As filed with the Securities and Exchange Commission on November 8, 2000
Registration No. 333-____
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NUVERA FUEL CELLS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 3629 04-3403793
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
---------
15 Acorn Park
Cambridge, MA 02140
(617) 498-6000
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
---------
Mark A. Brodsky
President
Nuvera Fuel Cells, Inc.
15 Acorn Park
Cambridge, MA 02140
(617) 498-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------
Copies to:
Richard D. Truesdell, Jr. David P. Falck
John G. Crowley Jeffrey J. Delaney
Davis Polk & Wardwell Winthrop, Stimson, Putnam & Roberts
450 Lexington Avenue One Battery Park Plaza
New York, New York 10017 New York, New York 10004
(212) 450-4000 (212) 858-1000
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE(1)
=========================================================================================================
Title of Each Class Proposed Maximum Amount of
of Securities to be Registered Aggregate Offering Price(2) Registration Fee
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share..... $115,000,000 $30,360
=========================================================================================================
</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act of 1933, as
amended, the number of shares being registered and the proposed maximum
offering price per share are not included in this table.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457 under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
Explanatory Note
This registration statement contains two forms of prospectus: one to be
used in connection with a U.S. and Canadian offering of the registrant's common
stock, and one to be used in a concurrent international offering of the common
stock outside the United States and Canada. The international prospectus will
be identical to the U.S. prospectus except that it will have a different front
cover page, underwriting section and back cover page. The U.S. prospectus is
included herein and is followed by the alternate front cover page, alternate
underwriting section and alternate back cover page to be used in the
international prospectus, each of which has been labeled "Alternative Page for
International Prospectus."
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated November 7, 2000
PROSPECTUS
----------
Shares
Nuvera Fuel Cells, Inc.
Common Stock
---------
This is Nuvera Fuel Cells, Inc.'s initial public offering. is offering
shares. The U.S. underwriters are offering shares in
the U.S. and Canada and the international managers are offering shares
outside the U.S. and Canada.
We expect the public offering price to be between $ and $
per share. Currently, no public market exists for the shares. After pricing of
the offering, we expect that the shares will be quoted on the Nasdaq National
Market under the symbol "NVRA."
Investing in our common stock involves risks that are described in the
"Risk Factors" section beginning on page 7 of this prospectus.
Per Share Total
--------- -----
Public offering price................................. $ $
Underwriting discount................................. $ $
Proceeds, before expenses, to Nuvera Fuel Cells, Inc.. $ $
The U.S. underwriters may also purchase up to an additional shares
from Nuvera, at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments. The
international managers may similarly purchase up to an additional shares
from Nuvera.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about , 2001.
Merrill Lynch & Co.
Lehman Brothers
ABN AMRO Rothschild LLC
Bear, Stearns & Co. Inc.
The date of this prospectus is , 2001.
<PAGE>
TABLE OF CONTENTS
Page
----
Summary......................................................................1
Risk Factors.................................................................7
Special Note Regarding Forward-Looking Statements...........................20
Use of Proceeds.............................................................21
Dividend Policy.............................................................21
Capitalization..............................................................22
Dilution....................................................................23
Selected Financial Data.....................................................24
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 26
Unaudited Pro Forma Condensed Financial Information.........................35
Business....................................................................40
Management..................................................................61
Related Party Transactions..................................................68
Principal Stockholders......................................................72
Description of Capital Stock................................................74
Shares Eligible for Future Sale.............................................77
United States Federal Income Tax Considerations for
Non-U.S. Holders of Common Stock..........................................78
Underwriting................................................................80
Legal Matters...............................................................83
Experts.....................................................................83
Where You Can Find Additional Information...................................85
Index to Financial Statements..............................................F-1
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus.
As used in this prospectus,
o all degrees refer to Fahrenheit (F);
o watt (W), kilowatt (kW) and megawatt (MW) numbers, unless the context
otherwise requires, designate nominal or rated capacity of the referenced power
source;
o fuel efficiency of a fuel processor means the ratio of the lower heating
value of the hydrogen generated by a fuel processor to the lower heating value
of the feedstock fuel fed to the fuel processor;
o electrical efficiency of a fuel cell stack means the ratio of the gross
electrical energy generated by a fuel cell stack to the hydrogen energy value
fed to the fuel cell stack; and
o electrical efficiency of a power module or an integrated fuel cell
system means the ratio of the electrical energy generated in the conversion of
the feedstock fuel to the total energy contained in the fuel.
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our common stock. You should read this entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors." Unless the context otherwise requires, all
references in this prospectus to "Nuvera," "we," "us" or "our" refer to Nuvera
Fuel Cells, Inc., formerly Epyx Corporation, and its wholly-owned subsidiary,
Nuvera Fuel Cells Europe S.r.l., formerly De Nora Fuel Cells S.p.A., during the
periods following the merger described below and to their predecessors during
the periods prior to the merger.
Nuvera Fuel Cells, Inc.
Our Business
We are a designer and developer of fuel processors, proton exchange
membrane, or PEM, fuel cell stacks and integrated fuel cell systems for
stationary and transportation applications. By combining our fuel processors
and our fuel cell stacks into an integrated unit, we are designing, developing
and testing power modules in the 1 kW, 5 kW and 10 kW power ranges. We plan to
market our products both as components to be integrated with other technologies
and as power modules or integrated fuel cell systems. We believe our fuel cell
technologies will provide power and heat that are more energy efficient,
environmentally cleaner and quieter than the current electric transmission
grid, most current backup power alternatives and the internal combustion
engine. We plan to bring to market our first premium power stationary products
in 2002, our first residential stationary products in 2003 and our first
transportation products in 2005.
We have built and tested approximately 34 fuel processors, comprising a
total of about 1 megawatt of hydrogen energy production capability, and
delivered approximately 6 fuel processors, comprising a total of about 170
kilowatts of hydrogen energy production capability, to automobile manufacturers
and other companies for testing and evaluation. We are one of the few companies
that has developed a fuel processor capable of operating on a variety of
commonly available hydrocarbon fuels. We believe we were the first company to
demonstrate publicly the use of a fuel processor to reform gasoline into
hydrogen to generate power from a fuel cell stack.
We have built and tested approximately 255 fuel cell stacks, comprising a
total of about 980 kilowatts, and delivered approximately 94 fuel cell stacks,
comprising a total of about 510 kilowatts, to automobile manufacturers, utility
and energy companies, universities and research institutions.
We have built and tested 4 integrated fuel cell systems, operating on
propane and natural gas, in the 300 W to 5 kW power ranges.
Our Heritage
Nuvera was formed in April 2000 through the merger of De Nora Fuel Cells
S.p.A., the fuel cell division of the Italian engineering and electrode
manufacturing concern De Nora S.p.A., and Epyx Corporation, the fuel processing
division of the American business and technology consulting firm Arthur D.
Little, Inc. In 1998, the two companies had worked together to develop, produce
and demonstrate a 300 W propane-fueled power module that combined De Nora's
fuel cell stack and AD Little's fuel processor. Both companies recognized that
by combining their complementary fuel cell technologies, they could develop,
produce and market power modules and integrated fuel cell systems in a manner
that could give them a long-term competitive advantage. Simultaneously with the
merger, Amerada Hess, a leading independent energy company, purchased 5% of our
capital stock from AD Little. Amerada Hess increased its equity ownership in
Nuvera to 11% in July 2000.
As a result of the merger, we believe we are uniquely positioned to
compete in global stationary and transportation markets due to our ability to
integrate our fuel processors and our fuel cell stacks into power modules
1
<PAGE>
and integrated fuel cell systems that we expect will generate clean, reliable
and efficient energy using a variety of commonly available hydrocarbon fuels.
Our Products
Fuel Processors
Our fuel processors have demonstrated the ability to extract hydrogen from
a number of commonly available hydrocarbon fuels, including gasoline, ethanol,
methanol, natural gas, kerosene, propane, butane, home heating oil and diesel.
The extracted hydrogen can then be used in fuel cell stacks to produce
electricity. Our fuel processors can be designed to use different reforming
technologies, such as autothermal or steam, to accommodate the needs of a
particular market and the applications within that market. We design and
develop our fuel processors in Cambridge, Massachusetts.
Fuel Cell Stacks
Fuel cell stacks produce electricity, without combustion, by combining
hydrogen fuel and oxygen from the air, with usable heat and water as the
principal byproducts. As a result, fuel cell stacks produce fewer emissions and
use fuel more efficiently than conventional generation processes. Our PEM fuel
cell stacks feature sheet metal bipolar plates, gas diffusion electrodes and
advanced catalysts, all of which we believe will make our products more
durable, more efficient and, ultimately, less expensive than other types of
fuel cell stacks. PEM fuel cell stacks operate at lower temperatures than other
types of fuel cell stacks, allowing faster start-up time and adjustment to
changes in the demand for power and thus making them suitable for
transportation and smaller stationary applications. We design and produce our
fuel cell stacks in Milan, Italy.
