject to market demand:
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<PAGE>
. Homes served by rural electric cooperatives. A rural electric
cooperative may choose to install fuel cell systems in homes rather than
incurring the cost to extend, maintain or replace existing power
distribution lines.
. Homes in urban and suburban load pockets. Electric utilities serving
urban and suburban load pockets may install our systems in selected
homes to lessen the frequency of capacity-driven outages.
. High-consumption households. Many high-consumption households place
importance on power quality, particularly with their increased use of
home computers and other electronics. Our systems, which are designed to
independently power the home while maintaining a grid connection as
backup, should provide a compelling solution to power quality and
reliability concerns.
. Owners and builders of remote homes. Building contractors and homeowners
often have the flexibility to choose how power will be provided to the
home. For many of these homes in remote areas, fuel cell systems can be
a cost effective and reliable alternative to new distribution
infrastructure, backup generators, or other alternative power sources.
. Dissatisfied utility customers. Some homeowners are dissatisfied with
the reliability and expense of the electricity and service provided by
the local utility company. We believe these homeowners will be willing
to try an easy-to-install alternative that could provide added
reliability without requiring them to disconnect from the grid
altogether.
Mass Markets
After introducing our first commercial systems in 2001 to our targeted early
markets, we believe that we will gain the experience and capabilities necessary
to lower the estimated price of our systems to consumers to approximately
$3,000 to $5,000, subject to market demand, expand our manufacturing capacity
and, through GE Fuel Cell Systems, extend our sales efforts to the mass market
beginning in 2003. Our targeted mass market segments will include:
. Homes utilizing natural gas. According to the National Gas Supply
Association, more than half of all homes in the United States and over
60% of newly constructed homes in the United States use natural gas for
heating and appliances. In areas with existing natural gas lines, the
cost of electricity from our natural gas-fueled residential fuel cell
systems may compare favorably to the cost of electricity from the grid.
. New homes. According to the United States Department of Housing and
Urban Development, 1.2 million single family houses were constructed in
the United States in 1998. Our residential fuel cell systems will offer
contractors and homeowners the opportunity to build developments or
individual homes powered by fuel cells rather than by the electric grid.
. Homes in countries with inadequate or no existing electric power
infrastructure. According to the World Bank, there are nearly two
billion people worldwide without electricity. In addition, many
countries have existing centralized electric power infrastructures that
are unreliable and outdated. Many of these developing countries do not
have the means to build or upgrade large, central power generation
plants and accompanying transmission and distribution networks to serve
a broad customer base. These countries may selectively purchase and
deploy fuel cell systems to supply electricity where it is most needed
as an alternative to major capital investment.
Installation, Servicing and Maintenance
GE Fuel Cell Systems has committed to provide complete product support for
Plug Power systems through its own service structure, reseller service network,
and contracts with third party service providers. We believe potential third
party service providers will include companies with
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<PAGE>
existing national service infrastructures, as well as regional companies with
strong reputations and service capabilities. Selected providers will be
required to meet General Electric's quality standards and customer needs of
timeliness, quality and cost-effectiveness.
GE Fuel Cell Systems' service program is expected to be closely coordinated
with the introduction of Plug Power's fuel cell systems, so that a sufficient
level of installation, maintenance, and customer support service will be
available in all areas where our systems are sold. We also expect that GE Fuel
Cell Systems will provide the warranty service for our products according to
terms to be mutually agreed upon by Plug Power and GE Fuel Cell Systems. We
will review GE Fuel Cell Systems' service plan and suggest modifications based
on the pace of product development and field test results. We expect that GE
Fuel Cell Systems' service plan will be completed and the requisite service
contracts in place prior to the release of our commercial units in 2001.
Fuel Cell Technology and Fuel Cell Systems
A fuel cell is a device that combines hydrogen, derived from a fuel such as
natural gas, propane, methanol or gasoline, and oxygen from the air to produce
electric power without combustion. Plug Power fuel cells consist principally of
two electrodes, the anode and the cathode, separated by a polymer electrolyte
membrane. Each of the electrodes is coated on one side with a platinum-based
catalyst. Hydrogen fuel is fed into the anode and air enters through the
cathode. Induced by the platinum catalyst, the hydrogen molecule splits into
two protons and two electrons. The electrons from the hydrogen molecule are
conducted around the membrane creating an electric current. Protons from the
hydrogen molecule are transported through the polymer electrolyte membrane and
combine at the cathode with the electrons and oxygen from the air to form water
and produce heat.
The following diagram illustrates how fuel cells work:
[A Diagram appears with a graphic depiction demonstrating the process by
which hydrocarbon fuels are passed through a PEM membrane in order to produce
electricity, water and heat and the following words appear in the diagram:
HOW FUEL CELLS WORK; Fuel cells extract hydrogen ions from hydrocarbon fuels and
combine them with oxygen to generate power...; Hydrogen molecules; Electrons;
Protons; Electricity; PEM Membrane; Electricity is generated via an
electrochemical process versus traditional combustion...; Oxygen (from air);
Water; Heat; The output from the process includes electricity, water and heat.]
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<PAGE>
To obtain the desired level of electric power, individual fuel cells are
combined into a fuel cell stack. Increasing the number of fuel cells in a stack
increases the voltage, while increasing the surface area of each fuel cell
increases the current. Our initial residential systems will provide 7kW of
baseload power, 10kW of peak power and 15kW of surge load capacity.
We plan to design our fuel cell systems to last approximately 15 to 20 years,
with major component maintenance and replacements scheduled to occur every four
to seven years. Items such as air filters will require annual replacement. The
chart below sets forth a brief description of our systems' components and
subsystems:
<TABLE>
<CAPTION>
Component or Subsystem Description
---------------------- -----------
<C> <S>
Fuel reformer (processor) Converts or reforms the specified
hydrocarbon fuel, such as natural gas,
propane, methanol or gasoline, into a
hydrogen-rich stream for use in the fuel
cell stack. Design may differ based upon the
type of fuel used.
Fuel cell stack Produces electricity in a chemical reaction
by combining hydrogen with oxygen.
Power conditioner (inverter) Converts the direct current, or DC,
electricity created by the fuel cell stack
into alternating current, or AC, electricity
for use in the home. Also designed to handle
voltage spikes, as well as distortions
caused by the concurrent use of multiple
appliances. Design may differ based upon the
country in which it will be used.
Fuel supply subsystem Connects the fuel supply to the fuel
reformer and filters out unwanted sulfur and
other fuel contaminants.
Air supply subsystem Supplies filtered air to both the fuel
reformer and the fuel cell stack.
Water management loop Supplies humidification water to the fuel
cell stack to prevent the system from drying
out and reaction water to the fuel reformer
to facilitate the conversion of the fuel to
hydrogen.
Thermal management system Regulates the operating temperature of both
the fuel reformer and the fuel cell stack to
ensure optimum performance.
Microprocessor-based control unit Monitors system parameters and provides
control signals to the various subsystems to
maintain efficient operation. Also signals
need for service or maintenance.
Battery Powers the system from initial start until
the fuel cell stack warms up to appropriate
temperature and also provides 3 kilowatt-
hours of back-up power. Recharges while
system is in use.
</TABLE>
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<PAGE>
The following diagram illustrates how a Plug Power fuel cell system produces
electricity:
[A Chart appears showing the components of the residential fuel cell system,
and the following words appear: Natural Gas; Air; Fuel Processor; Hydrogen;
Fuel Cell Stack; Controller; DC Electricity; DC AC Inverter; 120/240 VAC
Current; Heat and Water].
Proprietary Rights
Fuel cell technology has existed since the 19th century, and PEM fuel cells
were first developed in the 1950s. Consequently, we believe that neither we nor
our competitors can achieve a significant proprietary position on the basic
technologies used in fuel cell systems. For example, platinum catalysts have
been a standard component of fuel cells for decades. Recently, companies have
developed different formulations and methods for incorporating platinum into
the fuel cell that increases overall performance of the fuel cell while
reducing the amount of platinum required. While we have developed our own
proprietary technology to incorporate platinum which we have chosen to protect
as a trade secret, we currently purchase fuel cell components from several
vendors who have their own patented and trade secret platinum incorporation
technology. However, if these vendors were no longer willing or able to supply
such components, our own platinum incorporation technology would be available
for use, as would the platinum incorporation technologies of other potential
vendors.
Despite the inability to achieve a significant proprietary position on the
basic technologies of fuel cell systems, we believe the design and integration
of the system and system components, as well as some of the low-cost
manufacturing processes that we have developed, can be protected. Accordingly,
our overall intellectual property development and protection strategy has the
following components:
. Maximize protection of our internally developed processes and
designs. Our goal is to encourage employees to develop promising ideas
with potential business impact and then protect these ideas as patents
or trade secrets. To date, we have three issued patents and 47 patents
pending. These patents cover, among other things, fuel cell components
that
42
<PAGE>
reduce manufacturing part count, fuel cell system designs that lend
themselves to mass manufacturing, improvements to fuel cell system
efficiency, reliability, and longer system life, and control strategies,
such as added safety protections and operation under extreme conditions.
Each of our employees has agreed that all inventions made or conceived
while an employee of Plug Power which are related to or result from work
or research that Plug Power performs will remain the sole and exclusive
property of Plug Power, whether patented or not.
. Monitor relevant patents issued for their impact on the development of
our systems. We actively monitor issued patents and other patent actions
that may impact the development of fuel cell systems. We also seek to
ensure that the components manufactured for us by third parties do not
infringe on patents covered by others. Our experts in the various
technical fields assess these inventions for possible interference with
Plug Power technology. Based on our assessments to date, we do not
believe that patents issued to other parties will prevent us from
reaching our strategic goals.
. Purchase selected intellectual property rights. We regularly review
strategic opportunities to acquire or license technologies that can
advance the development of low cost system components and subsystems.
Competition
There are a number of companies located in the United States, Canada and
abroad that are developing PEM fuel cell technology. Ballard Power Systems
Inc., a publicly traded company located in Vancouver, British Columbia, has
been developing PEM fuel cell technology since the mid-1980s and has attracted
substantial funding from a number of partners, including DaimlerChrysler AG and
Ford Motor Company. A number of major automotive and manufacturing companies
also have in-house PEM fuel cell development efforts. To the extent publicly
disclosed, the primary efforts of many of these companies, including Ballard
and International Fuel Cells Corporation, a subsidiary of United Technologies
Corporation, appear to have been directed toward the development of fuel cell
systems for automotive and large stationary power applications. Although we
believe approximately 10 companies have established residential fuel cell
system development programs, we believe they are still in the research and
development stage and have not yet developed the product manufacturing and
distribution infrastructure necessary to reach commercialization.
We also compete with companies that are developing other types of fuel cells.
There are four types of fuel cells other than PEM fuel cells that are generally
considered to have viable commercial applications: phosphoric acid fuel cells,
molten carbonate fuel cells, solid oxide fuel cells and alkaline fuel cells.
Each of these fuel cells differs in the component materials, as well as in its
overall operating temperature. While all fuel cell types have environmental and
efficiency advantages over traditional power sources, we believe that PEM fuel
cells can be manufactured less expensively and are more efficient and more
practical in small-scale applications.
Our systems will also compete with other distributed generation technologies,
including microturbines and reciprocating engines, available at prices
competitive with existing forms of power generation. We believe that our fuel
cell systems will have a competitive advantage in that they can be more easily
scaled to residential size and will be more efficient in handling the load
profile of residential customers. We also believe that they will be quieter,
environmentally cleaner, more efficient, and less expensive to install, service
and maintain. Our systems will also compete with solar and wind-powered
systems.
Once we begin selling our systems, we intend to compete primarily on the
basis of cost, reliability, efficiency and environmental considerations.
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Government Regulation
We do not believe that we will be subject to existing federal and state
regulatory commissions governing traditional electric utilities and other
regulated entities. We do believe that our product and its installation will be
subject to oversight and regulation at the local level in accordance with state
and local ordinances relating to building codes, safety, pipeline connections
and related matters. Such regulation may depend, in part, upon whether a system
is placed outside or inside a home. At this time, we do not know which
jurisdictions, if any, will impose regulations upon our product or
installation. We also do not know the extent to which any existing or new
regulations may impact our ability to distribute, install and service our
product. Once our product reaches the commercialization stage and we begin
distributing our systems to our target early markets, federal, state or local
government entities or competitors may seek to impose regulations. We intend to
encourage the standardization of industry codes to avoid having to comply with
differing regulations on a state-by-state or locality-by-locality basis.
Facilities
Our principal executive offices are located in Latham, New York. At our 36
acre campus, we own a 56,000 square foot research and development center and a
32,000 square foot office building that we are currently leasing to Mechanical
Technology until December 1999, and are in the process of constructing a 51,000
square foot manufacturing facility. We own all of our facilities and believe
that they are sufficient to accommodate our anticipated growth through at least
2001.
Employees
As of September 30, 1999, we had a total staff of approximately 280,
including approximately 230 full-time employees, of which approximately 120
were engineers, scientists, and other degreed professionals. We consider our
relations with our employees to be good.
Legal Proceedings
We may from time to time be involved in legal proceedings in the ordinary
course of our business. We are not currently involved in any pending legal
proceedings that, either individually or taken as a whole, could harm our
business, prospects, results of operations, or financial condition.
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MANAGEMENT
Executive Officers, Key Employees and Directors
Our executive officers, directors, director-nominees, and key employees,
their positions and their ages as of September 30, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Executive Officers and
Directors
Gary Mittleman.......... 46 President, Chief Executive Officer and Director
William H. Largent...... 44 Chief Financial Officer and Treasurer
Gregory A. Silvestri.... 39 Senior Vice President--Operations
Louis R. Tomson......... 59 Senior Vice President--Corporate Development
Dr. William P. Acker.... 38 Vice President of Technology and Product Development
Dr. Manmohan Dhar....... 52 Vice President and Chief Engineer of the Residential Program
Michael J. Cudahy....... 75 Director
Anthony F. Earley, Jr... 49 Director
Larry G. Garberding..... 60 Director
George C. McNamee....... 52 Chairman
Dr. Walter L. Robb...... 71 Director
Robert L. Nardelli...... 51 Director-nominee
John M. Shalikashvili... 63 Director-nominee
Key Employees
Dr. Glenn A. Eisman..... 48 Chief Technology Officer
Dr. William D. Ernst.... 60 Vice President and Chief Scientist
Russel H. Marvin........ 32 Vice President of Component Engineering and Design
Ana-Maria Galeano....... 31 General Counsel and Corporate Secretary
</TABLE>
Gary Mittleman has served as President and Chief Executive Officer since June
1997 and as a director since August 1999. From October 1993 to June 1997, Mr.
Mittleman was the President of Edison Development Corporation, a wholly owned
subsidiary of DTE Energy Company, where he directed business development
efforts. Mr. Mittleman previously served as Manager of Corporate Strategy at
Ameritech, a telecommunications company. Prior to that he was employed at Booz
Allen & Hamilton, a consulting firm, in its commercial practice area and at
American Can Company. Mr. Mittleman received his Bachelor of Arts degree in
Mathematics and Master of Science degree in Mechanical and Aerospace
Engineering from the University of Rochester and a Master of Business
Administration degree, with honors, from the University of Chicago. Mr.
Mittleman is a trustee of the Albany Institute of History and Art and a trustee
of the Eastern New York State Chapter of the Nature Conservancy.
William H. Largent has served as Chief Financial Officer and Treasurer since
May 1999. From May 1997 to May 1999, Mr. Largent served as Senior Vice
President, Operations and Chief Financial Officer of Applied Innovation Inc., a
leading provider of mediation and data communications products for the
management of telecommunications providers' customer service networks. From
1994 to April 1997, Mr. Largent served as the Executive Vice President and
Chief Financial Officer of Metatec Corporation, an information services company
engaged in optical disc manufacturing and distribution, software development
and network services. Mr. Largent also served as a director of Metatec from
1990 until 1997. From 1990 to 1993, Mr. Largent was President of Liebert
Capital Management Corporation, a private investment management and consulting
company. Mr. Largent is a director of Applied Innovation, Inc. and until July
1999, was also a director AmeriLink Corporation, a company (subsequently merged
into Tandy Corp.) that designs, constructs, installs and maintains cabling
systems for transmission of audio, video and data on a national basis. Mr.
Largent, a certified public accountant, received his Bachelor of Science degree
in accounting from Franklin University.
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Gregory A. Silvestri has served as Senior Vice President--Operations since
June 1999. In that capacity, Mr. Silvestri manages the full range of
manufacturing activities, develops the strategy and structures alliances with
key component suppliers, and manages the sales and marketing interactions with
Plug Power's distribution partners. From May 1991 to May 1999, Mr. Silvestri
served in a number of senior general management positions responsible for North
American and Asia-Pacific operations for Norton Company, an operating unit of
Saint-Gobain Corporation that supplies engineered materials to a variety of
industries. Prior to that time, Mr. Silvestri served as an Engagement Manager
within the Industrial Practice Group of McKinsey & Company. Mr. Silvestri
received his Bachelor of Science and Engineering degree in Chemical Engineering
from Princeton University and a Masters in Business Administration degree, with
honors, from the University of Virginia.
Louis R. Tomson has served as Senior Vice President--Corporate Development
since January 1999. In that capacity, Mr. Tomson manages business development,
government relations and legal affairs. From January 1995 to January 1999, Mr.
Tomson was Deputy Secretary and subsequently First Deputy Secretary to Governor
George E. Pataki of the State of New York. Mr. Tomson was also the Governor's
Chief Policy Maker for energy and communications and served as the Governor's
liaison to New York's Public Service Commission and to New York's more than 60
public authorities. From 1992 to December 1994, Mr. Tomson was a partner in the
law firm of Plunkett & Jaffe in New York, New York. Mr. Tomson currently serves
as the Chairman of the New York State Thruway Authority. Mr. Tomson received a
Bachelor of Arts degree from Columbia College and a Bachelor of Law degree from
Columbia Law School.
Dr. William P. Acker has served as Vice President of Technology and Product
Development since October 1997. In that capacity, Dr. Acker manages the
development of Plug Power's fuel cell products as well as the ongoing
development of next generation fuel cell technology. From 1990 to October 1997,
Dr. Acker served in several positions for Texaco, including Global Manager for
Engineering and Product Testing. Dr. Acker received a Bachelor of Science
degree from Rensselaer Polytechnic Institute and a Master of Science, Master of
Philosophy and Ph.D. in Applied Physics and Engineering from Yale University.
Dr. Manmohan Dhar has served as Vice President and Chief Engineer of the
Residential Program since November 1998. In that capacity, Dr. Dhar is
responsible for managing the development of low-cost, highly reliable fuel cell
systems for residential electric power generation. From June 1997 to November
1998, Dr. Dhar served as our Director of Residential Programs. From 1978 to
June 1997, Dr. Dhar worked in various positions at Mechanical Technology
Incorporated, including as Chief Engineer for its Stirling Space Power Program,
an effort to develop a 12.5 kW power generation system as a backup power source
for Space Station Freedom, and, from 1993 to 1997, as a key member of
Mechanical Technology's fuel cell development efforts. Dr. Dhar has a Ph.D. in
Systems Dynamics from Purdue University, and a Master of Science degree in
Machine Design from the Indian Institute of Technology.
Michael J. Cudahy has served as a member of the Board of Directors since
February 1999. Mr. Cudahy co-founded and, prior to its sale to General Electric
Company in 1998, served from 1965 to November 1998 as Chairman of the Board,
and from 1965 to November 1997 as Chief Executive Officer, of Marquette Medical
Systems, Inc., a developer and manufacturer of medical equipment and integrated
systems for patient monitoring and diagnostic cardiology applications. Mr.
Cudahy currently serves as a Special Advisor to GE Marquette Medical Systems,
Inc. and as a director of Molecular OptoElectronics Corp., a developer and
manufacturer of optoelectronic technologies relating to information systems.
Anthony F. Earley, Jr. has served as a member of the Board of Directors since
June 1997. Mr. Earley has served as a director of DTE Energy Company since
1994, as Chairman of the Board and Chief Executive Officer of DTE Energy
Company and its subsidiary, The Detroit Edison
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Company, since 1998, and as President and Chief Operating Officer of DTE Energy
and Detroit Edison since 1994. From 1989 to 1994, Mr. Earley served as the
President and Chief Operating Officer of Long Island Lighting Company. Mr.
Earley currently serves as a director of Comerica Bank and Mutual of America
Capital Management Corporation. Mr. Earley received a Bachelor of Science
degree in physics, a Master of Science degree in engineering, and a Juris
Doctorate from the University of Notre Dame.
Larry G. Garberding has served as a member of the Board of Directors since
June 1997. Mr. Garberding has served as a director of DTE Energy Company since
1990 and as Executive Vice President and Chief Financial Officer of DTE Energy
and its subsidiary, The Detroit Edison Company, since 1995. Mr. Garberding
received a Bachelor of Science degree in industrial administration from Iowa
State University. Mr. Garberding is extensively involved with the United Way of
Southern Michigan, is a director/trustee of the Detroit Medical Center and the
Detroit Symphony Orchestra Hall, and is a Chairman of the Board of ArtServe
Michigan.
George C. McNamee has served as Chairman of the Board of Directors since June
1997. Mr. McNamee has served as Chairman since 1984 and as Co-Chief Executive
Officer since 1993 of First Albany Companies, Inc., a publicly traded holding
company the principal subsidiaries of which are First Albany Corporation, a
specialty investment banking firm and an underwriter of this offering, and
First Albany Asset Management. Mr McNamee previously served as President of
First Albany Companies from 1975 to 1989. Mr. McNamee has served as a director
of Mechanical Technology Incorporated since 1996 and as Chief Executive Officer
since 1998, and previously served as Chairman of the Board from 1996 to 1998.
Mr. McNamee also serves as a director of MapInfo Corporation, a maker of
mapping software products, application development tools, and data products,
and the META Group, Inc., a company that provides market assessments for
clients in the information technology industry. Mr. McNamee is a member of the
Board of Directors of the New York Stock Exchange, the New York State Science
and Technology Foundation, and the New York Conservation Education Fund. Mr.
McNamee received his Bachelor of Arts degree from Yale University.
Dr. Walter L. Robb has served as a member of the Board of Directors of Plug
Power since June 1997. He has been a member of the Board of Directors of
Mechanical Technology since January, 1997. Since 1993, Dr. Robb has served as
President of Vantage Management, Inc., a management consulting firm. Prior to
1993, Dr. Robb served as the Senior Vice President for Corporate Research and
Development at General Electric Company. In that capacity, Dr. Robb directed
the GE Research & Development Center, one of the world's largest and most
diversified industrial laboratories, and served on General Electric's Corporate
Executive Council. He serves on the Board of Directors of Cree Research, Inc.,
a developer and manufacturer of semiconductor materials and electronic devices,
Celgene Corporation, a specialty pharmaceutical company engaged in the
development and commercialization of human pharmaceuticals, and Neopath, Inc.,
a developer and marketer of visual intelligence technology designed to increase
accuracy in medical testing.
Robert L. Nardelli has been nominated and has agreed to serve as a member of
the Board of Directors effective upon the offering. Since 1995, Mr. Nardelli
has served as President and Chief Executive Officer of GE Power Systems, a $7.5
billion division of General Electric Company headquartered in Schenectady, New
York and is a Senior Vice President of General Electric Company and a member of
the Board of Directors of GE Capital Corporation. Previously, Mr. Nardelli
served from 1992 to 1995 as President and Chief Executive Officer of GE
Transportation Systems. From 1991 to 1992, Mr. Nardelli served as President and
Chief Executive Officer of CAMCO, Inc., General Electric's Canadian appliance
manufacturing company, and from 1988 to 1991, he served as an Executive Vice
President and General Manager at Case Corporation, a designer, manufacturer
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<PAGE>
and distributor of farm and construction equipment. Mr. Nardelli received a
Bachelor of Science degree in business from Western Illinois University and a
Master of Business Administration degree from the University of Louisville.
John M. Shalikashvili (U.S. Army-ret.) has been nominated and has agreed to
serve as a member of the Board of Directors effective upon the offering.
General Shalikashvili was the senior officer of the United States military and
principal military advisor to the President of the United States, the Secretary
of Defense and National Security Council by serving as the thirteenth Chairman
of the Joint Chiefs of Staff, Department of Defense, for two terms from 1993 to
1997. Prior to his tenure as Chairman of the Joint Chiefs of Staff, he served
as the Commander in Chief of all United States forces in Europe and as NATO's
tenth Supreme Allied Commander, Europe. He has also served in a variety of
command and staff positions in the continental United States, Alaska, Belgium,
Germany, Italy, Korea, Turkey and Vietnam. General Shalikashvili is currently a
director of L-3 Communications Holdings, Inc., a manufacturer of communications
and related equipment, and United Defense Industries, Inc., a privately held
manufacturer of military track equipment and naval armament. General
Shalikashvili received a Bachelor of Science degree in Mechanical Engineering
from Bradley University and a Master of Arts degree in International Affairs
from George Washington University, and is a graduate of the Naval Command and
Staff College and the United States Army War College.
Dr. Glenn A. Eisman has served as Chief Technology Officer since November
1998. In that capacity, Dr. Eisman manages the development of fuel cell
membranes and electrodes and other related technology. From June 1998 to
November 1998, Dr. Eisman served as our Director of Technology. From 1984 to
June 1998, Dr. Eisman held various technical positions at The Dow Chemical
Company where, from 1984 to 1989, he directed and conducted research pertaining
to all aspects of PEM fuel cell development efforts, including polymer
materials science, catalysts, coatings technology and electrochemical
techniques. From 1980 to 1983, Dr. Eisman was the Robert A. Welch Research
Fellow in Materials Science and Engineering at the University of Texas-Austin.
Dr. Eisman received a Bachelor of Science in Chemistry degree from Temple
University and a Ph.D. in Physical Inorganic Chemistry from Northeastern
University.
Dr. William D. Ernst has served as Vice President and Chief Scientist since
June 1997. In that capacity, Dr. Ernst is responsible for advancing our
scientific, competitive and intellectual property position within the fuel cell
industry and serves as Principal Investigator for government-sponsored
programs. From 1989 to June 1997, Dr. Ernst held various positions at
Mechanical Technology Incorporated, including Program Director for its
automotive fuel cell development program and Manager of Power Systems, in which
capacity he initiated their fuel cell development program and directed all fuel
cell programs and technical development activities. Dr. Ernst received a Master
of Science in Engineering degree from the Massachusetts Institute of Technology
and a Ph.D. in Aeronautical Engineering from Rensselaer Polytechnic Institute.
Russel H. Marvin has served as Vice President of Component Engineering and
Design since November 1998. In that capacity Mr. Marvin manages Plug Power's
design for manufacturing efforts to bring the residential product to market.