Power Modules and Integrated Fuel Cell Systems
By combining our fuel processors and our fuel cell stacks into an
integrated design, we believe that our power modules and integrated fuel cell
systems have the capability to produce electricity cleanly and efficiently from
most commonly available hydrocarbon fuels, including gasoline. By combining our
power modules with the technologies and components of third party
manufacturers, we believe that we will be able to build integrated fuel cell
systems for cogeneration applications in the European and Japanese residential
markets. In addition, by combining our power modules with power electronics and
control systems, we believe that we will be able to build integrated fuel cell
systems capable of providing AC power for United States residences and premium
power applications.
Our Target Markets
We are targeting specific sectors of both the stationary and
transportation markets for electrical power and heat.
Stationary Market
Within the stationary market, we are focusing on premium power,
residential power and, to a lesser extent, small commercial power applications.
o Premium Power Market. The premium power market is one in which
customers are willing to pay a premium for a secure and reliable
source of quality power. We plan to target the telecommunications
sector of this market as the first market in which we will
commercialize our products because of the willingness of participants
in this sector to pay a premium for reliable, high quality power. We
intend to bring our first commercially available premium power
products to the telecommunications market in 2002. We expect that
these products will be 1 kW to 5 kW power modules suitable for
manufacturers of telecommunications backup systems, telephone
switching centers and cellular transmission towers.
o Residential Power Market. We believe that residential customers will
purchase integrated fuel cell systems for their homes in order to
reduce their total energy cost and increase the quality and
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<PAGE>
environmental safety of the energy they use. We are designing our
residential power modules to generate between 1 kilowatt and 5
kilowatts of electrical power, depending on the needs of specific
geographical markets around the world. In the U.S. residential
market, our products will initially be focused on standby and primary
electrical power. We believe the demand for our products in the
European and Japanese residential markets will be focused primarily
on combined heat and electrical power applications. We intend to
focus first on the European residential market because we believe the
deregulation of utilities, particularly in Germany, offers the most
promising path to the commercialization of our residential products.
We intend to bring our first commercially available residential
products to market in 2003.
Transportation Market
The pace at which the transportation market for our fuel cell technologies
will develop is largely dependent upon the business strategy of automobile
manufacturers. We believe that we will be one of the few companies that can
offer original equipment manufacturers, or OEMs, and automobile manufacturers
the choice of purchasing fuel processors or fuel cell stacks separately as
components. We believe our gasoline fuel processing technology will give us a
competitive advantage in the transportation market, as we believe it would
allow for the continued use of the existing fuel delivery infrastructure. We
also believe that our fuel cell stacks, which feature sheet metal bipolar
plates, will give us a competitive advantage in this market due to their
durability, compact design and suitability for low-cost manufacturing.
We have already supplied our fuel processors and fuel cell stacks to seven
automobile manufacturers, including Fiat of Italy and, in the framework of the
FEVER project, Renault of France, and recently delivered two complete
gasoline-powered fuel processors designed for testing transportation
applications of fuel cell stacks. Our fuel processors and fuel cell stacks for
transportation applications are being designed for integration into
transportation power modules which will generate between 30 kilowatts and 250
kilowatts of electrical power to provide power for passenger car, bus and truck
applications. We intend to bring our first commercially available transportation
products to market in 2005.
Our Strategy
Our objective is to extend our leadership in the design, development and
testing of fuel cell technologies and to bring about the successful
commercialization of our products. Key elements of our strategy to achieve this
objective include:
o extending our technology leadership,
o exploiting our design integration advantage,
o exploiting our multi-fuel advantage,
o focusing on early-adopter markets,
o exploiting our multi-market advantage and
o leveraging strategic relationships.
-----------------------
We plan to maintain corporate and operational facilities in both
Cambridge, Massachusetts and Milan, Italy. Our principal executive offices are
located at 15 Acorn Park, Cambridge, Massachusetts 02140 and our telephone
number is (617) 498-6655.
3
<PAGE>
The Offering
Common stock offered by Nuvera:
U.S. offering................................... shares
International offering.......................... shares
-------------------
Total ................. shares
Shares outstanding after this offering............... shares
Use of proceeds..................... We estimate that our net proceeds from
this offering without exercise of the
over-allotment options will be
approximately $ million. We
intend to use these net proceeds for:
o working capital and capital
expenditures,
o general corporate purposes,
including funding our operations and
acquiring capital equipment, and
Risk factors........................ See "Risk Factors" and other
information included in this prospectus
for a discussion of factors you should
carefully consider before deciding to
invest in shares of the common stock.
Proposed Nasdaq National Market
symbol ............................. "NVRA"
The number of shares outstanding after the offering excludes 176,124
shares reserved for issuance under our 2000 stock incentive plan, of which
options to purchase shares at a weighted average exercise price of $
per share have been issued. This number assumes that the underwriters'
over-allotment options are not exercised. If the over-allotment options are
exercised in full, we will issue and sell an additional shares.
We intend to effect a stock split before the completion of the offering.
All share amounts and financial information in this prospectus do not reflect
this stock split.
4
<PAGE>
Summary Financial Data
You should read the summary historical and pro forma financial data of
Nuvera Fuel Cells, Inc. and subsidiary (a development stage company) set forth
below in conjunction with our consolidated financial statements and the notes
thereto, "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
appearing elsewhere in this prospectus.
The statement of operations data for the years ended December 31, 1997,
1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 are
derived from the audited consolidated financial statements and the notes
thereto of Nuvera Fuel Cells, Inc. and subsidiary (a development stage company)
included elsewhere in this prospectus. The statement of operations data for the
six months ended June 30, 1999 and 2000 and the balance sheet data as of June
30, 2000 are derived from the unaudited consolidated financial statements and
the notes thereto of Nuvera Fuel Cells, Inc. and subsidiary (a development
stage company) included elsewhere in this prospectus which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, which we consider necessary for a fair presentation of our results
of operations and financial position as of the end of and for such periods.
Historical results are not necessarily indicative of the results that may occur
in the future, and interim results are not necessarily indicative of the
results that may be expected for any other interim period or a full year.
As described in note 2 of the notes to our consolidated financial
statements included elsewhere in this prospectus, the merger of De Nora Fuel
Cells S.p.A. and Epyx Corporation has been accounted for under the purchase
method of accounting and was treated as a reverse acquisition because the
stockholder of De Nora Fuel Cells S.p.A. received the controlling interest in
the combined enterprise. Therefore, De Nora Fuel Cells S.p.A. was considered
the acquiror for accounting purposes and recorded Epyx's assets and liabilities
based upon their fair values at the date of acquisition. Since the transaction
has been accounted for as a reverse acquisition, the summary financial data set
forth below for all periods prior to the merger on April 4, 2000 represents the
financial position and results of operations of De Nora Fuel Cells S.p.A. The
summary financial data set forth below for periods subsequent to April 4, 2000
includes the financial position and results of operations of both De Nora Fuel
Cells S.p.A. and Epyx. Accordingly, the summary financial data for the six
months ended June 30, 2000 is not comparable to the summary financial data for
the six months ended June 30, 1999 or to the years ended December 31, 1997
through 1999.
The summary pro forma statement of operations data set forth below are
derived from the unaudited pro forma condensed statements of operations of
Nuvera Fuel Cells, Inc. and subsidiary (a development stage company) contained
under "Unaudited Pro Forma Condensed Financial Statements." The unaudited pro
forma statement of operations data for the year ended December 31, 1999 and the
six months ended June 30, 2000 give effect to the merger as if it had occurred
at the beginning of those fiscal periods. We have prepared the unaudited pro
forma condensed statements of operations for informational purposes only and
they are not necessarily indicative of what would have occurred had the merger
occurred at those dates or the results that may occur in the future. In
accordance with SEC rules, the pro forma condensed statement of operations for
the six months ended June 30, 2000 and the year ended December 31, 1999 excludes
$20.3 million of in-process research and development expense that is reflected
in our unaudited historical consolidated statement of operations for the six
months ended June 30, 2000.
The as adjusted balance sheet data set forth below give effect to the sale
of the shares of our common stock in this offering, after deducting
underwriting discounts and commissions and our estimated offering expenses.