From January 1998 to November 1998, Mr. Marvin served as our Vice President of
Engineering and Manufacturing. From 1994 to January 1998, Mr. Marvin served as
the Director of Engineering for two different divisions of Axiohm Transaction
Solutions, Inc., a manufacturer and marketer of transaction printers. Mr.
Marvin served from 1991 to 1994 as a Project Leader for Eastman Kodak Co.'s
Clinical Products Division, a maker of blood analysers, and from 1989 to 1991
as a Senior Mechanical Engineer for NCR Corp.'s printer division. Mr. Marvin
received a Bachelor of Science degree from Clarkson University and a Master of
Science degree from Rensselaer Polytechnic Institute.
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Ana-Maria Galeano has served as General Counsel and Corporate Secretary since
April 1998. In that capacity, Ms. Galeano advises the company on legal issues
in such areas as corporate law, contracts, strategic alliances and intellectual
property. From September 1993 to April 1998, Ms. Galeano served as an attorney
at the law firm of Whiteman, Osterman & Hanna in Albany, New York, where she
participated in the formation of Plug Power. Ms. Galeano received a Bachelor of
Arts degree from the State University of New York at Binghamton and a Juris
Doctorate from Brooklyn Law School.
Board Composition
Effective upon the closing of this offering, the number of our directors will
be fixed at nine. Initially we will have eight directors, with the one vacancy
to be filled with an independent director selected by the Board of Directors.
Effective upon the offering, Messrs. Nardelli and Shalikashvili, each a
director-nominee, will be elected to our Board of Directors for an initial term
of three years. Pursuant to our amended distribution agreement with GE Fuel
Cell Systems, we have agreed to nominate Mr. Nardelli, or another designee of
GE Power Systems, for election to the Board of Directors during the term of the
agreement. Our Board of Directors will be divided into three classes, each of
whose members will serve for a staggered three-year term. Our Board of
Directors will consist of three Class I directors, Messrs. Mittleman, Robb and
Earley, whose term of office will continue until the 2000 annual meeting of
stockholders, three Class II directors, Messrs. McNamee, Cudahy and the
independent director to be selected following the offering, whose term of
office will continue until the 2001 annual meeting of stockholders, and three
Class III directors, Messrs. Garberding, Nardelli and Shalikashvili, whose term
of office will continue until the 2002 annual meeting of stockholders. At each
annual meeting of stockholders, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are then
expiring. Vacancies on our Board of Directors may be filled solely by the Board
of Directors.
There are no family relationships among any of our directors or executive
officers.
Board Committees
Effective upon the closing of this offering, our Board of Directors will
establish an Audit Committee and a Compensation Committee. The members of the
Audit Committee, which will include Mr. Cudahy, an independent director, and
another independent director to be appointed to the committee after the
offering, will be responsible for recommending to the Board of Directors the
engagement of our outside auditors and reviewing our accounting controls and
the results and scope of audits and other services provided by our auditors.
The Compensation Committee, which will be made up of Messrs. McNamee and
Earley, will be responsible for reviewing and recommending to the Board of
Directors the amount and type of non-stock compensation to be paid to senior
management and establishing and reviewing general policies relating to
compensation and benefits of employees. The administration of our stock option
plan will be conducted by the entire Board of Directors.
Director Compensation
Directors who are employees receive no additional compensation for their
services as directors. Non-employee directors receive cash compensation of
$1,000 for each Board meeting attended in person and $500 for each Board
meeting attended by telephone. Non-employee directors are eligible to
participate in our 1999 Stock Option and Incentive Plan at the discretion of
the full Board of Directors. In accordance with a policy approved by our Board
of Directors, upon initial election or appointment to the Board of Directors,
new non-employee directors will receive non-qualified stock options to purchase
15,000 shares (50,000 shares for any new non-employee Chairman) of common stock
which will be fully vested upon grant. Each year of a non-employee director's
tenure, the
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<PAGE>
director will receive non-qualified options to purchase 10,000 shares (20,000
shares for any non-employee Chairman), plus non-qualified options to purchase
an additional 5,000 shares for a non-employee director serving as chairman of
the Audit Committee and non-qualified options to purchase an additional 2,000
shares for a non-employee director serving as chairman of any other committee,
including the Compensation Committee. These annual options will fully vest on
the first anniversary of the date of grant. Upon the effectiveness of the
registration statement of which this prospectus is a part and including any
options to be granted in accordance with this policy, (i) Messrs. Cudahy,
Earley, Garberding, Robb, Nardelli and Shalikashvili will receive non-qualified
options to purchase 25,000 shares of common stock at the initial public
offering price with 15,000 shares vested upon grant and 10,000 shares vesting
on the date of our 2000 annual meeting of stockholders, and (ii) Mr. McNamee
will receive non-qualified options to purchase 70,000 shares of common stock at
the initial public offering price with 50,000 shares vested upon grant and
20,000 shares vesting on the date of our 2000 annual meeting of stockholders.
During 1998, options to purchase an aggregate of 20,000 shares were granted to
Messrs. McNamee and Robb as compensation for their services as directors.
Executive Compensation
The following table sets forth the total compensation paid in the year ended
December 31, 1998 to Messrs. Mittleman, Acker and Dhar, who were the only Plug
Power executive officers whose aggregate compensation exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
-------------
Number
of Securities
Annual Compensation Underlying All
--------------------- Options Other
Name Salary($) Bonus($) Granted(#) Compensation(1)
- ---- ---------- --------- ------------- ---------------
<S> <C> <C> <C> <C>
Gary Mittleman.............. $ 152,885 $ 45,000 100,000 $6,115
President and Chief
Executive Officer
Dr. William P. Acker........ 112,316 -- 55,000 2,877
Vice President of
Product Development
and Commercialization
Dr. Manmohan Dhar........... 103,269 -- 30,000 2,692
Vice President and Chief
Engineer of the Residential
Program
</TABLE>
- --------
(1) Amounts shown in this column represent the dollar value of matching
contributions made by Plug Power under our 401(k) Savings and Retirement
Plan.
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<PAGE>
Option Grants In Last Fiscal Year
The following table sets forth information regarding stock options granted
during 1998 to our executive officers listed in the Summary Compensation Table.
During 1998, we granted options to purchase an aggregate of 597,650 shares of
common stock to employees. The exercise price per share for these options was
equal to the fair market value of the common stock as of the grant date as
determined by the Board of Directors.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Number of Percent of Total Stock Price
Securities Options Appreciation
Name Underlying Granted to Exercise for Option Term(2)
- ---- Options Employees in Price Expiration ---------------------
Granted(1) Fiscal Year ($/Share) Date 5%($) 10%($)
---------- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gary Mittleman.......... 100,000 16.7% $5.00 7/16/08 $ 314,447 $ 796,871
Dr. William P. Acker.... 55,000 9.2% 1.00 2/27/08 34,589 87,656
Dr. Manmohan Dhar....... 20,000 3.3% 1.00 2/27/08 12,578 31,875
10,000 1.7% 1.00 6/29/08 6,289 15,937
</TABLE>
- --------
(1) All options were granted under our 1997 stock option plan and have a ten
year term. Of the options shown in this table, 20% vest after completion
of 12 months of continuous employment service and an additional 20% vest
at each 12 month anniversary over the four year period following the date
of grant. Vested options become immediately exercisable upon a sale of the
company or an initial public offering; otherwise, all vested options
become exercisable on July 1, 2000.
(2) Potential realizable value is based on the assumption that our common
stock appreciates at the annual rate shown, compounded annually, from the
date of grant until expiration of the ten-year term. These numbers are
calculated based on Securities and Exchange Commission requirements and do
not reflect our projection or estimate of future stock price growth.
Potential realizable values are computed by multiplying the number of
shares of common stock subject to a given option by the fair market value
on the date of grant, as determined by our Board of Directors, assuming
that the aggregate stock value derived from that calculation compounds at
the annual 5% or 10% rate shown in the table for the entire ten-year term
of the option and subtracting from that result the aggregate option
exercise price. At an initial public offering price of $15.00 per share,
the potential realizable value at the assumed annual rates of stock price
appreciation will be higher than the values shown above. Mr. Mittleman's
options to purchase 100,000 shares of common stock will have a potential
realizable value of $1,943,342 and $3,390,614 at assumed annual rates of
stock price appreciation of 5% and 10%, respectively. Dr. Acker's options
to purchase 55,000 shares of common stock will have a potential realizable
value of $1,288,838 and $2,084,838 at assumed annual rates of stock price
appreciation of 5% and 10%, respectively. Dr. Dhar's options to purchase
20,000 shares of common stock will have a potential realizable value of
$468,668 and $758,123 at assumed annual rates of stock price appreciation
of 5% and 10%, respectively. Dr. Dhar's options to purchase 10,000 shares
of common stock will have a potential realizable value of $234,334 and
$379,061 at assumed annual rates of stock price appreciation of 5% and
10%, respectively.
Fiscal Year-End Option Values
The following table sets forth information concerning the number and value of
unexercised options to purchase common stock held as of December 31, 1998 by
our executive officers listed in the Summary Compensation Table. There was no
public trading market for our common stock as of December 31, 1998.
Accordingly, the values of the unexercised in-the-money options have been
calculated on the basis of an initial public offering price of $15.00 per share
less the applicable exercise price multiplied by the number of shares that may
be acquired on exercise. None of the executive officers listed in the Summary
Compensation Table exercised any stock options in 1998.
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<PAGE>
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year- In-The-Money Options
End (#) at Fiscal Year-End (1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary Mittleman.............. -- 600,000 -- $8,000,000
Dr. William P. Acker........ -- 90,000 -- 1,260,000
Dr. Manmohan Dhar........... -- 50,000 -- 700,000
</TABLE>
- --------
(1) There was no public market for the common stock on December 31, 1998. The
value of exercisable and unexercisable in-the-money options at December 31,
1998 has been calculated using an initial public offering price of $15.00
per share.
Stock Option Plans
Effective July 1, 1997, we established a stock option plan to provide
employees, consultants, and members of the Board the ability to acquire an
ownership interest in Plug Power. Options for employees generally vest 20% per
year and expire ten years after issuance. Options granted to members of the
Board vest 50% upon grant and 25% per year thereafter. Options granted to
consultants vest one-third on the expiration of the consultant's initial
contract term, with an additional one-third vesting on each anniversary
thereafter. At September 30, 1999, there were a total of 3,377,189 options
granted under this plan. Although no further options will be granted under this
plan, the options previously granted will continue to vest in accordance with
this plan and vested options will be exercisable for shares of common stock
upon completion of the offering.
Our Board of Directors and stockholders have adopted the 1999 Stock Option
and Incentive Plan, which allows for the issuance of up to 2,561,002 shares of
common stock and other awards. The number of shares of common stock available
for issuance under our plan will be increased by the amount of any forfeitures
under the 1999 Stock Option and Incentive Plan and under the 1997 Stock Option
Plan. The number of shares of common stock under our plan will further increase
January 1 and July 1 of each year by an amount equal to 16.4% of any net
increase in the total number of shares of stock outstanding. This offering will
result in an increase of 984,000 shares of stock available for issuance under
our plan. The 1999 Stock Option and Incentive Plan permits us to:
. grant incentive stock options;
. grant non-qualified stock options;
. grant stock appreciation rights;
. issue or sell common stock with vesting or other restrictions, or
without restrictions;
. grant rights to receive common stock in the future with or without
vesting;
. grant common stock upon the attainment of specified performance goals;
and
. grant dividend rights in respect of common stock.
These grants may be made to officers, employees, non-employee directors,
consultants, advisors and other key persons of Plug Power.
The 1999 Stock Option and Incentive Plan will be administered by our Board of
Directors or by a committee designated by our Board of Directors consisting
solely of two or more independent directors. Subject to the provisions of the
plan, the Board or the committee may select the individuals eligible to receive
awards, determine or modify the terms and conditions of the awards granted,
accelerate the vesting schedule of any award and generally administer and
interpret the plan.
The exercise price of options granted under the 1999 Stock Option and
Incentive Plan is determined by the Board or committee. Under present law,
incentive stock options and options
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<PAGE>
intended to qualify as performance-based compensation under Section 162(m) of
the Internal Revenue Code of 1986 may not be granted at an exercise price less
than the fair market value of the common stock on the date of grant, or less
than 110% of the fair market value in the case of incentive stock options
granted to optionees holding more than 10% of the voting power. Non-qualified
stock options may be granted at prices which are no less than 85% of the fair
market value of the underlying shares on the date granted. Options are
typically subject to vesting schedules, terminate ten years from the date of
grant, may be exercised for specified periods after the termination of the
optionee's employment or other service relationship with us, and are generally
non-transferable. Upon the exercise of options, the option exercise price must
be paid in full:
. in cash or by certified or bank check or other instrument acceptable to
the committee;
. in the sole discretion of the committee, by delivery of shares of common
stock that have been owned by the optionee free of restrictions for at
least six months;
. by promissory note if the loan of these funds to the optionee has been
authorized by the Board of Directors and the optionee pays so much of
the exercise price as represents the par value of the common stock
acquired in a form other than a promissory note; and
. by a broker under irrevocable instructions to the broker selling the
underlying shares from the optionee.