5
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<TABLE>
Year Ended December 31, Six Months Ended June 30,
---------------------------------------------- ----------------------------------
Pro Forma Pro Forma
1997 1998 1999 1999 1999 2000 2000
-------- -------- -------- ---------- -------- -------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Sales and contracts...........................$ -- $ -- $ 574 $ 1,032 $ 360 $ 780 $ 841
Lease......................................... 350 284 95 219 7 62 62
-------- -------- -------- ---------- -------- -------- ----------
Total revenues.............................. 350 284 669 1,251 367 842 903
-------- -------- -------- ---------- -------- -------- ----------
Cost of revenues
Sales and contracts........................... -- -- 216 3,963 158 1,235 3,134
Lease......................................... 106 178 86 210 43 33 33
Total cost of revenues...................... 106 178 302 4,173 201 1,268 3,167
-------- -------- -------- ---------- -------- -------- ----------
In-process research and development............ -- -- -- -- -- 20,300 20,300
Research and development expense, net.......... 1,119 1,988 1,004 3,588 612 1,674 2,287
Selling, general and administrative expense.... 465 403 644 8,106 231 2,995 5,175
-------- -------- -------- ---------- -------- -------- ----------
Loss from operations........................ (1,340) (2,285) (1,281) (14,616) (677) (25,395) (30,026)
-------- -------- -------- ---------- -------- -------- ----------
Interest expense............................... -- -- 2 2 -- 20 20
Other (income) expense, net.................... -- -- 7 7 -- 28 28
-------- -------- -------- ---------- -------- -------- ----------
Loss before income tax benefit................. (1,340) (2,285) (1,290) (14,625) (677) (25,443) (30,074)
Income tax benefit............................. -- -- -- 1,149 -- 1,274 1,561
-------- -------- -------- ---------- -------- -------- ----------
Net loss.......................................$ (1,340) $ (2,285) $ (1,290) $ (13,476) $ (677) $(24,169) $ (28,513)
======== ======== ======== ========== ======== ======== ==========
Net loss per common share - basic and diluted..$ (2.68) $ (4.57) $(2.58) $ (13.48) $ (1.35) $ (32.53) $ (28.51)
======== ======== ======== ========== ======== ======== ==========
Shares used in computing basic and diluted
net loss per common share.................... 500,000 500,000 500,000 1,000,000 500,000 743,094 1,000,000
======== ======== ======== ========== ======== ======== ==========
</TABLE>
<TABLE>
As of December 31, As of June 30,
------------------- -----------------------
As Adjusted
1998 1999 2000 2000
------- ------- ------- -----------
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ -- $ 19 $ 2,177
Total assets.................................. 2,158 2,340 62,400
Working capital (deficiency).................. (5,280) 183 3,508
Due from stockholder.......................... -- -- 939
Due to stockholder............................ 5,248 -- --
Notes payable - stockholder................... -- 545 --
Total non-current liabilities................. 201 207 4,193
Total stockholders' equity (deficit).......... (5,104) 282 54,425
</TABLE>
6
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RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in Nuvera. As one of our stockholders, your investment will be subject
to risks inherent in our business and our industry, as well as other risks
relating to this offering. The price of our common stock may decline. You
should carefully consider the following factors as well as other information
contained in this prospectus before deciding to invest in shares of our common
stock.
RISKS RELATING TO NUVERA
We have only been in business for a short time, and you have a limited basis
for evaluating our performance
We were formed in April 2000 by the merger of De Nora Fuel Cells S.p.A.,
the fuel cell division of De Nora S.p.A., and Epyx Corporation, the fuel
processing division of Arthur D. Little, Inc. As a result, we are in the early
stage of development and our proposed operations are subject to the risks
inherent in the growth of a new business enterprise, including the absence of
any significant operating history. We do not expect to produce our first
commercially viable product until at least 2002. 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 likely face, and the problems and delays we may
encounter, as a development stage company seeking to design, develop, build,
test and commercialize new products in a variety of evolving markets around the
world. As a development stage company, it will be difficult for us to predict
future results and you should not rely on historical results as an indicator of
future performance.
We may have difficulty completing the integration of the former operations of
De Nora Fuel Cells S.p.A. and Epyx Corporation
Prior to the merger in April 2000, De Nora Fuel Cells S.p.A. and Epyx
Corporation were separate corporate entities, wholly owned by unaffiliated
companies. For the merger to be successful, we will need to complete the
integration of the products, technologies, systems and personnel of the two
companies. The integration of these two companies is complicated by the fact
that the former Epyx and its related operations and personnel are located in
Cambridge, Massachusetts while the former De Nora Fuel Cells and its related
operations and personnel are located in Milan, Italy. If we do not successfully
complete the integration of the two companies, our business and operating
results may be harmed. In addition, the integration effort may disrupt our
research, development and commercialization efforts, affect our ability to
execute our corporate strategy, distract our management, result in the loss of
key personnel or dilute our other resources.
We have a history of operating losses and anticipate continued losses and
negative cash flow
Our business has generated significant operating losses and negative cash
flow since our inception and we expect our losses to continue. As of June 30,
2000, we had an accumulated deficit of approximately $31.8 million. We have not
achieved profitability and expect to continue to incur net losses until we can
produce sufficient revenues to cover our costs, which will primarily be
incurred in research and product development activities to achieve the
commercialization of our products. We expect the cost to produce our
pre-commercial stationary prototypes during 2001 and our initial commercial
stationary products during 2002 to be higher than their sales price.
Furthermore, even if we achieve our objective of bringing our first commercial
stationary product to market in 2002, we anticipate that we will continue to
incur losses and generate negative cash flow until we can cost-effectively
produce and sell our products to the mass market. We may never become
profitable. Even if we do achieve profitability, we may be unable to sustain or
increase profitability or positive cash flow.
We may not meet our product development and commercialization milestones and we
may never complete the development of commercially viable products
We have established product development and commercialization milestones
that we use to assess our progress toward developing commercially viable
products. These milestones relate to technology and design improvements
7
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as well as to dates for achieving development goals and conducting field trials
and other demonstrations of our products. While we have been aggressive in
setting our internal milestones and have been generally successful in meeting
them, we cannot guarantee that we will successfully achieve our milestones in
the future. Our product development efforts are subject to unanticipated and
significant delays and technical or other problems. If we do experience delays
in meeting our development goals, if our products exhibit technical defects or
are unable to meet cost or performance goals, including power output,
emissions, useful life or reliability, our commercialization schedule could be
delayed beyond 2002, which is our goal for bringing our first premium power
products to market. Failure to meet publicly announced milestones may have a
material adverse effect on our operations and our stock price.
We do not know when or whether we will successfully complete the
development of commercially viable products. We must complete substantial
additional research, development and testing on our technologies before we will
have commercially viable products. This is particularly true in the areas of
fuel processing and fuel cell system integration, which involve complex
technologies and processes. In addition, while we are conducting tests to
predict the durability and overall operating lives of our products, we will not
have tested or evaluated our technologies over their projected useful lives
prior to commercialization. Our success will depend upon our products and
technologies meeting acceptable cost and performance criteria, and upon their
timely introduction into the marketplace.
Failure of our field trials could negatively affect demand for our products
We are currently conducting laboratory tests and trials of our fuel
processors and our fuel cell stacks at our facilities, at our customers'
facilities and in the field. We plan to conduct additional laboratory tests and
field trials in the future. We do not plan, however, to conduct field trials of
our power modules or our integrated fuel cell systems until 2001. We may
encounter problems and delays during these laboratory tests and field trials
for a number of reasons, including the failure of our technology or the
technology of third parties. Many of these potential problems and delays are
beyond our control. Any problem or perceived problem with our field trials
could materially harm our reputation and impair market acceptance of, and
demand for, our products, which would substantially harm our business,
financial condition and ability to achieve profitability.
We have no experience manufacturing our products on a commercial basis
To date, we have focused primarily on research and development and have no
experience manufacturing fuel processors, fuel cell stacks, power modules or
integrated fuel cell systems on a commercial basis. We do not know whether or
when we will be able to develop efficient, low-cost manufacturing capabilities
and processes that will enable us to meet the quality, price, engineering,
design and production standards or production volumes required to successfully
market our products. 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 in our various target markets, or to
satisfy the requirements of our distributors or customers. Our failure to
develop these manufacturing capabilities and processes could have a material
adverse effect on our business and financial results.
Based on our commercialization plan, we anticipate that our existing
production facilities will provide sufficient manufacturing and assembly
capacity through 2002, and that we will need to develop joint ventures or
develop additional large-scale manufacturing capacity in order to achieve mass
market production by 2003. If we do not locate suitable joint venture
manufacturing partners, we will need to incur substantial capital expenses to
build or otherwise develop large-scale manufacturing capacity. To the extent
any joint venture manufacturing relationships that we establish are exclusive
in nature, we may be unable to enter into other arrangements at a time when the
manufacturer with which we form a relationship is not successful in
manufacturing our products or has reduced its commitment to manufacturing our
products. Our failure to develop manufacturing or similar joint ventures or
additional large-scale manufacturing capacity will likely adversely affect our
product commercialization plans and, therefore, materially and adversely affect
our business and financial results.
We expect the production costs of our initial stationary commercial
products to be higher than their sales price. As a result, we believe that we
will need to reduce the unit production cost of our products over time to
maintain our ability to offer our products in a cost-effective manner on a
large commercial scale. Our ability to achieve cost
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reductions will depend on manufacturing process and engineering design
enhancements; the degree to which some of these enhancements can be attained is
not currently ascertainable. Our ability to achieve cost reductions will also
depend on entering into suitable manufacturing and distribution relationships,
as well as increasing sales volumes so we can achieve economies of scale. A
failure by us to achieve a lower cost structure through economies of scale and
improvements in the manufacturing process and engineering design would have a
material adverse effect on our business and financial results. There can be no
assurance that we will obtain higher production levels or that sales prices will
ever exceed our production costs.