Upon certain events, including a merger, reorganization or consolidation, the
sale of all or substantially all of our assets or all of our outstanding
capital stock or a liquidation or other similar transaction, all outstanding
awards issued under the 1999 Stock Option and Incentive Plan will become fully
vested and exercisable upon the closing of the transaction. The 1999 Stock
Option and Incentive Plan and all awards issued under the plan will terminate
upon any of the transactions described above, unless Plug Power and the other
parties to such transactions have agreed otherwise. All participants under the
1999 Stock Option and Incentive Plan will be permitted, for a period of time to
be determined by the committee, to exercise before any termination all awards
held by them which are then exercisable or will become exercisable upon the
closing of the transaction.
1999 Employee Stock Purchase Plan
We have adopted the Plug Power 1999 Employee Stock Purchase Plan under which
employees will be eligible to purchase shares of our common stock at a discount
through periodic payroll deductions. The plan is intended to meet the
requirements of Section 423 of the Internal Revenue Code. After the initial
period, purchases will occur at the end of six month offering periods at a
purchase price equal to 85% of the market value of our common stock at either
the beginning of the offering period or the end of the offering period,
whichever is lower. The first offering period under the plan will begin on
January 1, 2000 and will end on April 30, 2000. Participants may elect to have
from 1% to 10% of their pay withheld for purchase of common stock at the end of
the offering period, up to a maximum of $12,500 within any offering period. We
have reserved 1,000,000 shares of common stock for issuance under this plan.
Employment Agreements
We have entered into the following agreements with our senior management:
Gary Mittleman, our President and Chief Executive Officer, will receive 100%
of his base salary, continuation of employee benefits and vesting of stock
options for twelve months if we terminate his employment for any reason other
than failure to perform, gross negligence and/or fraud. For 1999, Mr.
Mittleman's base salary is $205,000.
Dr. Manmohan Dhar, our Vice President and Chief Engineer of the Residential
Program, will receive 100% of his base pay for twelve months if he voluntarily
terminates his employment or if we terminate his employment for any reason
other than gross misconduct, negligence, theft, dishonesty, or fraud.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mechanical Technology Incorporated and Edison Development Corporation formed
Plug Power in June 1997. In exchange for 4,750,000 shares of common stock each
in Plug Power, Mechanical Technology contributed to Plug Power $4.75 million of
in-process research and development and other assets and Edison Development
contributed $4.75 million in cash.
In June 1997, Plug Power and Edison Development Corporation entered into a
distribution agreement which provides Edison Development with the exclusive
right to distribute fuel cell systems of 2 kilowatts and higher to end-users
for stationary applications in the states of Illinois, Indiana, Michigan and
Ohio. The agreement expires in January 2010. In exchange for commitments to
purchase pre-commercial fuel cell systems and meet minimum sales obligations
during commercial production, we agreed to amend the distribution agreement to
permit Edison Development to, among other things, sell fuel cell systems to
resellers.
In June 1997, we granted to Edison Development options to purchase 200,000
shares of common stock at an exercise price of $1.00 per share. In June 1998,
we granted Edison Development an additional option to purchase 30,000 shares of
common stock at an exercise price of $5.00 per share.
On June 27, 1997, we entered into a management services agreement with
Mechanical Technology to obtain services relating to the management of Plug
Power and lease office space for a period of one year. The management services
agreement terminated in June 1998. At the expiration of this agreement, we
extended the existing facilities lease through September 30, 1998. In June
1998, we entered into a new facilities lease with Mechanical Technology which
commenced on October 1, 1998, and had a term of ten years with an option to
extend for an additional five years. We paid rent to Mechanical Technology of
$79,000 for the period from June 27, 1997 to December 31, 1997, $378,000 for
the year ended December 31, 1998, and $215,000 for the six months ended June
30, 1999. As part of the new facilities lease, Mechanical Technology reimbursed
Plug Power $2.0 million for improvements made to the facilities.
Our limited liability company agreement gave us the right to call upon Edison
Development for additional contributions up to an aggregate of $4.25 million
beginning on June 27, 1998, subject to achieving defined milestones relating to
technology development and system production, and gave Mechanical Technology
the right to match the contribution within a stated period to preserve its
percentage ownership in Plug Power. We made such calls on Edison Development in
April 1998 for $2.25 million and in June 1998 for $2.0 million, and Mechanical
Technology matched these contributions by making in-kind contributions to us of
a below-market lease valued at $2.0 million and research (non cash) credits
valued at $2.25 million, as described below. In exchange for such contributions
we issued 4,250,000 shares of our common stock to each of Mechanical Technology
and Edison Development.
In April 1998, Mechanical Technology purchased 2,000,000 shares of Plug Power
common stock in exchange for a below-market lease for office and manufacturing
facilities valued at $2.0 million. In April and June 1998, Mechanical
Technology paid $191,250 for two one-year options which entitled Mechanical
Technology to acquire a total of 2,250,000 shares of Plug Power at a price of
$1.00 per share. In March 1999, we agreed that Mechanical Technology had earned
research (non-cash) credits valued at $2.25 million which were used by
Mechanical Technology to exercise their option to acquire the 2,250,000 shares,
and the $191,250 was returned to Mechanical Technology in accordance with the
terms of the option agreements. The research credits were earned by Mechanical
Technology by assisting Plug Power in obtaining government grants and research
contracts.
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<PAGE>
After receiving these $4.25 million contributions from Mechanical Technology
and Edison Development, the limited liability company agreement required us to
seek additional financing from Mechanical Technology and Edison Development,
allowing them to maintain their ownership percentage, before seeking financing
from new investors. In accordance with the agreement, in August 1998 we offered
Mechanical Technology and Edison Development the opportunity to contribute
additional funds. Mechanical Technology and Edison Development each committed
to contribute an additional $5.0 million to Plug Power.
Pursuant to this committment, in August 1998 Mechanical Technology purchased
200,000 shares of Plug Power common stock at a price of $5.00 per share in
exchange for a contribution to capital of a $500,000 short-term loan and
accounts receivable (totaling $500,000) owed by Plug Power to Mechanical
Technology for management services under our management services agreement and
rent. Between October 1998 and February 1999, Mechanical Technology purchased
800,000 additional shares of Plug Power at a price of $5.00 per share for $4.0
million in cash pursuant to its $5.0 million commitment. To match these
contributions, in August 1998 Edison Development purchased 200,000 shares of
Plug Power common stock at a price of $5.00 per share in exchange for a
contribution to capital of two $500,000 short-term loans. Between October 1998
and February 1999, Edison Development purchased 800,000 shares of Plug Power
common stock at a price of $5.00 per share for $4.0 million in cash.
In January 1999, we entered into an agreement with Mechanical Technology and
Edison Development, pursuant to which we have the right to call upon Edison
Development and Mechanical Technology to contribute $7.5 million each in 1999
and $15.0 million each in 2000 in exchange for which each will receive common
stock valued at $7.50 per share. The agreement terminates on the earlier of
December 31, 2000 or upon an initial public offering of our shares at a price
greater than $7.50 per share. An amendment to the agreement permits Mechanical
Technology and Edison Development to contribute any funds not previously called
by us on the termination date in exchange for shares at a price of $7.50 per
share. Mechanical Technology and Edison Development committed to contribute
$22.5 million each in exchange for an aggregate of 6,000,000 shares of common
stock prior to the closing of this offering. In September 1999 Mechanical
Technology and Edison Development contributed $2.0 million each pursuant to
these agreements. Accordingly, Mechanical Technology and Edison Development
will each contribute $20.5 million immediately before this offering.
In July 1999, we acquired Mechanical Technology's 36 acre office facilities
in Latham, New York, including all land and buildings, in exchange for 704,315
shares of Plug Power common stock valued at $6.67 per share or a total of $4.7
million and the assumption of approximately $6.2 million in debt. In accordance
with the terms of our limited liability company agreement, Edison Development
purchased 704,315 shares of Plug Power common stock at $6.67 per share for $4.7
million in cash.
After giving effect to the offering and the additional investments
contemplated, Mechanical Technology will beneficially own approximately 32.5%
of Plug Power's outstanding common stock. FAC/Equities, a co-manager of this
offering, is a division of First Albany Corporation, whose parent, First Albany
Companies, Inc., owns approximately 34.0% of the outstanding common stock of
Mechanical Technology. George C. McNamee, the Chairman and Co-Chief Executive
Officer of First Albany Companies, the Chairman and Co-Chief Executive Officer
of First Albany Corporation and the Chief Executive Officer and a director of
Mechanical Technology, is currently the Chairman of the Board of Directors of
Plug Power and will be the Chairman of the Board of Directors of Plug Power
upon completion of the offering. In addition, Dr. Walter L. Robb, a director of
Mechanical Technology, is a director of Plug Power and will be a director of
Plug Power upon completion of this offering.
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<PAGE>
After giving effect to the offering, Edison Development will beneficially own
approximately 32.8% of Plug Power's outstanding common stock. Anthony F.
Earley, Jr., the Chairman, Chief Executive Officer, President and Chief
Operating Officer of DTE Energy Company and its subsidiary, The Detroit Edison
Company, is a director of Plug Power and will be a director of Plug Power upon
completion of the offering. Detroit Edison is the parent company of Edison
Development. In addition, Larry G. Garberding, a director of DTE Energy and the
Executive Vice President and Chief Financial Officer of DTE Energy and Detroit
Edison, is also director of Plug Power and will be a director of Plug Power
upon completion of the offering.
In February 1999, we granted a warrant to Mr. Michael Cudahy, a director of
Plug Power, to purchase up to 400,000 shares of common stock at an exercise
price of $8.50 per share and sold Mr. Cudahy 1,440,000 shares of common stock
for a purchase price of $9,600,000. Mr. Cudahy committed to exercise his
warrant to purchase 400,000 shares before the closing of this offering for a
total purchase price of $3,400,000.
In February 1999, we also entered into an agreement with GE On-Site Power to
create GE Fuel Cell Systems, a joint venture owned 75% by GE On-Site Power and
25% by Plug Power, which is dedicated to marketing, selling, installing, and
servicing Plug Power residential fuel cell systems on a worldwide basis (other
than in the states of Illinois, Indiana, Michigan and Ohio). In connection with
the formation of GE Fuel Cell Systems we issued 2,250,000 shares of our common
stock to GE On-Site Power, of which 750,000 shares vested immediately. We have
capitalized the fair value of these shares ($11.3 million) under the caption
"Investment in Affiliate" in the financial statements. Before this agreement
was amended, as described below, the remaining 1,500,000 shares were to vest
ratably over the next four years.
We also issued a warrant to GE On-Site Power to purchase 3,000,000 additional
shares of common stock at a price of $12.50 per share. GE On-Site Power has
committed to exercise this warrant immediately before the closing of this
offering for a total exercise price of $37.5 million in cash.
In February 1999 we entered into an agreement with General Electric pursuant
to which General Electric agreed to provide capital to GE Fuel Cell Systems, in
the form of loans, to fund GE Fuel Cell Systems' commitment to purchase 485
pre-commercial systems during the period ending December 31, 2000. General
Electric also agreed to provide additional capital, in the form of a loan not
to exceed $8.0 million, to fund GE Fuel Cell Systems' ongoing operations. In
addition, the agreement provides that, as long as we are providing PEM fuel
cell systems that are competitive, as determined by GE On-Site Power, in good
faith, based on objective factors set forth in the joint venture agreement, GE
Power Systems may not sell PEM fuel cell systems that compete with our fuel
cell systems. If GE On-Site Power determines that our fuel cell systems are not
competitive, we have 12 months to make them competitive before the noncompete
provision terminates. Divisions or subsidiaries of General Electric Company
other than GE Power Systems are not prohibited from selling competing fuel cell
systems but, in the event that they do, we can terminate our agreements with GE
Fuel Cell Systems or appoint additional distributors.
In August 1999, we amended our agreement with GE On-Site Power to vest all
remaining shares. In addition, we have agreed to purchase $12.0 million of
technical support services from General Electric during the next three years
and extended the term of the distribution agreement by 5 years to 2009. We also
agreed with GE On-Site Power to use our best efforts to cause one individual
nominated by GE Power Systems to be elected to our Board of Directors for as
long as our distribution agreement with GE Fuel Cell Systems remains in effect.
Robert L. Nardelli, President and Chief Executive Officer of GE On-Site Power,
will be elected to our Board of Directors as a Class III Director effective
upon this offering, with an initial term expiring in 2002.
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<PAGE>
As of September 30, 1999, we had granted options to purchase 3,377,189 shares
of common stock under our 1997 stock option plan to our officers, directors,
employees, consultants and advisors. We have reserved for issuance up to
2,561,002 additional options under our 1999 stock option plan and 1,000,000
shares of common stock for issuance under our 1999 employee stock purchase plan
under which employees will be eligible to purchase shares of common stock at a
discount through periodic payroll deductions.
We have granted GE On-Site Power the right, on one occasion at any time after
the second anniversary of this offering, to require us to register up to
3,000,000 shares of our common stock under the Securities Act. In addition,
upon the closing of this offering, we will grant all of our eight current
stockholders the right to include their shares of common stock in any of the
first three registration statements we may file under the Securities Act.
Plug Power has agreed to purchase power conditioners from Satcon Technology
Corporation for our residential fuel cell systems. Mechanical Technology owns
16% of Satcon's outstanding stock on a fully diluted basis and has the right to
appoint two members to Satcon's board of directors.