We may not be able to establish strategic marketing and distribution
relationships
We are in the early stages of developing our marketing and distribution
network. In order to expand our customer base in our target markets, we believe
that we must enter into strategic marketing or distribution alliances or
similar collaborative relationships, in which we ally ourselves with companies
that have particular expertise in, or more extensive access to, the end users
in these markets. For example, since our strategy in the European and Japanese
residential markets calls for the provision of combined heat and power
applications, it will be essential for us to establish relationships with
manufacturers of furnaces, water heaters and boilers in order to integrate our
power modules with their cogeneration technologies and distribute our combined
co-branded products to homes. Similarly, we believe a critical prerequisite to
entry into the transportation market will be the establishment of joint
ventures or similar relationships with one or more vehicle manufacturers or
their suppliers.
To date, we have not formalized any marketing or distribution
relationships. We may not be able to identify or establish appropriate
marketing or distribution relationships on a timely basis. Even if we enter
into these types of relationships, we cannot assure you that the distributors
with which we form relationships will focus adequate resources on selling our
products or will be successful in selling them. In addition, we cannot assure
you that we will be able to finalize collaborative relationships on favorable
terms, and providing volume price discounts and other allowances along with
significant costs incurred in customizing our products may reduce the potential
profitability of these relationships. To the extent any distribution
relationships that we establish are exclusive in nature, we may be unable to
enter into other arrangements at a time when the distributor with which we form
a relationship is not successful in selling our products or has reduced its
commitment to marketing our products. Failure to develop sufficient
distribution and marketing relationships in our target markets will adversely
affect our commercialization schedule. Further, to the extent we enter into
these relationships, the failure of our distributors and other third parties in
assisting us with the marketing and distribution of our products may adversely
affect our financial condition and results of operations.
We depend upon third party suppliers for the development and supply of key
components for our products
We purchase several key components of our products from other companies. 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
technical specifications, or our inability to obtain alternative sources of
these components on a timely basis or on terms acceptable to us, could harm our
ability to manufacture our products. 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 do not know when or whether we will secure long-term supply
relationships with suppliers of all required components and subsystems for our
integrated fuel cell systems, or whether such relationships will be on terms
that will allow us to achieve our objectives. In addition, there are limited
suppliers for some of the key components of our products. 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 products.
We face intense competition and may be unable to compete successfully
There are many companies engaged in all areas of traditional and
alternative electric power generation in the United States, Canada, Europe and
Asia, including, among others, major electric, oil, chemical, natural gas,
automotive and specialized electronics firms, as well as universities, research
institutions and government-sponsored
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companies. These entities are engaged in developing commercial forms of
alternative power generation such as solar and wind power, low-emission
reciprocating diesel engines and microturbines as well as grid-supplied
electricity.
There are also a number of companies and other entities located in the
United States, Canada, Europe and Asia that are developing fuel processors,
fuel cell stacks utilizing PEM fuel cell technology and integrated fuel cell
systems. We also compete with companies that are developing applications,
stationary, transportation and otherwise, using other types of fuel cell
technologies, such as solid oxide and molten carbonate. These entities may have
the research, manufacturing, marketing and sales capabilities to complete
development and commercialization of commercially viable fuel cell products
more quickly and effectively than we can.
Many of our competitors have substantially greater financial, research and
development, manufacturing, marketing and human resources, established
relationships with original equipment manufacturers, name-brand recognition and
established positions in the markets that we have targeted for penetration.
Our stockholders AD Little and De Nora may compete with us by developing
non-PEM fuel cell technologies prior to 2004 and in the PEM fuel cell market
thereafter
Under the investment and exchange agreement relating to the merger, with
some exceptions, AD Little and De Nora, two of our stockholders, have agreed to
not compete with us in reformate fueled direct hydrogen or direct
methanol-fueled PEM fuel cell systems until April 2004. In connection with the
merger, we agreed to license non- exclusively to AD Little until 2010 various
intellectual property rights pertaining to gas-to-liquids fuel processing and
fuel conversion for internal combustion engines. Accordingly, after April 2004,
it is possible that AD Little and De Nora may compete with us in the
development of PEM fuel cell systems.
The investment and exchange agreement does not restrict AD Little or De
Nora from competing with us in the development of alternative power generation
technologies other than PEM fuel cell technology. For example, AD Little is
currently involved in technology consulting for clients in various technologies,
including solid oxide fuel cell, microturbine and photo-voltaic technologies. In
some instances, this work involves AD Little scientists who also participated in
the early-stage development of our fuel processor technology. AD Little's
principal business is consulting in the area of technology product research and
development for commercial and governmental clients worldwide. In light of the
current businesses conducted by AD Little, De Nora and their respective
affiliates, and the license that we granted to AD Little, it is possible that AD
Little, De Nora or their affiliates may compete with us in the development of
alternative power generation technologies other than PEM fuel cell technologies
both before and after April 2004. In addition, Amerada Hess, one of our other
stockholders, is not restricted from competing with us in any fuel cell
technology or distributed generation market.
We cannot guarantee you that AD Little, De Nora, Amerada Hess or their
respective affiliates will not compete with us and, to the extent that any of
them are successful, that such competition will not materially adversely affect
our business, prospects, financial condition or 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 in both Cambridge and Milan and the scope of our operations.
For example, we began with 80 employees in April 2000 and expect to have
approximately 165 by the end of 2000. Our business, prospects, results of
operations or financial condition may be harmed if we encounter difficulties in
effectively managing the budgeting, forecasting and other process control
issues presented by such a rapid expansion. If we are successful in achieving
market penetration of our products, we are likely to experience a significant
strain on our management, operational and technical resources. We may have
difficulty coordinating our Cambridge and Milan operations and managing the
distribution challenges associated with producing our fuel cell stacks in Milan
and shipping them to Cambridge for integration with our fuel processors. Our
failure to manage our growth effectively would have a material adverse effect
on our business, financial condition and ability to achieve or sustain
profitability.
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We may not be able to sell our products if they are not compatible with the
products of third-party manufacturers or our potential customers
Our success will depend upon our ability to make our products compatible
with the products of third-party manufacturers, such as vehicle manufacturers
or their suppliers, and the ability of these manufacturers to sell their
products containing our fuel cell components or power modules. In addition,
some of our products will be successful only if our potential customers
redesign or modify their existing products to fully incorporate our products
and technologies. Our failure to make our products and technologies compatible
with the products of third-party manufacturers or the failure of potential
customers to redesign or make necessary modifications to their existing
products to accommodate our products would significantly impair or preclude our
ability to sell our products. We cannot predict with any degree of certainty
whether we will be able to make our products compatible with the products of
third-party manufacturers to create a sufficient market for our products.
Furthermore, we cannot assure you that third-party manufacturers will be able
to market their products containing our components or power modules
successfully, or that they will not alter their acceptance of our fuel cell
technologies in favor of other energy product solutions. Any integration,
design, manufacturing or marketing problems encountered by third-party
manufacturers or customers that will integrate our products could also
adversely affect the market for our products and our financial results.
Our failure to protect our intellectual property could adversely affect our
future growth and success
PEM fuel cell technologies were first developed in the 1950s and we do not
believe we can achieve a significant proprietary position on the basic
technologies used in integrated fuel cell systems. Similarly, fuel processor
technology has been practiced on a large scale in the petrochemical industry for
decades. Nonetheless, our ability to compete effectively against other companies
will depend, in part, on our ability to protect our proprietary technologies,
product designs and manufacturing processes through a combination of patent and
trade secret protection, non-disclosure agreements and other arrangements. We do
not know whether any of our pending patent applications will be granted or, in
the case of patents issued or to be issued, that the claims allowed are or will
be sufficiently broad to protect our technologies or processes. Moreover, patent
applications filed in foreign countries are subject to laws, rules and
procedures that differ from those of the United States and any resulting patents
may be difficult to enforce.
There can be no assurance that our competitors will not either
independently develop proprietary information that is the same or similar to
ours or obtain access to our proprietary information. In addition, there can be
no assurance that we would prevail if third parties assert challenges to our
intellectual property rights. We could incur substantial costs defending patent
infringement suits brought by others and prosecuting patent infringement suits
against third parties. 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 products. Moreover, some
foreign countries provide significantly less patent protection than the United
States. Competitors' products may infringe upon our patents and the cost of
protecting our rights may be substantial, if not cost prohibitive, thereby
undermining our ability to protect our technologies effectively.
We rely, in part, on contractual provisions with our employees and third
parties to protect our unpatented information, know-how and trade secrets.
These agreements may be breached, for example, through reverse engineering, 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, thereby harming our business prospects.
While we are not currently engaged in any material intellectual property
litigation, we could become subject to lawsuits in which it is alleged that we
have infringed the intellectual property rights of others or commence lawsuits
against others who we believe are infringing upon our rights. Our involvement
in intellectual property litigation could result in significant expense to us,
adversely affecting the development of sales of the challenged product or
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intellectual property and diverting the efforts of our technical and management
personnel, whether or not such litigation is resolved in our favor.
We have historically relied on government contracts to fund research and
development, and failure to receive funds allocated under these contracts may
limit our ability to reach the commercialization stage
Government research and development contracts historically have been our
single most important source of cash flow. On a pro forma basis, in the first
six months of 2000, approximately 42% of our research and development costs were
offset by government funding. In 1999, approximately 43% of the research and
development costs of De Nora Fuel Cells S.p.A. and approximately 87% of the
research and development costs of Epyx Corporation were offset by government
funding.
Generally, our government research and development contracts are subject
to the risk of termination at the convenience of the contracting agency.
Furthermore, these contracts, irrespective of the amounts allocated by the
contracting agency, are subject to periodic appropriations and the results of
government or agency sponsored audits of our cost reduction efforts and our
cost projections. We can only receive funds under these contracts, ultimately
made available to us periodically, as a result of governmental appropriations
processes. Accordingly, we cannot be sure that we will receive the full amounts
allocated under our research and development contracts. We also cannot be sure
that we will be able to finance or otherwise meet the cost sharing requirements
of these contracts, which are conditions to receiving any amounts allocated
under these contracts. Failure to receive the full amounts allocated under any
of our existing government research and development contracts could materially
adversely affect our commercialization plans and, therefore, our business,
prospects, results of operations and financial condition.
Our government contracts could restrict our ability to commercialize our
technology
Under some of our U.S. research and development contracts, U.S. government
agencies can require us to obtain or produce components for our products from
sources located in the United States rather than foreign countries. Our U.S.
research and development 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. In addition, these "march-in" rights permit the United
States government to take title to these patents and license the patented
technology to third parties if the contractor fails to utilize the patents.
Pursuant to our research and development contracts funded by the European
Union, the Joint Research Centre of the European Union is granted a
non-exclusive, royalty-free license and right to access and use certain
information generated under such contracts. The implementation of restrictions
on our sourcing of components, the exercise of march-in rights or the use of
information derived from our contracts with the European Union could materially
harm our business, prospects, results of operations or financial condition.
We depend entirely upon vehicle manufacturers to purchase our products for
transportation applications
The sole market for the transportation applications of our products is and
will continue to be car, bus and other vehicle manufacturers. We cannot
guarantee that those manufacturers which have expressed interest in or
conducted demonstrations of our products will ultimately place commercial
orders for our transportation products. Each of these manufacturers has a
strong investment in and commitment to the use of the internal combustion
engine, and some have invested in alternative technologies that may compete
with our products. The failure of car, bus and other vehicle manufacturers to
use our fuel cell technologies in their vehicles would have a material adverse
effect on our business and financial results.
The development of automobile models is a lengthy process. Based on
discussions with automobile manufacturers, we anticipate that there will be a
delay of at least three years between a decision by an automobile manufacturer
to produce commercial vehicles powered by our fuel cell technologies and the
actual production of such vehicles. The length of the decision-making process
and the success of our commercialization plans will affect
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any demand for our transportation products by automobile manufacturers and,
consequently, our financial position, results of operations and cash flows.
We could be liable for environmental damages resulting from our research,
development or manufacturing operations
Our business exposes us to the risk of harmful substances escaping into
the environment, resulting in potential personal injury or loss of life, damage
to or destruction of property, and natural resource damage. Depending on the
nature of the claim, our current insurance policies may not adequately
reimburse us for costs incurred in settling environmental damage claims, and in
some instances, we may not be reimbursed at all. Our business is subject to
numerous international, federal, state and local laws and regulations that
govern environmental protection and human health and safety. These laws and
regulations have changed frequently in the past and it is reasonable to expect
additional and more stringent changes in the future. Our operations may not
comply with future laws and regulations and we may be required to make
significant unanticipated capital and operating expenditures. If we fail to
comply with applicable environmental laws and regulations, governmental
authorities may seek to impose fines and penalties on us or to revoke or deny
the issuance or renewal of operating permits and private parties may seek
damages from us. Under those circumstances, we might be required to curtail or
cease operations, conduct site remediation or other corrective action, or pay
substantial damage claims.
Our future plans could be harmed if we are unable to attract or retain key
personnel
We have attracted a specialized workforce, including scientists, engineers
and researchers. 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, sales and marketing and technical personnel
and establishing and maintaining relationships with outside contractors. We do
not know whether we will be successful in hiring or retaining qualified
personnel, including a chief executive officer and a chief financial officer.
We cannot assure you that the expense of this internal expansion will not
exceed the net revenues generated. Since new management team members will not
have a proven track record with us, we cannot assure you that they will be
successful in overseeing their functional areas. We cannot guarantee that our
sales and marketing team will successfully compete against the more extensive
and well-funded sales and marketing operations of our current and future
competitors. Our inability to hire qualified personnel on a timely basis, or
the departure of key employees, including Jeffrey Bentley, Michele Tettamanti,
William Mitchell, James Calvin Cross III and Antonio Maggiore could harm our
business and our expansion and commercialization plans. We do not have
employment agreements with any of our key employees.
We may be unable to obtain the additional capital needed to operate and grow
our business, thereby requiring us to curtail or cease operations
We will continue to have significant capital requirements in connection
with our development activities and transition to commercial operations. In
addition to the proceeds from this offering, we will require substantial
additional funds to continue the research, development and testing of our
technologies and products, to obtain patent protection relating to our
technologies when appropriate and to manufacture and market our products. Except
for the line of credit available to Nuvera Fuel Cells Europe S.r.l., or Nuvera
Europe, we have no current arrangements with respect to any additional
financing. The commitment of our stockholders to contribute up to $30 million of
capital will terminate upon completion of this offering if the proceeds of this
offering to Nuvera exceed $30 million. Consequently, there is no assurance that
any additional financing will be available on commercially attractive terms, in
a timely fashion, in sufficient amounts, or at all. We may have to issue stock
to obtain financing, which may dilute your investment. If adequate funds are not
available, we may have to scale back our operations, including our product
development, manufacturing, marketing and distribution activities, all of which
could cause us to lose both customers and market share to the extent we achieve
it and ultimately cease operations.
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We are subject to risks inherent in international operations
Since we plan to market our products and technologies both inside and
outside the United States, we will be subject to the risks inherent in
international operations. We have limited experience developing and
manufacturing our products to comply with the commercial and legal requirements
of international markets. We also may be subject to tariff regulations,
non-tariff trade barriers and requirements for export licenses, particularly
with respect to the export of certain technologies. We face numerous challenges
in international markets, including unexpected changes in regulatory
requirements (including increases in duty rates), fluctuations in currency
exchange rates, longer accounts receivable requirements and collections,
difficulties in managing international operations and establishing
international distribution channels, potentially adverse tax consequences,
restrictions on repatriation of earnings and the burdens of complying with a
wide variety of foreign laws. We currently do not intend to enter into any
hedging or other similar agreements or arrangements to protect us against any
currency risks.
Any acquisitions we make could disrupt our business and harm our financial
condition
Although we are not currently negotiating any acquisitions, as part of our
growth strategy, we may review opportunities to acquire other businesses or
technologies that would complement our products, expand the breadth of our
target markets or enhance our technical capabilities. Acquisitions entail a
number of risks that could materially and adversely affect our business and
operating results, including:
o problems integrating the acquired operations, technologies or
products with our existing business and products;
o constraints arising from increased expenses and working capital
requirements;
o constraints on our ability to incur additional debt;
o dilution of our stock if we issue additional securities;
o disruption of our ongoing business, diversion of capital and
distraction of our management;
o difficulties in retaining business relationships with suppliers and
customers of the acquired companies;
o difficulties in coordinating and integrating overall business
strategies, sales and marketing and research and development efforts;
o potential liabilities of businesses and facilities acquired;
o difficulties in maintaining corporate cultures, controls, procedures
and policies;
o difficulties evaluating risks associated with entering markets in
which we lack prior experience; and
o potential loss of key employees.
RISKS RELATING TO THE FUEL CELL INDUSTRY
Market acceptance for fuel cell technologies may never develop or may take
longer to develop than we anticipate
Fuel cell technologies represent an emerging market, and we do not know
whether potential distributors will want to purchase products using these
technologies or whether potential end-users will want to use them. Because we
and our competitors are designing products to capitalize on markets that
currently utilize or are serviced by products from traditional and
well-established power generation sources, such as the existing electric grid,
engine generators and internal combustion engines, we and our competitors may
face significant resistance from end users
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to adopt a new and alternative power source technology. 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 products and may be
unable to achieve profitability. The development of a mass market for our
products may be affected by many factors that are out of our control, including:
o the price of competitive products;
o the future costs of gasoline, ethanol, methanol, natural gas,
kerosene, propane, butane, home heating oil, diesel, hydrogen and
other fuels used by fuel processors and fuel cell stacks;
o consumer reluctance to try new products;
o industry standards;
o consumer perceptions of the safety and performance of these products;
and
o regulatory requirements.
Due to these and other factors, we cannot predict with any degree of
certainty what our revenues and profitability, if any, will be in future
periods. If we do achieve future profitability, we cannot be certain that we
can sustain or increase profitability on a quarterly or annual basis in the
future. If we fail to do so, our common stock price could suffer.
Alternatives to fuel cell technologies could render our products uncompetitive
or obsolete
PEM fuel cell technology is one of a number of alternative energy products
being developed today as a supplement to or replacement for the electric grid
and internal combustion engine, including microturbines, solar power and wind
power. Other types of fuel cell technologies are being actively pursued by a
number of companies, and the technologies of choice for fuel cell stacks and
processors have not yet been identified by customers. Improvements are also
being made to the existing electric grid and internal combustion engine.