We believe that each of the transactions described above was entered into on
terms no less favorable to Plug Power than could be obtained with non-
affiliated parties. For all future transactions, we have adopted a conflict of
interest policy whereby all material transactions between Plug Power and our
officers, directors and other affiliates must (i) be approved by a majority of
the members of the Board of Directors, including a majority of the
disinterested members and (ii) be on terms no less favorable to us than could
be obtained from unaffiliated third parties. In addition, any loans to our
officers, directors and other affiliates must be for bona fide business
purposes only.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock on a pro forma basis to reflect the issuance of shares to
current stockholders immediately prior to the closing of this offering and on a
pro forma, as adjusted basis to reflect the sale of the common stock offered
hereby, by:
. all persons known by us to own beneficially 5% or more of the common
stock;
. each of our directors;
. the executive officers listed in the Summary Compensation Table; and
. all directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned
by the stockholder. The address of Mechanical Technology Incorporated is 968
Albany-Shaker Road, Latham, NY 12110. The address of Edison Development
Corporation is c/o DTE Energy Company, 2000 Second Avenue, 644 WCB, Detroit,
Michigan 48226. The address of GE On-Site Power, Inc. is c/o GE Power Systems,
One River Road, Schenectady, New York 12345. The address of Michael Cudahy is
10850 West Park Place, Suite 980, Milwaukee, Wisconsin 53224. The address of
all other listed stockholders is c/o Plug Power Inc., 968 Albany-Shaker Road,
Latham, New York 12110.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission and includes
voting or investment power with respect to securities. Under these rules,
beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power and includes any shares as
to which the individual or entity has the right to acquire beneficial ownership
within 60 days after September 30, 1999 through the exercise of any warrant,
stock option or other right. The inclusion in this prospectus of such shares,
however, does not constitute an admission that the named stockholder is a
direct or indirect beneficial owner of such shares. The number of shares of
common stock outstanding used in calculating the percentage for each listed
person includes the shares of common stock underlying options held by such
person that are exercisable within 60 days of September 30, 1999, but excludes
shares of common stock underlying options held by any other person. Percentage
of beneficial ownership is based on 36,208,480 shares of common stock
outstanding as of September 30, 1999 on a pro forma basis.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-------------------------------------------
Prior to the Offering After the Offering
-------------------------------------------
Name of Beneficial Owners Number Percent Number Percent
------------------------- ------------- --------------------- -------
<S> <C> <C> <C> <C>
DTE Energy Company(1).......... 13,926,815 38.2% 13,926,815 32.8%
Mechanical Technology
Incorporated(2)............... 13,704,315 37.8 13,704,315 32.5
General Electric Company(3).... 5,250,000 14.5 5,250,000 12.4
Michael J. Cudahy(4)........... 1,840,000 5.1 1,840,000 4.4
Gary Mittleman(5).............. 380,000 1.0 380,000 *
Dr. William P. Acker(5)........ 57,000 * 57,000 *
Dr. Manmohan Dhar(5)........... 49,000 * 49,000 *
Anthony F. Earley, Jr.(6) ..... 13,926,815 38.2 13,926,815 32.8
Larry G. Garberding(6)......... 13,926,815 38.2 13,926,815 32.8
George C. McNamee(7)........... 13,811,815 38.0 13,811,815 32.6
Dr. Walter L. Robb(5).......... 57,500 * 57,500 *
Robert L. Nardelli(8).......... 5,250,000 14.5 5,250,000 12.4
John M. Shalikashvili.......... -- -- -- --
All executive officers,
directors, and director-
nominees as a group (13
persons)(9)................... 35,372,130 95.4 35,372,130 82.1
</TABLE>
- --------
* Represents less than 1% of the outstanding shares of common stock
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<PAGE>
(1) Includes 13,926,815 shares owned of record by Edison Development
Corporation, an indirect wholly-owned subsidiary of DTE Energy Company, of
which 2,733,333 are shares of common stock that will be acquired upon the
exercise of certain purchase rights immediately prior to the closing of
this offering and 222,500 are shares of common stock that are issuable
upon the exercise of outstanding options that are exercisable within 60
days of September 30, 1999.
(2) Includes 2,733,333 shares of common stock to be acquired upon the exercise
of certain purchase rights immediately before the closing of this
offering.
(3) Includes 5,250,000 shares of common stock owned of record by GE On-Site
Power, Inc., an indirect wholly-owned subsidiary of General Electric that
operates within its GE Power Systems business, of which 3,000,000 are
shares of common stock that will be acquired upon the exercise of a
warrant immediately before the closing of this offering.
(4) Includes 400,000 shares of common stock to be acquired upon the exercise
of a warrant immediately before the closing of this offering.
(5) All shares shown represent shares of common stock issuable upon exercise
of outstanding options that are exercisable within 60 days of September
30, 1999.
(6) Includes 13,926,815 shares owned of record by Edison Development
Corporation, an indirect wholly-owned subsidiary of DTE Energy Company, of
which 2,733,333 are shares of common stock that will be acquired upon the
exercise of certain purchase rights immediately before the closing of this
offering and 222,500 are shares of common stock that are issuable upon the
exercise of outstanding options that are exercisable within 60 days of
September 30, 1999. Messrs. Earley and Garberding, who are directors and
executive officers of DTE Energy, may be deemed the beneficial owners of
these shares. Each of Messrs. Early and Garberding disclaim beneficial
ownership of these shares.
(7) Includes 13,704,315 shares of common stock owned of record by Mechanical
Technology, of which 2,733,333 are shares of common stock to be acquired
upon the exercise of certain purchase rights in connection with the
closing of this offering. Mr. McNamee, a director and Chief Executive
Officer of Mechanical Technology, may be deemed the beneficial owner of
these shares. Mr. McNamee disclaims beneficial ownership of these shares.
Also includes 107,500 shares of common stock issuable upon exercise of
outstanding options held by Mr. McNamee that are exercisable within 60
days of September 30, 1999.
(8) Includes 5,250,000 shares of common stock owned of record by GE On-Site
Power, Inc., an indirect wholly-owned subsidiary of General Electric that
operates within its GE Power Systems business, of which 3,000,000 are
shares of common stock that will be acquired upon the exercise of a
warrant immediately before the closing of this offering. Mr. Nardelli, a
Senior Vice President of General Electric and the President and Chief
Executive Officer of GE Power Systems, disclaims beneficial ownership of
these shares.
(9) Includes 873,500 shares of common stock issuable upon exercise of
outstanding options held by the executive officers, directors and director-
nominees as a group that are exercisable within 60 days of September 30,
1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
As of September 30, 1999 there were 36,208,480 shares of common stock issued
and outstanding after giving effect to the issuance of 9,216,666 shares of
common stock upon the exercise of purchase rights and warrants by current
stockholders immediately before this offering. Following the offering, our
authorized capital stock will consist of 95,000,000 shares of common stock, of
which 42,208,480 will be issued and outstanding, and 5,000,000 shares of
undesignated preferred stock issuable in one or more series designated by our
Board of Directors, of which no shares will be issued and outstanding. In
addition, as of September 30, 1999, there were outstanding stock options to
purchase 3,377,189 shares of common stock. Of the issued and outstanding common
stock, 111,851 shares are subject to forfeiture by the holder. At September 30,
1999, there were eight holders of record of our common stock.
Common Stock
Voting Rights
The holders of our common stock have one vote per share. Holders of our
common stock are not entitled to vote cumulatively for the election of
directors. Generally, all matters to be voted on by stockholders must be
approved by a majority, or, in the case of election of directors, by a
plurality, of the votes entitled to be cast at a meeting at which a quorum is
present by all shares of common stock present in person or represented by
proxy, voting together as a single class, subject to any voting rights granted
to holders of any then outstanding preferred stock.
Dividends
Holders of common stock will share ratably in any dividends declared by our
Board of Directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid to
holders of shares of common stock.
Other Rights
On liquidation, dissolution or winding up of Plug Power, all holders of
common stock are entitled to share ratably in any assets available for
distribution to holders of shares of common stock. No shares of common stock
are subject to redemption or have preemptive rights to purchase additional
shares of common stock.
Preferred Stock
Our certificate of incorporation provides that shares of preferred stock may
be issued from time to time in one or more series. Our Board of Directors is
authorized to fix the voting rights, if any, designations, powers, preferences,
qualifications, limitations and restrictions thereof, applicable to the shares
of each series. Our Board of Directors may, without stockholder approval, issue
preferred stock with voting and other rights that could adversely affect the
voting power and other rights of the holders of the common stock and could have
anti-takeover effects. We have no present plans to issue any shares of
preferred stock. The ability of our Board of Directors to issue preferred stock
without stockholder approval could have the effect of delaying, deferring or
preventing a change of control of Plug Power or the removal of existing
management.
Indemnification Matters
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors for monetary
damages for breaches of their fiduciary duty,
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<PAGE>
including breaches involving negligence or gross negligence in business
combinations, unless the director has breached his or her duty of loyalty,
failed to act in good faith, engaged in intentional misconduct or a knowing
violation of law, paid a dividend or approved a stock repurchase in violation
of the Delaware General Corporation Law or obtained an improper personal
benefit. This provision does not alter a director's liability under the federal
securities laws and does not affect the availability of equitable remedies,
such as an injunction or rescission, for breach of fiduciary duty. Our by-laws
provide that directors and officers shall be, and in the discretion of our
board of directors, non-officer employees may be, indemnified by Plug Power to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of Plug Power. Our by-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. We also have directors' and officers' insurance against certain
liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Plug Power as
described above, we have 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. At present, there is no
pending material litigation or proceeding involving any director, officer,
employee or agent of Plug Power in which indemnification will be required or
permitted.
Provisions of Certificate of Incorporation and By-laws which may have Anti-
takeover Effect
A number of provisions of our certificate of incorporation and by-laws which
will be effective upon completion of this offering concern matters of corporate
governance and the rights of stockholders. These provisions, as well as the
ability of our Board of Directors to issue shares of preferred stock and to set
the voting rights, preferences and other terms, may be deemed to have an anti-
takeover effect and may discourage takeover attempts not first approved by our
Board of Directors, including takeovers which stockholders may deem to be in
their best interests. If takeover attempts are discouraged, temporary
fluctuations in the market price of our common stock, which may result from
actual or rumored takeover attempts, may be inhibited. These provisions,
together with our classified Board of Directors and the ability of our Board of
Directors to issue preferred stock without further stockholder action, also
could delay or frustrate the removal of incumbent directors or the assumption
of control by stockholders, even if the removal or assumption would be
beneficial to our stockholders. These provisions also could discourage or make
more difficult a merger, tender offer or proxy contest, even if favorable to
the interests of stockholders, and could depress the market price of our common
stock. Our Board of Directors believes that these provisions are appropriate to
protect the interests of Plug Power and of our stockholders. Our Board of
Directors has no present plans to adopt any further measures or devices which
may be deemed to have an "anti-takeover effect."
No Stockholder Action by Written Consent
Our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders at an annual or special meeting of
stockholders must be effected at a duly called meeting and may not be taken or
effected by a written consent of stockholders.
Meetings of Stockholders
Our certificate of incorporation and by-laws provide that a special meeting
of stockholders may be called only by the Chairman, if any, the President, the
Chief Executive Officer or our Board of Directors unless otherwise required by
law. Our by-laws provide that only those matters included in the notice of the
special meeting may be considered or acted upon at that special meeting unless
otherwise provided by law. In addition, our by-laws include advance notice and
informational
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<PAGE>
requirements and time limitations on any director nomination or any new
proposal which a stockholder wishes to make at an annual meeting of
stockholders.
Director Vacancies and Removal
Our certificate of incorporation and by-laws provide that vacancies in our
Board of Directors may be filled only by the affirmative vote of a majority of
the remaining directors. Our certificate of incorporation provides that
directors may be removed from office only with cause and only by the
affirmative vote of holders of at least two-thirds of the shares then entitled
to vote at an election of directors.
Ability to Adopt Stockholder Rights Plan
Our Board of Directors may in the future resolve to issue shares of preferred
stock or rights to acquire such shares in order to implement a stockholder
rights plan. A stockholder rights plan typically creates voting or other
impediments to discourage persons seeking to gain control of Plug Power by
means of a merger, tender offer, proxy contest or otherwise if our Board of
Directors determines that such change in control is not in the best interests
of Plug Power and our stockholders. Our Board of Directors has no present
intention of adopting a stockholder rights plan and is not aware of any attempt
to effect a change in control of Plug Power.
Amendment of the Certificate of Incorporation
Any amendment to our certificate of incorporation must first be approved by a
majority of our Board of Directors and, if required by law, thereafter approved
by a majority of the outstanding shares entitled to vote with respect to such
amendment, except that any amendment to the provisions relating to stockholder
action, directors, limitation of liability and the amendment of our certificate
of incorporation must be approved by a super-majority of the outstanding shares
entitled to vote with respect to such amendment.
Amendment of By-laws
Our certificate of incorporation and by-laws provide that our by-laws may be
amended or repealed by our Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority of
the directors then in office. Such action by the stockholders requires the
affirmative vote of at least two-thirds of the shares present in person or
represented by proxy at an annual meeting of stockholders or a special meeting
called for such purpose unless our Board of Directors recommends that the
stockholders approve such amendment or repeal at such meeting, in which case
such amendment or repeal shall only require the affirmative vote of a majority
of the shares present in person or represented by proxy at the meeting.
Statutory Business Combination Provision
Following the offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly-held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date
such person became an "interested stockholder" unless:
. before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
. upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
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<PAGE>
. following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66 2/3% of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior three
years, owned, 15% or more of a corporation's outstanding voting stock. The term
"business combination" includes mergers, asset sales and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or by-laws resulting from an amendment approved by
holders of a least a majority of the outstanding voting stock. Neither our
certificate of incorporation nor our by-laws contains any such exclusion.
Trading on the Nasdaq National Market System
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PLUG".
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be the American
Stock Transfer & Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock,
and no prediction can be made as to the effect, if any, that sales of common
stock or the availability of common stock for sale will have on the market
price of our common stock prevailing from time to time. Nonetheless,
substantial sales of common stock in the public market following this offering,
or the perception that sales could occur, could lower the market price of our
common stock or make it difficult for us to raise additional equity capital in
the future.
Following this offering, there will be 42,208,480 shares of our common stock
outstanding on a fully diluted basis. Of these shares, the 6,000,000 shares
which are being sold in this offering generally will be freely transferable
without restriction or further registration under the Securities Act, except
that any shares held by our "affiliates" as is defined in Rule 144 under the
Securities Act may be sold only in compliance with the limitations described
below.
The remaining 36,208,480 shares of common stock which will be outstanding
after the offering will be "restricted securities" as defined in Rule 144, and
may be sold in the future without registration under the Securities Act subject
to compliance with the provisions of Rule 144 or any other applicable exemption
under the Securities Act.
In connection with this offering, our existing officers, directors, and
stockholders, who hold all of the currently outstanding shares of common stock
and will own an aggregate of 36,208,480 shares of common stock after this
offering, have agreed with the underwriters that, subject to exceptions, they
will not sell or dispose of any of their shares for 180 days after the date of
this prospectus. Goldman, Sachs & Co. may, in its sole discretion and at any
time without notice, release all or any portion of the shares subject to such
restrictions. Subject to these lock-up agreements, the shares of common stock
outstanding upon the closing of the offering will be available for sale in the
public market as follows:
<TABLE>
<CAPTION>
Approximate
Number of Shares Description
---------------- ------------------------------------------------------------
<C> <S>
6,000,000 After the date of this prospectus, freely tradeable shares
sold in the offering.
25,049,850 After 180 days from the date of this prospectus, the lock-up
period will expire and these shares will be saleable under
Rule 144 (subject, in some cases, to volume limitations).
</TABLE>
In general, under Rule 144 as currently in effect, assuming we are current in
our public filings with the Securities Exchange Commission, a person or persons
whose shares are required to be aggregated, including an affiliate of ours, and
who has beneficially owned shares for at least one year is entitled to sell
through a brokers transaction or in a transaction directly with a market maker,
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 1% of the
then outstanding shares of common stock, which is expected to be 422,085 shares
upon the completion of this offering, or the average weekly trading volume of
the common stock during the four calendar weeks preceding the date on which
notice of such sale is filed, subject to certain restrictions. In addition, a
person who is not deemed to have been an affiliate of ours 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 would be entitled to sell such shares under
Rule 144(k) without regard to the requirements described above. To the extent
that shares were acquired from an affiliate of ours, such person's holding
period for the purpose of effecting a sale under Rule 144 commences on the date
of transfer from the affiliate.
We have agreed not to sell or otherwise dispose of any shares of common stock
during the 180-day period following the date of this prospectus, except we may
issue, and grant options to purchase, shares of common stock under the 1999
stock option plan and our employee stock purchase plan.
64
<PAGE>
We have granted GE On-Site Power the right, on one occasion at any time after
the second anniversary of this offering, to require us to register up to
3,000,000 shares of our common stock under the Securities Act. In addition,
upon the closing of this offering, we will grant all of our eight current
stockholders the right to include their shares of common stock in any of the
first three registration statements we may file under the Securities Act.
We intend to file a registration statement on Form S-8 with respect to the
aggregate of shares of common stock issuable under our stock option plans and
our employee stock purchase plan promptly following the consummation of this
offering. Shares issued upon the exercise of stock options after the effective
date of the Form S-8 resgistration statement will be eligible for resale in the
public market without restriction, subject to Rule 144 limitations applicable
to affiliates and the lock-up agreements described above.
VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed upon
for Plug Power by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Various
legal matters related to the sale of the common stock offered hereby will be
passed upon for the underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The financial statements as of December 31, 1997 and 1998, the period from
June 27, 1997 (date of inception) to December 31, 1997, and for the year ended
December 31, 1998, included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including the exhibits and schedules thereto) under the
Securities Act and the rules and regulations thereunder, for the registration
of the common stock offered hereby. This prospectus is part of the registration
statement. This prospectus does not contain all the information included in the
registration statement because we have omitted certain parts of the
registration statement as permitted by the Securities and Exchange Commission's
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract, agreement or other document referred to are not
necessarily complete. Where the contract or other document is an exhibit to the
registration statement, each statement is qualified by the provisions of that
exhibit.
You can inspect and copy all or any portion of the registration statements or
any reports, statements or other information we file at the public reference
facility maintained by the Securities and Exchange Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information
about the operation of the public reference rooms. Copies of all or any portion
of the registration statement can be obtained from the Public Reference Section
of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, the registration statement is
publicly available through the Securities and Exchange Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov.
65
<PAGE>
We will also file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You can also
request copies of these documents, for a copying fee, by writing to the
Securities and Exchange Commission. We intend to furnish to our stockholders
annual reports containing audited financial statements for each fiscal year.
66
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of independent accountants......................................... F-2
Balance sheets as of December 31, 1997 and 1998 and June 30, 1999
(unaudited).............................................................. F-3
Statements of operations for the period from June 27, 1997 (date of
inception) to December 31, 1997, the year ended December 31, 1998, the
six months ended June 30, 1998 (unaudited), the six months ended June 30,
1999 (unaudited), and cumulative amounts from inception (unaudited)...... F-4
Statements of stockholders' equity for the period from June 27, 1997 (date
of inception) to December 31, 1997, the year ended December 31, 1998 and
the six months ended June 30, 1999 (unaudited)........................... F-5
Statements of cash flows for the period from June 27, 1997 (date of
inception) to December 31, 1997, the year ended December 31, 1998, the
six months ended June 30, 1998 (unaudited), the six months ended June 30,
1999, and cumulative amounts from inception (unaudited).................. F-6
Notes to financial statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Members and Holders of Membership Interests
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Plug Power, LLC (a development
stage enterprise), at December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period from June 27, 1997 (date of
inception) to December 31, 1997, and for the year ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the 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.
PricewaterhouseCoopers LLP
Albany, New York
April 9, 1999
F-2
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents, principally
commercial paper..................... $3,080,181 $ 3,993,122 $17,242,734
Accounts receivable................... 803,557 599,955 1,016,402
Other current assets.................. 33,550 14,647 81,614
Due from investor..................... -- 685,306 --
---------- ----------- -----------
Total current assets................ 3,917,288 5,293,030 18,340,750
Property, plant and equipment, net...... 737,613 2,753,492 8,142,513
Investment in affiliate................. -- -- 10,749,552
Other assets............................ 191,665 46,913 --
---------- ----------- -----------
Total assets........................ $4,846,566 $ 8,093,435 $37,232,815
========== =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................... $ 434,795 $ 568,007 $ 3,233,998
Accrued expenses...................... 797,864 1,746,239 1,439,454
Due to investor....................... 17,247 286,492 7,610
Current portion of capital lease
obligation........................... -- -- 90,173
---------- ----------- -----------
Total current liabilities........... 1,249,906 2,600,738 4,771,235
Capital lease obligation.............. -- -- 155,397
---------- ----------- -----------
Total liabilities................... 1,249,906 2,600,738 4,926,632
---------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Class A membership interest; no par
value, authorized 18,000,000,
25,000,000 and 40,000,000 in 1997,
1998 and 1999, respectively; issued
and outstanding; 9,500,000,
17,150,000 and 26,458,480 in 1997,
1998 and 1999, respectively.......... -- -- --
Class B membership interests; no par
value, authorized 3,000,000, none
issued............................... -- -- --
Paid-in capital....................... 9,500,000 21,012,000 67,607,964
Class A membership interests
subscribed........................... -- -- (4,697,782)
Deficit accumulated during the
development stage.................... (5,903,340) (15,519,303) (30,603,999)
---------- ----------- -----------
Total stockholders' equity.......... 3,596,660 5,492,697 32,306,183
---------- ----------- -----------
Total liabilities and stockholders'
equity............................. $4,846,566 $ 8,093,435 $37,232,815
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
Statements of Operations
For the period from June 27, 1997 (date of inception) to December 31, 1997,
the year ended December 31, 1998, the six months ended June 30, 1998,
the six months ended June 30, 1999, and cumulative amounts from inception
<TABLE>
<CAPTION>
Cumulative
December 31, December 31, June 30, June 30, Amounts from
1997 1998 1998 1999 Inception
------------ ------------ ----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Contract revenue........ $ 1,193,530 $ 6,541,040 $ 2,548,653 $ 3,695,535 $ 11,430,105
Cost of contract
revenue................ 1,226,443 8,863,845 3,438,301 5,117,834 15,208,122
----------- ----------- ----------- ------------ ------------
Loss on contracts....... (32,913) (2,322,805) (889,648) (1,422,299) (3,778,017)
In-process research and
development............ 4,042,640 -- -- -- 4,042,640
Research and development
expense................ 1,300,877 4,632,729 2,153,775 7,780,246 13,713,852
General and
administrative
expense................ 630,033 2,753,645 1,328,256 5,599,736 8,983,414
----------- ----------- ----------- ------------ ------------
Operating loss......... (6,006,463) (9,709,179) (4,371,679) (14,802,281) (30,517,923)
Other income,
principally interest... 103,123 93,216 41,472 218,033 414,372
----------- ----------- ----------- ------------ ------------
Loss before equity in
losses of affiliate... (5,903,340) (9,615,963) (4,330,207) (14,584,248) (30,103,551)
Equity in losses of
affiliate.............. -- -- -- (500,448) (500,448)
----------- ----------- ----------- ------------ ------------
Net loss............... $(5,903,340) $(9,615,963) $(4,330,207) $(15,084,696) $(30,603,999)
=========== =========== =========== ============ ============
Loss per membership
interest:
Basic and diluted...... $ (0.62) $ (0.71) $ (0.40) $ (0.71)
=========== =========== =========== ============
Weighted average number
of membership interests
outstanding:........... 9,500,000 13,616,986 10,864,641 21,299,034
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
Statements of Stockholders' Equity
For the period from June 27, 1997 (date of inception) to December 31, 1997,
the year ended December 31, 1998, and the six months ended June 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Class A Additional Membership During the Total
Membership Paid-in Interests Development Stockholders'
Interests Capital Subscribed Stage Equity
---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, June 27, 1997.. -- $ -- $ -- $ -- $ --
Capital contributions... 9,500,000 9,500,000 9,500,000
Net loss................ (5,903,340) (5,903,340)
---------- ----------- ----------- ------------ -----------
Balance, December 31,
1997................... 9,500,000 9,500,000 (5,903,340) 3,596,660
Capital contributions... 7,650,000 13,250,000 13,250,000
Deferred rent expense... (2,000,000) (2,000,000)
Amortization of deferred
rent expense........... 50,000 50,000
Compensatory options.... 212,000 212,000
Net loss................ (9,615,963) (9,615,963)
---------- ----------- ----------- ------------ -----------
Balance, December 31,
1998................... 17,150,000 21,012,000 (15,519,303) 5,492,697
Capital contributions... 4,808,480 31,065,564 (4,697,782) 26,367,782
Shares issued for equity
in affiliate........... 2,250,000 11,250,000 11,250,000
Stock based
compensation........... 2,250,000 2,250,000 2,250,000
Amortization of deferred
rent expense........... 100,000 100,000
Write-off deferred rent
expense................ 1,850,000 1,850,000
Compensatory options.... 80,400 80,400
Net loss................ (15,084,696) (15,084,696)
---------- ----------- ----------- ------------ -----------
Balance, June 30, 1999.. 26,458,480 $67,607,964 $(4,697,782) $(30,603,999) $32,306,183
========== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
Statements of Cash Flows
For the period from June 27, 1997 (date of inception) to December 31, 1997,
the year ended December 31, 1998, the six months ended June 30, 1998,
the six months ended June 30, 1999 and cumulative amounts from inception
<TABLE>
<CAPTION>
Cumulative
December 31, December 31, June 30, June 30, Amounts from
1997 1998 1998 1999 Inception
------------ ------------ ----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Net loss........................ $(5,903,340) $(9,615,963) $(4,330,207) $(15,084,696) $(30,603,999)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization.. 187,708 499,142 187,673 224,217 911,067
In-process research and
development................... 4,042,640 -- -- -- 4,042,640
Equity in losses of affiliate.. -- -- -- 500,448 500,448
Amortization of deferred rent.. -- 50,000 -- 100,000 150,000
Write-off of deferred rent..... -- -- -- 1,850,000 1,850,000
In-kind services............... -- 500,000 -- -- 500,000
Stock based compensation....... -- -- -- 2,406,250 2,406,250
Compensatory options........... -- 212,000 106,000 80,400 292,400
Increases (decreases) in
operating assets:
Accounts receivable............ (803,557) 203,602 (267,915) (416,447) (1,016,402)
Other current assets........... (33,550) 18,903 (26,703) (66,967) (81,614)
Change in due from/due to
investor...................... 17,247 (416,061) (367,759) 406,424 7,610
Accounts payable and accrued
expenses...................... 1,184,551 1,081,587 1,066,239 2,359,206 4,625,344
Other assets................... -- -- -- 21,914 21,914
----------- ----------- ----------- ------------ ------------
Net cash used in operating
activities................... (1,308,301) (7,466,790) (3,632,672) (7,619,251) (16,394,342)
----------- ----------- ----------- ------------ ------------
Cash Flows From Investing
Activities:
Purchase of property, plant and
equipment...................... (361,518) (2,370,269) (1,876,440) (5,498,919) (8,230,706)
----------- ----------- ----------- ------------ ------------
Cash used in investing
activities................... (361,518) (2,370,269) (1,876,440) (5,498,919) (8,230,706)
----------- ----------- ----------- ------------ ------------
Cash Flows From Financing
Activities:
Contributed capital............. 4,750,000 10,750,000 4,250,000 26,367,782 41,867,782
----------- ----------- ----------- ------------ ------------
Cash provided by financing
activities................... 4,750,000 10,750,000 4,250,000 26,367,782 41,867,782
----------- ----------- ----------- ------------ ------------
Increase (decrease) in cash...... 3,080,181 912,941 (1,259,112) 13,249,612 17,242,734
Cash and cash equivalents,
beginning....................... -- 3,080,181 3,080,181 3,993,122 --
----------- ----------- ----------- ------------ ------------
Cash and cash equivalents,
ending.......................... $ 3,080,181 $ 3,993,122 $ 1,821,069 $ 17,242,734 $ 17,242,734
=========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1999 amounts are unaudited
1. Nature of Operations
Plug Power, LLC (Company), was formed as a joint venture between Edison
Development Corporation (EDC) and Mechanical Technology Incorporated (MTI) on
June 27, 1997. The Company is a development stage enterprise formed to
research, develop, manufacture and distribute fuel cells for electric power
generation.