Technological advances in alternative energy products, improvements in the
electric grid or internal combustion engine or other fuel cell technologies may
render our products uncompetitive or obsolete prior to commercialization or
afterwards. Accordingly, if we are unable, for technical, legal, financial or
other reasons, to adapt in a timely manner to changing market conditions or user
requirements, our business, financial condition and results of operations could
be seriously harmed.
For example, it is possible to meet the vehicle emission requirements
imposed by California and certain U.S. northeastern states, discussed below, by
using technologies other than PEM fuel cell technologies. Vehicles powered by
batteries can receive full credit and vehicles powered by certain low emission
internal combustion engines and hybrid vehicles which combine internal
combustion or micro-turbine engines with batteries can receive partial credit
toward the zero emission vehicle component of some of these laws. We can offer
no assurance that automobile manufacturers will use fuel cell technologies in
their vehicles to meet regulatory requirements as opposed to other available
alternatives. Their failure to do so could have a material adverse effect on our
business and financial results.
Changes in government laws and regulations and electric utility industry
restructuring may adversely affect demand for, or the viability of, products
using fuel cell technologies
The market for electricity generation products is heavily influenced by
federal and state governmental regulations and policies concerning the electric
utility industry. Changes in current regulatory standards could deter further
investment in the research and development of alternative energy sources,
including fuel cell technologies, and could result in a significant reduction
in the potential market demand for products using fuel cell technologies. We
cannot predict how the deregulation and restructuring of the electric and
natural gas industry will affect the market for our products.
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For example, electric 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 backup purposes. Though
these fees are not currently charged to residential customers, in connection
with electric utility restructuring, it is possible that electric utility
companies could charge similar fees to residential customers in the future. The
imposition of these fees could increase the cost to customers of using
residential fuel cell products and could make our residential products less
attractive, thereby harming our revenue and profitability.
To date, the interest by automobile manufacturers in PEM fuel cell
technology has been driven in large part by environmental laws and regulations,
mainly in California, under the California Low-Emission Vehicle Program, or CA
LEV program, and, to a lesser extent, certain U.S. northeastern states. These
laws and regulations set forth vehicle emission limitations and some of them
require the manufacture and sale of "zero emission vehicles." Certain of these
laws and regulations have been challenged and may continue to be challenged in
the future. As a result of these challenges, these laws and regulations have
changed, and there can be no guarantee that these laws and regulations will not
change in the future. Changes in these laws and regulations could result in the
application of currently existing federal or other laws and regulations that
limit vehicular emissions, but do not require the manufacture of zero emission
vehicles which, in turn, could result in automobile manufacturers abandoning
their interest in PEM fuel cell-powered vehicles. In addition, if current laws
and regulations in California and certain of the U.S. northeastern states are
not kept in force or if further environmental laws and regulations are not
adopted in these jurisdictions as well as in other jurisdictions, demand for
vehicular PEM fuel cell technologies may be limited.
Under those laws and regulations requiring the manufacture and sale of
"zero emission vehicles," manufacturers may satisfy the "zero emission vehicles"
requirement in part through the sale of certain forms of "super ultra-low
emission vehicles." We are designing our transportation fuel processors to meet
the super ultra-low emission vehicle, or SULEV, standards of the CA LEV program
and similar standards of certain of the U.S. northeastern states as they are
enacted at the time of design. If these laws and regulations change, however,
there can be no guarantee that our products will meet the requirements of these
laws and regulations at the time we intend to bring these products to market or
any other time in the future.
Our business may become subject to future government regulation that may
adversely affect our ability to sell our stationary products
Our stationary products may be subject to existing federal, state and local
regulations governing electric and gas utilities and other entities. Our
residential products and the installation of these products will likely be
subject to oversight and regulation at the local level in accordance with state
and local ordinances relating to pipeline connections, building codes and other
safety related matters. Any government regulation may depend, in part, upon
whether an integrated fuel cell system is placed outside or inside a home or
business.
At this time, we do not know which jurisdictions, if any, will impose
regulations upon our products or the installation of our products. We also do
not know the extent to which any existing or new regulations may adversely
affect our ability to sell our products. Once our products reach the
commercialization stage and we begin distributing them to our early target
markets, federal, state or local government entities or competitors may seek to
impose regulations. Any new government regulation of our products, whether at
the federal, state or local level, including any regulations relating to the
installation and servicing of our products, may increase our costs and the
price of our products, and may have a negative effect on our revenue and
profitability, and therefore harm our business, prospects, results of
operations or financial condition.
Our products use flammable fuels which are inherently dangerous substances
Our fuel cell products use hydrogen, natural gas and propane, which are
flammable fuels that could leak and combust if ignited by another source. These
dangers are present in any home appliance that uses similar fuels, such as a
gas furnace, stove or dryer and in automobiles which operate on gasoline,
propane and natural gas. Any accidents involving our products or other products
using similar flammable fuels could materially suppress demand for, or heighten
regulatory scrutiny of, our products. We may also be exposed to product
liability or other tort claims arising from a malfunction or the inadequate
design of our products. Since our products use flammable fuels
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that are inherently dangerous substances, accidents involving our products could
lead to personal injury or physical damage. Although we attempt to reduce the
risk of these types of losses through liability limitation clauses in our
agreements and insurance coverage, we cannot assure you that our efforts will
effectively limit our liability or that we will not be held responsible for
damages beyond the scope of our insurance coverage. Any liability for damages
resulting from malfunctions or design defects could be substantial and could
materially adversely affect our business and results of operations. In addition,
a well-publicized actual or perceived problem could adversely affect the
market's perception of our products resulting in a decline in demand for our
products and could divert the attention of our management, which may materially
adversely affect our financial condition and results of operations.
RISKS RELATING TO THE OFFERING
Our quarterly operating results are likely to be volatile in the future
Because we are in the early stages of selling our products, with
relatively few customers, we expect our order flow to continue to be uneven
from period to period. Because a significant portion of our expenses are fixed,
a small variation in the timing of recognition of revenue can cause significant
variations in operating results from quarter to quarter. As a result, quarter
to quarter comparisons of our revenues and operating results may not be
meaningful. In addition, given the current stage of development of our products
and the uncertainty of market acceptance of our products, we cannot predict our
future revenues or results of operations accurately. It is likely that in one
or more future quarters our operating results will fall below the expectations
of securities analysts and investors. If this happens, the trading price of our
common stock may be materially and adversely affected.
Our common stock price is likely to be volatile
The market price for our common stock is likely to be as volatile as the
stock market in general and the market for technology-related stocks, including
the stock of our competitors, which has been volatile. The market has
experienced significant price and volume fluctuations that are often unrelated
to the operating performance of particular companies. In addition,
announcements of technological innovations or new competing technologies by our
competitors, investor perception of our industry or our prospects, as well as
our failure to meet the expectations of securities analysts or investors, may
have a significant effect on the market price of our common stock.
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 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.
We will be controlled by our significant stockholders as long as they own a
majority of our common stock, which may lead to conflicts of interest
Upon the completion of this offering, Arthur D. Little, Inc., De Nora New
Energy Investments B.V. and Amerada Hess Corporation will retain approximately
% of our outstanding common stock. These stockholders will have the ability to
exert significant influence over our board of directors and its policies as
long as they own a majority of our common stock. For instance, these
stockholders will be able to control the outcome of all stockholder votes,
including votes concerning director elections, charter and bylaw amendments and
possible mergers, corporate control contests and other significant corporate
transactions.
Conflicts of interest may arise between us and AD Little and De Nora in a
number of areas relating to our past and ongoing relationships as a result of
the merger in April 2000 and AD Little's and De Nora's continued controlling
interest in us. These may include:
o the cost and quality of the substantial services rendered by AD
Little, De Nora and affiliates of De Nora to us under various services
and lease agreements with AD Little, De Nora and affiliates of De
Nora;
17
<PAGE>
o disputes over AD Little's and De Nora's respective indemnification or
other continuing obligations under the investment and exchange
agreement effecting the merger and other agreements; and
o disputes with respect to intellectual property rights assigned or
licensed under various agreements in connection with the merger.
Because of these ongoing relationships, it is possible that the decisions
concerning the operation or interpretation of these agreements could be made
from perspectives other than solely from our interests. We may not be able to
resolve any potential conflicts, and even if we do, the resolution may be less
favorable than if we were dealing with an unaffiliated party.
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 we expect that 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.
Provisions of Delaware law and of our charter and bylaws may make a takeover
more difficult
Provisions in our certificate of incorporation and bylaws 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
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.
In addition, upon completion of this offering, our board of directors will
have the authority to issue shares of preferred stock and to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by you. Your rights
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock.
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 shares of common stock
outstanding. Of these shares, the shares sold in this offering will be freely
tradeable. All the remaining shares are subject to 180-day lock-up agreements.
Up to shares may be available for sale in the public market 180 days after the
date of this prospectus, subject to compliance with Rule 144 under the
Securities Act.