The unaudited interim financial statements reflect all adjustments which are,
in the opinion of management, necessary for a fair statement of the results for
the interim periods presented.
2. Significant Accounting Policies
Use of estimates:
The financial statements of the Company have been prepared in conformity with
generally accepted accounting principles which require 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.
Cash and cash equivalents:
Cash and cash equivalents include cash on hand and short term investments
with original maturities of three months or less.
Inventories:
Inventories are stated at lower of cost (first-in, first-out) or market.
Property, plant and equipment, and long-lived assets:
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over their estimated useful lives ranging from 2 to 10
years.
The Company reviews long-lived assets and identifiable intangible assets for
impairment whenever any events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable.
Revenue recognition:
The Company's contract revenue is derived from revenues earned under
contracts principally with government agencies. Such contracts require the
Company to deliver research and tangible developments in fuel cell technology
and system design and prototype fuel cell systems for test and evaluation by
the government agency. Revenues are recognized in proportion to the costs
incurred. Total estimated cost to complete a contract in excess of the awarded
contract amounts are charged to operations during the period such costs are
estimated. While the Company's accounting for these contract costs are subject
to audit by the sponsoring agency, in the opinion of management, no material
adjustments are expected as a result of such audits.
The Company generally is required to absorb from 25% to 50% of the total
costs incurred on government contracts. At June 30, 1999 the Company has been
awarded approximately $40 million of such government contracts.
F-7
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999 amounts are unaudited
2. Significant Accounting Policies, continued
At December 31, 1998 and at June 30, 1999, $25,688 of retainage was owed to
the Company and is included in accounts receivable.
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information"(SFAS 131). SFAS 131 establishes new
standards for the way companies report information about operating segments in
annual financial statements. The disclosures prescribed by SFAS 131 are
effective for the year ended December 31, 1998. We do not believe we operate in
more than one segment.
3. Inventories
Inventories at December 31, 1997 and 1998, and June 30, 1999 consist of
unbilled work-in-progress on research contracts of $20,911 and $14,647, and
$53,087 respectively, and are included in other current assets.
4. Property, Plant and Equipment
Property, plant and equipment at December 31, 1997 and 1998 and June 30, 1999
consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31
1997 1998 June 30, 1999
------------ ----------- -------------
<S> <C> <C> <C>
Leasehold improvements.. $ 36,778 $ 97,889 $ 97,889
Machinery and
equipment.............. 817,643 3,104,887 5,562,223
Construction in
progress............... 3,287,153
--------- ---------- ----------
854,421 3,202,776 8,947,265
Less accumulated
depreciation........... (116,808) (449,284) (804,752)
--------- ---------- ----------
Property, plant and
equipment, net......... $ 737,613 $2,753,492 $8,142,513
========= ========== ==========
</TABLE>
Depreciation and amortization expense was approximately $29,375 for the
period from June 27, 1997 (date of inception) to December 31, 1997, $332,476
for the year ended December 31, 1998, and $104,340 and $355,468 for the six
months ended June 30, 1998 and 1999, respectively.
As of June 30, 1999, the Company has committed to approximately $4 million of
additional capital expenditures. The Company also leased equipment under a
capital lease transaction subsequent to December 31, 1998 with a net book value
at June 30, 1999 of $248,110 which is included in machinery and equipment.
Future minimum non-cancelable lease payments are as follows:
<TABLE>
<CAPTION>
1999.............................................................. $ 58,921
<S> <C>
2000.............................................................. 93,022
2001.............................................................. 93,022
2002.............................................................. 34,068
2003.............................................................. 5,368
---------
284,401
Less amounts representing interest................................ (38,831)
---------
$ 245,570
=========
</TABLE>
F-8
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999 amounts are unaudited
5. Loss Per Membership Interest
Loss per membership interest for the Company is as follows:
<TABLE>
<CAPTION>
June 27, 1997 Six months
to Year ended ended Six months
December 31, December 31, June 30, ended
1997 1998 1998 June 30, 1999
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net loss............... $(5,903,340) $(9,615,963) $(4,330,207) $(15,084,696)
Denominator:
Weighted average
membership interests
outstanding........... 9,500,000 13,616,986 10,864,661 21,299,034
</TABLE>
No options, warrants, or contingently issuable membership interests were
included in the calculation of diluted loss per membership interest because
their impact would have been anti-dilutive.
6. Income Taxes
The Company's income taxes or credits resulting from earnings or losses were
payable by, or accrued to, its members. Therefore, no provision has been made
for income taxes in these financial statements.
7. Stockholders' Equity
The Company has two classes of membership interests, Class A voting and Class
B non voting interests. All Class B membership interests will be converted to
Class A membership interests on the earlier of (1) the date on which the
Company (or its successor) files a registration statement for the public sale
of interests in the Company (or shares of a successor), under the Securities
Act of 1933; or (2) approval by a majority of the Class A membership interests,
of (a) a sale, lease, assignment, transfer or other conveyance of all or
substantially all of the assets of the Company, or (b) a merger, combination or
dissolution of the Company. At December 31, 1998 and June 30, 1999, 3,000,000
Class B membership interests were reserved for issuance under the membership
option plan. At June 30, 1999, 9,750,000 Class A membership interests are
reserved for warrant exercises and capital calls. Subsequent to June 30, 1999,
an additional 1,300,000 Class B membership interests were authorized for
issuance, for a total of 4,300,000.
In exchange for EDC's initial cash contribution of $4,750,000, the Company
issued 4,750,000 Class A membership interests in the Company. MTI made noncash
contributions of $4,750,000 consisting of in-process research and development
($4,042,640), and certain net assets, in exchange for 4,750,000 Class A
membership interests. The amount allocated to the in-process research and
development contributed to the Company by MTI represents its estimated fair
value based on the negotiations of two parties and is consistent with its value
under the cost valuation approach. Under the cost valuation approach, value is
measured by quantifying the cost of replacing the future service capability of
the acquired property without considering the amount of economic benefits that
can be achieved, or the time period over which they might continue.
Contributed in-process research and development was early development stage
property, which did not and currently does not have commercial viability or any
alternative future use and which will require substantial additional
expenditures to commercialize. Accordingly, the assigned value was charged to
operations at the time the Company was formed.
F-9
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999 amounts are unaudited
7. Stockholders' Equity, continued
During the year ended December 31, 1998, EDC and MTI made additional total
contributions of $13,250,000 in exchange for 7,650,000 Class A membership
interests. EDC contributed $7,750,000 in cash for 4,950,000 Class A membership
interests. MTI contributed $3,000,000 in cash, $2,000,000 of deferred rent
related to a below market lease for office and manufacturing facilities, and
$500,000 of in-kind services ($5,500,000 in total) for 2,700,000 Class A
membership interests. In 1998, MTI purchased options for $191,250, which
entitled MTI to acquire 2,250,000 Class A membership interests by June, 1999
for $2,250,000.
According to the joint venture agreement, MTI may earn non-cash credits which
will be applied toward the purchase price of Class A membership interests under
option. MTI can earn these credits based on the Company obtaining certain
defined levels of research contracts. In March 1999, all parties to the
agreement mutually agreed that MTI had earned $2,250,000 of non-cash credit
which were used to acquire 2,250,000 Class A membership interests.
Accordingly, these interests were issued in March 1999, a charge to
operations of $2,250,000 was recorded under the caption "General and
Administrative Expense," and $191,250 was returned to MTI in accordance with
the terms of the option agreement.
A summary of equity transactions from inception through June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Membership
Number of Price per Total Paid Interests
Date Shares Share Cash Non-cash in Capital Subscribed
---- ---------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
June, 1997................... 4,750,000 $1.00 $ 4,750,000 $ $ 4,750,000 $
June, 1997................... 4,750,000 1.00 4,750,000 4,750,000
---------- ----------- ----------- ----------- -----------
December 31, 1997............ 9,500,000 4,750,000 4,750,000 9,500,000
April and June, 1998......... 4,250,000 1.00 4,250,000 4,250,000
June, 1998................... 2,000,000 1.00 2,000,000 2,000,000
August, 1998................. 300,000 5.00 1,500,000 1,500,000
August, 1998................. 100,000 5.00 500,000 500,000
October, November, and
December, 1998.............. 1,000,000 5.00 5,000,000 5,000,000
---------- ----------- ----------- ----------- -----------
Capital contributions, 1998 7,650,000 10,750,000 2,500,000 13,250,000
Deferred rent expense........ (2,000,000) (2,000,000)
Amortization of deferred rent
expense..................... 50,000 50,000
Compensatory options......... 212,000 212,000
---------- ----------- ----------- ----------- -----------
December 31, 1998............ 17,150,000 15,500,000 5,512,000 21,012,000
January and February, 1999... 600,000 5.00 3,000,000 3,000,000
February, 1999............... 1,500,000 6.67 10,000,000 10,000,000
April and June, 1999(a)...... 2,004,165 6.67 13,367,782 13,367,782
June, 1999................... 704,315 6.67 4,697,782 4,697,782 (4,697,782)
---------- ----------- ----------- ----------- -----------
Capital contributions,
1999...................... 4,808,480 26,367,782 4,697,782 31,065,564 (4,697,782)
Share issued for equity in
affiliate, February, 1999... 2,250,000 5.00 11,250,000 11,250,000
Stock based compensation,
March 1999(b)............... 2,250,000 1.00 2,250,000 2,250,000
Amortization of deferred rent
expense..................... 100,000 100,000
Write-off deferred rent
expense..................... 1,850,000 1,850,000
Compensatory options......... 80,400 80,400
---------- ----------- ----------- ----------- -----------
June 30, 1999................ 26,458,480 $41,867,782 $25,740,182 $67,607,964 $(4,697,782)
========== =========== =========== =========== ===========
</TABLE>
- --------
(a) Excludes $840,000 of in-kind marketing services not yet provided.
(b) Represents exercise of April, 1998 option.
F-10
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999 amounts are unaudited
8. Related Party Transactions
On June 27, 1997, the Company entered into a distribution agreement with the
EDC. Under the agreement, EDC was appointed the Company's exclusive independent
distributor in Michigan, Ohio, Indiana and Illinois to promote and assist in
the sale of products developed by the Company, subject to certain terms and
conditions.
On June 27, 1997, the Company entered into a management services agreement
with MTI to obtain certain services and lease certain facilities for a period
of one year. At the expiration of this agreement, the Company extended the
existing facilities lease through September 30, 1998. In June 1998, the Company
entered into a new facilities lease which commenced on October 1, 1998, and had
a term of ten years with an option for an additional five years. Rental expense
was $79,000 for the period from June 27, 1997 (date of inception) to December
31, 1997, and $378,000 for the year ended December 31, 1998. Rental expense was
$256,000 and $215,000 for the six months ended June 30, 1998 and 1999,
respectively. The total amount due MTI was $17,247, $286,492 and $7,610 at
December 31, 1997, December 31, 1998 and June 30, 1999, respectively.
As part of the new facilities lease, MTI agreed to reimburse the Company up
to $2.0 million for improvements made to the Company's facilities. At December
31, 1998, $685,306 in Company expenditures had not yet been reimbursed by MTI,
and is included in due from investor. Subsequent to June 30, 1999, the lease
and the management agreement with MTI were terminated in connection with MTI's
contribution of its real estate to the Company in exchange for Class A
membership interests (see Note 10).
9. Employee Benefit Plans
Membership Option Plan:
Effective July 1, 1997, the Company established a Membership Option Plan (the
Plan) to provide employees an option to purchase Class B membership interests.
Employee options generally vest 20% per year and expire ten years after
issuance. Options granted to the Board of Managers vest 50% upon grant and 25%
per year thereafter. Options granted to consultants vest one-third on
expiration of the consultant's initial contract term with an additional one-
third vesting on each anniversary thereafter. Except as discussed below, no
options can be exercised prior to July 1, 2000. All options granted shall
become immediately vested and exercisable in the event of the sale of all or
substantially all of the Company's assets, or in the event of the sale of all
or substantially all of the Company's Class A Membership interests. All vested
options shall become immediately exercisable in the event the Company's Class A
membership interests become publicly traded. At June 30, 1999, there are
3,000,000 interests authorized for issuance under the Plan. Subsequent to June
30, 1999, an additional 1,300,000 interests were authorized for issuance, for a
total of 4,300,000.