Certain of our stockholders have the right to include 1,049,916 shares of
our common stock in any registration of common stock made by Nuvera for its own
account or for the account of other stockholders of Nuvera. In addition, after
this offering, we also intend to register 176,124 shares of common stock for
issuance under our 2000 stock incentive plan. As of , options to purchase
shares of common stock were issued and outstanding under the 2000 stock
incentive plan, none of which have vested.
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.
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<PAGE>
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.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," contains forward-looking
statements. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms or other comparable terminology. These statements are only
predictions and may be inaccurate. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks outlined under "Risk Factors." These
factors may cause our actual results to differ materially from any
forward-looking statement. Although we believe that the expectations reflected
in the forward- looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither we
nor any other person assumes responsibility for the accuracy and completeness
of such statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such statements to
actual results.
20
<PAGE>
USE OF PROCEEDS
We will receive net proceeds from this offering of about $ million, or
about $ million if the over- allotment options are exercised in full. We
intend to use these net proceeds for working capital and capital expenditures
and general corporate purposes, including funding our operations and acquiring
capital equipment. 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 cash dividends on our common stock. We
intend to retain our future earnings, if any, to finance the operation and
expansion of our business. Accordingly, we do not anticipate paying any cash
dividends on our common stock in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our total capitalization at June 30, 2000
and as adjusted to reflect the sale by us of shares of common stock pursuant
to this offering, after deducting the estimated underwriting discounts and
commissions and the estimated offering expenses that we expect to pay. You
should read this table together with our consolidated financial statements and
the notes thereto appearing elsewhere in this prospectus.
As of June 30, 2000
-------------------------
Actual As Adjusted
------ -----------
Stockholders' equity:
Common Stock, $.01 par value per share,
2,000,000 shares authorized, actual;
1,000,000 shares issued and outstanding,
actual; shares authorized,
as adjusted; shares issued and
outstanding, as adjusted............................. $ 10 $
Additional paid-in capital........................... 86,096
Accumulated other comprehensive income (loss)........ 82
Deficit accumulated during the development stage..... (31,763)
------- -------
Total stockholders' equity......................... $54,425 $
------- -------
Total capitalization............................. $54,425 $
======= =======
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<PAGE>
DILUTION
Our net tangible book value as of June 30, 2000 was approximately $54.4
million or $54.43 per share of common stock. Net tangible book value per share
is determined by dividing our tangible net worth, total assets less total
liabilities, by the aggregate number of shares of common stock outstanding at
that date. After giving effect to the sale by us of the shares of common
stock in this offering, at an assumed initial public offering price of $
per share, the midpoint of the range set forth on the cover page of this
prospectus, and the receipt and application of the net proceeds, our pro forma
net tangible book value as of June 30, 2000 would have been $ , or $
per share of common stock. This represents an immediate increase in net tangible
book value to existing stockholders of $ per share and an immediate
dilution to new investors of $ per share. The following table illustrates
this share dilution:
Assumed initial public offering price per share..........................$
Net tangible book value per share as of June 30, 2000.................$54.43
Increase in net tangible book value per share attributable
to new investors....................................................
------
Pro forma net tangible book value per share after this offering.......
------
Dilution per share to new investors......................................$
======
Dilution is determined by subtracting net tangible book value per share
after the offering from the initial public offering price per share.
The following table sets forth as of June 30, 2000, the number of shares
of common stock purchased from us, the total consideration paid, or to be paid,
and the average price per share paid, or to be paid, by existing stockholders
and by the new investors purchasing shares in this offering. We have assumed an
initial public offering price of $ per share, the midpoint of the range set
forth on the cover page of this prospectus, and we have not deducted estimated
underwriting discounts and commissions and offering expenses in our
calculation:
<TABLE>
Shares Purchased Total Consideration
------------------- ------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 1,000,000 % $ % $
New investors...............
Total...................... 100% $ 100% $
</TABLE>
The foregoing tables assume no exercise of the underwriters'
over-allotment options or of outstanding stock options after June 30, 2000. At
June 30, 2000, shares of common stock were subject to outstanding options
under our 2000 stock incentive plan, at a weighted average exercise price of
$ per share. To the extent these options are exercised, there will be
further dilution to new investors.
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<PAGE>
SELECTED FINANCIAL DATA
You should read the selected historical financial data of Nuvera Fuel
Cells, Inc. and subsidiary (a development stage company) set forth below in
conjunction with our consolidated financial statements and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
The statement of operations data for the years ended December 31, 1997,
1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 are
derived from the audited consolidated financial statements and notes thereto of
Nuvera Fuel Cells, Inc. and subsidiary (a development stage company) included
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 1995 and 1996 and the balance sheet data as of December 31,
1995, 1996 and 1997 are derived from our unaudited financial statements not
included in this prospectus. The statement of operations data for the six months
ended June 30, 1999 and 2000 and the balance sheet data as of June 30, 2000 are
derived from the unaudited financial statements and notes thereto of Nuvera Fuel
Cells, Inc. and subsidiary (a development stage company) included elsewhere in
this prospectus. The unaudited financial statements, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, which we consider necessary for a fair presentation of our results
of operations and financial position as of the end of and for such periods.
Historical results are not necessarily indicative of the results that may occur
in the future, and interim results are not necessarily indicative of the results
that may be expected for any other interim period or a full year.
As described in note 2 of the notes to our consolidated financial
statements included elsewhere in this prospectus, the merger of De Nora Fuel
Cells S.p.A. and Epyx Corporation has been accounted for under the purchase
method of accounting and was treated as a reverse acquisition because the
stockholder of De Nora Fuel Cells S.p.A. received the controlling interest in
the combined enterprise. Therefore, De Nora Fuel Cells S.p.A. was considered
the acquiror for accounting purposes and recorded Epyx's assets and liabilities
based upon their fair values at the date of acquisition. Upon consummation of
the merger, approximately $71.6 million was allocated to developed technology,
in-process research and development, assembled workforce, patents, deferred
income taxes and goodwill. Upon consummation of the merger, the in-process
research and development in the amount of $20.3 million was expensed and is
reflected in our unaudited consolidated statement of operations for the six
months ended June 30, 2000. Our statement of operations for the six months
ended June 30, 2000 also includes $2.2 million for amortization of the
developed technology, assembled workforce, patents and goodwill over estimated
useful lives of six, four, five and seven years, respectively.
Since the transaction has been accounted for as a reverse acquisition, the
selected financial data set forth below for all periods prior to the merger on
April 4, 2000 represents the financial position and results of operations of De
Nora Fuel Cells S.p.A. The selected financial data set forth below for periods
subsequent to April 4, 2000 includes the financial position and results of
operations of both De Nora Fuel Cells S.p.A. and Epyx. Accordingly, the selected
financial data for the six months ended June 30, 2000 is not comparable to the
selected financial data for the six months ended June 30, 1999 or to the years
ended December 31, 1995 through 1999.
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<PAGE>
<TABLE>
Year Ended December 31, Six Months Ended June 30,
-------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Sales and contracts........... $ -- $ -- $ -- $ -- $ 574 $ 360 $ 780
Lease......................... 203 203 350 284 95 7 62
-------- -------- -------- -------- -------- -------- --------
Total revenues............ 203 203 350 284 669 367 842
-------- -------- -------- -------- -------- -------- --------
Cost of revenues
Sales and contracts........... -- -- -- -- 216 158 1,235
Lease......................... 30 30 106 178 86 43 33
-------- -------- -------- -------- -------- -------- --------
Total cost of revenues.... 30 30 106 178 302 201 1,268
-------- -------- -------- -------- -------- -------- --------
In-process research and
development.................. -- -- -- -- -- -- 20,300
Research and development
expense, net................. 180 189 1,119 1,988 1,004 612 1,674
Selling, general and
administrative expense....... 125 324 465 403 644 231 2,995
-------- -------- -------- -------- -------- -------- --------
Loss from operations...... (132) (340) (1,340) (2,285) (1,281) (677) (25,395)
Interest expense............... -- -- -- -- 2 -- 20
Other (income) expense, net.... -- -- -- -- 7 -- 28
-------- -------- -------- -------- -------- -------- --------
Loss before income tax benefit. $ (132) $ (340) $ (1,340) $ (2,285) $ (1,290) $ (677) (25,443)
Income tax benefit............. -- -- -- -- -- -- 1,274
-------- -------- -------- -------- -------- -------- --------
Net loss....................... $ (132) $ (340) $ (1,340) $ (2,285) $ (1,290) $ (677) $(24,169)
======== ======== ======== ======== ======== ======== ========
Net loss per common share -
basic and diluted............ $ (0.26) $ (0.68) $ (2.68) $ (4.57) $ (2.58) $ (1.35) $ (32.53)
======== ======== ======== ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
common share................. 500,000 500,000 500,000 500,000 500,000 500,000 743,094
</TABLE>
<TABLE>
As of December 31, As of June 30,
----------------------------------------------------------- --------------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- ------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $ -- $ -- $ -- $ -- $ 19 $ 2,177
Total assets............................ 493 572 1,031 2,158 2,340 62,400
Working capital (deficiency)............ (1,189) (1,579) (2,762) (5,280) 183 3,508
Due from stockholder.................... -- -- -- -- -- 939
Due to stockholder...................... 1,241 625 2,185 5,248 -- --
Notes payable - stockholder............. -- -- -- -- 545 --
Total non-current liabilities........... 123 161 174 201 207 4,193
Total stockholders' equity (deficit).... (1,050) (1,431) (2,542) (5,104) 282 54,425
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated 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 elsewhere in this
prospectus.