The following table summarizes information about the membership options
outstanding under the Plan at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding
----------------------------
Average Weighted
Remaining Average
Life Exercise
Exercise Price Interests (Years) Price
-------------- --------- --------- --------
<S> <C> <C> <C>
$ 1.00.......................................... 1,435,200 8.9 $1.00
$ 5.00.......................................... 240,000 9.8 5.00
--------- --- -----
1,675,200 9.1 1.57
--------- --- -----
</TABLE>
F-11
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999 amounts are unaudited
9. Employee Benefit Plans, continued
The following table summarizes information about the membership options
outstanding under the Plan at June 30, 1999:
<TABLE>
<CAPTION>
Outstanding
----------------------------
Average Weighted
Remaining Average
Life Exercise
Exercise Price Interests (Years) Price
-------------- --------- --------- --------
<S> <C> <C> <C>
$ 1.00.......................................... 1,435,200 8.4 $1.00
$ 5.00.......................................... 583,039 9.6 5.00
$ 6.67.......................................... 591,500 10.0 6.67
---------
2,609,739 9.0 3.18
=========
</TABLE>
The following table summarizes activity of the Plan:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Interests Price
Under Per
Option Activity Option Interest
--------------- --------- --------
<S> <C> <C>
Balance, June 27, 1997................................... -- $--
Granted at fair value.................................... 1,132,500 1.00
Forfeited or terminated.................................. (18,500) 1.00
---------
Balance December 31, 1997................................ 1,114,000 1.00
Granted below fair value................................. 197,000 1.00
Granted at fair value.................................... 460,650 3.09
Forfeited or terminated.................................. (96,450) 1.03
---------
Balance December 31, 1998................................ 1,675,200 1.57
---------
Granted at fair value.................................... 934,539 6.06
---------
Balance at June 30, 1999................................. 2,609,739 3.12
=========
</TABLE>
Accounting for Stock Based Compensation:
The per share weighted average fair value of the options granted during 1997,
1998 and 1999 was $0.26, $0.58 and $1.45, respectively, using the minimum value
method of valuing stock options under Statement of Financial Accounting
Standard No. 123 (SFAS No.123) "Accounting for Stock-Based Compensation".
The dividend yield was assumed to be $0 for all periods. The risk free
interest rate ranged from 5.8% to 6.1% in 1997 and 4.5% to 5.6% in 1998, and
5.1% to 5.7% in 1999. An expected life of five years was assumed. The Company
applies Accounting Principles Board Opinion No. 25 in accounting for the Plan
and does not record compensation cost for options granted at fair value.
During 1998 the Company awarded 197,000 options to key employees for which
issuance was contingent upon the attainment of specified performance
objectives. Of those awarded, 51,500 were forfeited. The difference between the
fair value of the membership interests at the measurement date and the exercise
price of the options was $582,000, and will be charged to expense over the four
F-12
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999 amounts are unaudited
9. Employee Benefit Plans, continued
year vesting period of the options. The charge to operations was $212,000 and
$80,400 for the year ended December 31, 1998 and for the six months ended June
30, 1999, respectively.
Had the Company determined compensation cost based on fair value in
accordance with SFAS 123, the Company's net loss would have increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Six months
June 27, 1997 Year ended ended
to December 31, December 31, June 30,
1997 1998 1999
--------------- ------------ -------------
<S> <C> <C> <C>
Net loss, as reported............. $ (5,903,340) $ (9,615,963) $ (15,084,696)
Proforma net loss................. (6,000,628) (9,775,441) (15,197,507)
Proforma loss per membership in-
terest, basic and
diluted.......................... $ (0.63) $ (0.72) $ (0.71)
</TABLE>
401(k) Savings & Retirement Plan:
The Company offers a 401(k) Savings & Retirement Plan to eligible employees
meeting certain age and service requirements. This plan permits participants
to contribute up to 15% of their salary, up to the maximum allowable by the
Internal Revenue Service regulations. Participants are immediately vested in
their voluntary contributions plus actual earnings thereon. Participants are
vested in the Company's matching contribution based on the years of service
completed. Participants are fully vested upon completion of four years of
service. The Company's expense for this plan was $23,000 for the period from
June 27, 1997 (date of inception) to December 31, 1997 and $95,000 for the
year ended December 31, 1998. The Company's expense for this plan was $34,000
and $90,000 for the six months ended June 30, 1998 and 1999, respectively.
10. Subsequent Events (Unaudited)
Capital Call:
Effective January 26, 1999, the Company entered into an agreement with MTI
and EDC. The agreement provides that the Company has the right to call upon
MTI and EDC to make capital contributions (Capital Call), at any time through
December 31, 2000, if the Company determines that it requires additional
funds, as follows:
. The agreement requires both MTI and EDC to each fund capital calls of up
to $7.5 million in 1999 and $15 million in 2000 (Capital Commitment).
. In exchange for such Capital Commitment, MTI and EDC will receive Class
A membership interests from the Company at $7.50 per interest.
. MTI and EDC will share the Capital Commitment equally.
. The Company's Board of Managers will determine when there is a
requirement for additional funds.
. MTI and EDC shall have sixty days from the date of such determination to
tender their payment to the Company.
The agreement will terminate on the earlier of i) December 31, 2000 or ii)
an initial public offering of shares by the Company at a price of greater than
$7.50 per share (Termination Date).
F-13
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999 amounts are unaudited
10. Subsequent Events (Unaudited), continued
Under an amendment to the agreement, the Company has also agreed to permit MTI
and EDC to make capital contributions on the Termination Date, whether or not
such funds have been called, to the extent of their Capital Commitment. Such
contributions will be made at a fixed price of $7.50 per Class A membership
interest.
If the Company makes a Capital Call and either MTI or EDC fail to make the
required capital contribution (Defaulting Member), then such Defaulting Member
shall permanently forfeit the right to receive the interests it is entitled to
under the agreement (Defaulted Interests). Additionally, to the extent of
outstanding Capital Commitments, the Defaulting Member shall forfeit the right
to receive additional interests equal to two times the Defaulted Interests. The
non-defaulting Member may then elect to fund the Defaulting Member's share of
the Capital Call in exchange for membership interests at the fixed price of
$7.50 per interest.
Subsequent to June 30, 1999, the Company made a capital call on EDC and MTI
in the amount of $4,000,005, representing 266,667 Class A membership interests
each at $7.50 per share.
GE On-Site Power:
In February 1999, the Company entered into an agreement with GE On-Site
Power, Inc. (a wholly owned subsidiary of General Electric Co.) to create GE
Fuel Cell Systems, L.L.C. (GEFCS) a limited liability company created to market
and distribute fuel cell systems world-wide. GE On-Site Power, Inc. owns 75% of
the new entity and the Company owns 25% of the new entity.
As part of the agreement, the Company will work closely with General
Electric's Corporate Research and Development Center for product development
and manufacturing support. GEFCS will market, sell, install and service fuel
cells systems, designed and manufactured by the Company, world-wide (with the
exception of EDC's exclusive four state territory of Michigan, Ohio, Indiana
and Illinois) for residential and small business power applications up to 35kW.
In addition, the Company entered into a ten year distribution agreement with
GEFCS that requires GEFCS purchase from the Company a specified number of pre-
commercial units by December 31, 2000.
In accordance with the terms of the agreement, General Electric will provide
capital, in the form of loans, to fund the purchase of pre-commercial units
during the period ending December 31, 2000. General Electric will also provide
additional capital, in the form of a loan not to exceed $8.0 million, to fund
the operations of GEFCS. The Company has agreed to purchase a minimum of $12.0
million of technical support services over a three year period and extend the
term of the distribution agreement by five years to 2009.
In connection with the formation of GEFCS, the Company issued 2,250,000 Class
A membership interests to GE On-Site Power, Inc. in exchange for a 25% interest
in GEFCS. Of these, 750,000 interests vested immediately and the remaining
1,500,000 interests in August 1999. As of the date of the issuance of such
interests, the Company capitalized $11,250,000, the fair value of the interests
issued, under the caption "Investment in Affiliate".
F-14
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999 amounts are unaudited
10. Subsequent Events (Unaudited), continued
The Company accounts for its interest in GEFCS on the equity method of
accounting and adjusts its investment by its proportionate share of income or
losses under the caption "Equity in losses of affiliate". From inception
through June 30, 1999, GEFCS had no revenue and an operating and net loss of
approximately $127,000. The unaudited balance sheet of GEFCS at June 30, 1999
included no assets, current liabilities of $117,000 (including $73,000 due to
General Electric) and a members' deficit of $117,000. At June 30, 1999, the
difference between the amount at which the investment is carried and the amount
of the underlying equity in net assets of GEFCS is $10,749,552. Such amount is
being amortized on the straight line basis over a ten year period. For the
period ended June 30, 1999, equity in losses of affiliate were $500,448
including goodwill amortization of $468,750.
The Company also issued warrants to purchase 3,000,000 additional Class A
membership interests at $12.50 per interest. These warrants expire the later of
i) December 31, 2000, ii) twelve months after an initial public offering of
shares, by the Company, at a price less than $12.50 per share, or iii) an
initial public offering of shares, by the Company, at a price of at least
$12.50 per share.
Other Financing Transactions:
During the first quarter of 1999 MTI and EDC each purchased 300,000 Class A
membership interests for $1.5 million each.
In February 1999, two investors purchased 1,500,000 Class A membership
interests for $10.0 million. In addition, one of the investors received a
warrant to purchase 400,000 Class A membership interests at a price of $8.50
per interest. These warrants expire at the earliest of i) December 31, 2001,
ii) an initial public offering of the Company, at a price of at least $8.50 per
share, or iii) eighteen months after an initial public offering of shares by
the Company at a price less than $8.50 per share.
In April 1999 an investor purchased 299,850 Class A membership interests for
$2.0 million.
In April 1999, an investor purchased 1,000,000 Class A membership interests
for $6.7 million. In connection with the purchase agreement, the investor is
required to spend an aggregate of $840,000 for market research and related
services on behalf of the Company. In the event such amounts are not expended
by April, 2002, up to 111,851 of the previously issued interests may be
returned to the Company. The Company will account for these services by
recording a charge to earnings and a credit to paid-in capital as these
services are rendered. As of June 30, 1999, no services had been provided.
Additionally, the investor received warrants to purchase an additional 350,000
Class A membership interests at an exercise price of $8.50 per interest. These
warrants terminate on the earliest of i) December 31, 2001, ii) an initial
public offering of shares, by the Company, at a price of at least $8.50 per
share, or iii) twelve months after an initial public offering of shares, by the
Company, at a price less than $8.50 per share.
On June 23, 1999, EDC purchased 704,315 interests of the Company's Class A
membership interests for $4,697,782. Also, the Company entered into a purchase
agreement with MTI to acquire approximately 36 acres of land, two commercial
buildings and a residential building located in Latham, New York in exchange
for 704,315 Class A membership interests.
F-15
<PAGE>
PLUG POWER, LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999 amounts are unaudited
As part of the transaction, the Company assumed a $6.2 million letter of
credit to KeyBank National Association. In connection with the agreement, the
Company was required to escrow $6.2 million. The KeyBank debt was issued for
the express purpose of servicing debt related to $6.2 million of Industrial
Development Revenue (IDR) Bonds issued by the Town of Colonie Industrial
Development Agency.
10. Subsequent Events (Unaudited), continued
The transaction closed on July 7, 1999, and a receivable for membership
interests of $4,697,782 is recorded as membership interests subscribed as of
June 30, 1999. Simultaneous with the July closing, the Company agreed to lease
back to MTI certain office and manufacturing space on a short-term basis.
In connection with the transaction with MTI, the Company has written off
deferred rent expense in the amount of $1,850,000 relating to a 10-year
facilities lease associated with the property.
Option Remeasurement:
Subsequent to June 30, 1999, the Company modified the terms of an employee's
option. The impact of this modification will result in a charge to earnings of
approximately $800,000 in the fourth quarter of 1999.
Line of Credit:
In October 1999, the Company entered into a loan agreement for a $6.0 million
line of credit from KeyBank, N.A. The line of credit bears interest at the
prime rate in effect from time to time, matures upon the earlier of the closing
of the offering or November 30, 1999, and is collateralized by an assignment of
our right to call capital from Mechanical Technology and Edison Development.
Initial Public Offering:
The Company is currently undertaking an initial public offering. In the event
that the public offering becomes effective, the Company will be converted from
a limited liability corporation to a C corporation with one class of common
stock and authorization to issue preferred stock. In connection with this
conversion, the Company would then be subject to state and federal income taxes
and would account for income taxes under SFAS 109, "Accounting for Income
Taxes". In addition, it is expected that the Company will revise its employee
membership interest plan and implement an employee stock purchase plan.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Historical Financial Data....................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 30
Management............................................................... 45
Certain Relationships and Related Transactions........................... 54
Principal Stockholders................................................... 58
Description of Capital Stock............................................. 60
Shares Eligible For Future Sale.......................................... 64
Validity of Common Stock................................................. 65
Experts.................................................................. 65
Where You Can Find More Information...................................... 65
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
---------------
Through and including November 22, 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,000,000 Shares
Common Stock
---------------
PROSPECTUS
---------------
Goldman, Sachs & Co.
Hambrecht & Quist
Merrill Lynch & Co.
FAC/Equities
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