Overview
Our Formation
We were formed in April 2000 through the merger of De Nora Fuel Cells
S.p.A. and Epyx Corporation. We design and develop fuel processors, proton
exchange membrane, or PEM, fuel cell stacks and integrated fuel cell systems
for stationary and transportation applications.
Under the terms of the merger, the stockholder of De Nora Fuel Cells S.p.A.
received 50% of the capital stock of Epyx in exchange for 100% of the capital
stock of De Nora Fuel Cells S.p.A. Immediately after the merger, this
stockholder controlled four of the eight seats on our board of directors,
enabling it to retain voting and operating control of Nuvera. Accordingly, the
merger was accounted for under the purchase method of accounting and was treated
as a reverse acquisition as this stockholder received the controlling interest
in the combined enterprise. De Nora Fuel Cells S.p.A. was considered the
acquiror for accounting purposes and recorded Epyx's assets and liabilities
based upon their fair values at the date of acquisition.
Since the transaction has been accounted for as a reverse acquisition, the
consolidated financial statements of Nuvera Fuel Cells, Inc. and subsidiary (a
development stage company) and other financial information included in this
prospectus for all periods prior to the merger on April 4, 2000 represent the
financial position, results of operations and cash flows of De Nora Fuel Cells
S.p.A. These financial statements and financial information for periods
subsequent to April 4, 2000 include the financial position, results of
operations and cash flows of both De Nora Fuel Cells S.p.A. and Epyx.
Accordingly, our results of operations for the six months ended June 30, 2000
are not comparable to the six months ended June 30, 1999 or to the years ended
December 31, 1997 through 1999. The historical financial statements and the
notes thereto of Epyx Corporation (a development stage company) as of and for
the years ended December 31, 1997, 1998 and 1999 and as of and for the three
months ended March 31, 2000 and 1999 are included elsewhere in this prospectus.
De Nora Fuel Cells S.p.A. began its fuel cell research operations in 1989
and conducted its activities as an integral part of the overall operations of
its indirect parent company, Norfin S.p.A. Epyx began its operations in July
1991 and all fuel cell development activities were conducted as an integral part
of the overall operations of its parent company, AD Little. Accordingly, the
financial statements of De Nora Fuel Cells S.p.A. and Epyx have been prepared on
a carve-out basis for the purpose of presenting the financial position, results
of operations and cash flows of Nuvera.
Value of Shares Exchanged. The following is a summary of the value of the
shares exchanged in the reverse acquisition and the allocation of that value to
the assets and liabilities of Epyx at the date of acquisition (dollars in
thousands):
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<PAGE>
Value of shares exchanged:
Value of 100% interest in Epyx on April 4, 2000 (45% interest in
the combined enterprise).................................... $72,000
Acquisition costs incurred by De Nora Fuel Cells S.p.A......... 100
-------
Total.......................................................... $72,100
=======
Allocation of value of shares exchanged:
Tangible net assets acquired................................... $ 500
Intangible assets acquired - developed technology, assembled
workforce and patents....................................... 15,600
Deferred income tax liabilities................................ (5,225)
In-process research and development............................ 20,300
Goodwill....................................................... 40,925
-------
Total............................................................. $72,100
=======
We engaged an independent third party valuation firm to determine:
o the value of the shares exchanged in the merger (which leads to the
value of Epyx),
o all identifiable intangible assets acquired and
o the estimated useful life of each intangible asset identified.
Nuvera was valued on a 100 percent basis for the purpose of allocating the
value of the shares exchanged to the identifiable intangible assets. For
accounting purposes, the effective consideration for a 100% interest in Epyx
was a 45% minority equity interest in Nuvera retained by AD Little.
On the date of acquisition, Amerada Hess purchased a 5% minority equity
interest in Nuvera from AD Little in an arm's length transaction for $10
million. Included in the investment agreement between Amerada Hess and AD Little
was an option to acquire an additional 50,000 shares of our common stock held by
AD Little at a per share price equal to the midpoint of the range between $200
and the fair market value at the date of exercise. The third party valuation
firm deemed the fair market value of the stock option acquired by Amerada Hess
to be $2 million as of April 4, 2000 and the 5% minority equity interest in
Nuvera to be $8 million.
Since Amerada Hess purchased a minority equity interest in Nuvera for cash
in an arm's length transaction on the date of acquisition, the valuation firm
deemed this transaction to be the most relevant measurement of value of a
minority interest in the equity of Nuvera on April 4, 2000. Accordingly, the
fair market value of the consideration to acquire a 100% interest in Epyx was
estimated to be $72.1 million, including $100,000 in merger costs.
Overall Methodology to Allocation of Value. All identifiable intangible
assets were assigned a portion of the value of the shares exchanged in the
merger on the basis of their calculated allocations in accordance with the
provisions of Accounting Principles Board (APB) Opinions No. 16, "Business
Combinations" and No. 17, "Intangible Assets." Intangible assets identified were
developed technology, in-process research and development, an assembled
workforce and patents. The excess of the value of the shares exchanged over the
fair value of identifiable intangible net assets was allocated to goodwill.
The developed technology and in-process research and development were
determined using the income method. Revenue and expense projections as well as
technology assumptions were prepared through 2015 based on information provided
by management. Revenue assumptions reflect probable contract revenues from
various governmental and commercial funding sources, as well as projected
product sales. Total revenues include research and development/prototype
revenue, stationary revenue and transportation revenue. The total revenues were
analyzed for each of the three primary categories of products:
developed/existing technology, in-process technology, and future technology. For
each category, revenue was projected based on the expected development of
technology
27
<PAGE>
for each product. Existing technology revenue relates to the actual sales of
prototype products that incorporate the existing technology.
Cost of revenues, depreciation and general and administrative expenses were
estimated based on management's projections, review of market and industry data,
and discussions with management.
Research and development expenses were divided into:
o costs to complete projects related to current technology,
o costs for developed products that have already been introduced to the
market ("maintenance research and development") and
o costs to complete future technologies.
Total research and development was allocated between costs to complete and
maintenance based on an allocation of a majority of the expenses to costs to
complete with the remainder allocated to maintenance based on management
estimates. In 2000, approximately 15% of the costs related to maintenance, while
the balance related to costs to complete in-process projects. The research and
development that was in-process at the valuation date was assumed to have been
completed by the end of 2003. The remaining research and development costs were
allocated between maintenance and costs to complete future technologies.
The income tax rate was based on an estimated federal and state corporate
tax rate of 40%.
The patents were valued utilizing the relief from royalty method of the
income approach and the assembled workforce was valued on a replacement cost
basis. The relief from royalty method is based on the premise that in lieu of
ownership, a firm would be willing to pay a royalty for the use of patent
technology. An assembled workforce is the presence of a skilled employee base
that is knowledgeable about company procedures and possesses expertise in
certain fields that are important to continued profitability and growth of the
company. The developed technology, assembled workforce, patents and goodwill
will be amortized on a straight-line basis over their useful lives of 6, 4, 5
and 7 years, respectively.
Development Stage Company
We are a development stage company. Since inception, we have incurred
approximately $31.8 million in losses, including $20.3 million resulting from
the write-off of our in-process research and development in connection with the
merger, which was recorded in the six months ended June 30, 2000. Our losses
have resulted principally from costs incurred in research and development and
from general and administrative costs associated with our operations. Research
grants from the U.S. and Italian governments and the European Union have been
our single most important source of cash flow. We have primarily depended upon
advances, loans and capital contributions from our stockholders to meet our
remaining financing needs.
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 things,
the number of products we produce and test and potential design changes required
as a result of testing. There can be no assurance that we will manufacture or
sell our products successfully or ever achieve or sustain profitability.
Revenues
Our major source of revenues is the sale and lease of fuel cell stacks and
fuel processors to end-users. Given the early state of fuel cell technology,
our sales practice in our initial years was to test the fuel cell stack
prototypes by leasing them to customers. In 1999, we began to offer our
prototype fuel cell stacks for sale to customers in addition to leasing them.
Accordingly, our fuel cell stack revenues are now primarily generated through
sales and
28
<PAGE>
not through leases. Revenues from prototype fuel processors are primarily
generated through long-term contracts where title does not pass to the customer.
A portion of our revenues is attributable to sales where title passes to
the customer and the products are sold without the right of return and without
customer acceptance. These revenues are recognized when the product has been
shipped and we have met our obligations under the sales contract, which vary
based on specific customer. Revenues attributable to products requiring us to
perform installation are recognized when installation is complete.
Revenues attributable to long-term contracts, which increased in frequency
due to our acquisition of Epyx, are recognized on a percentage-of-completion
method based on the costs incurred to date as compared to the estimated total
costs for each contract. Losses on long-term contracts are charged to operations
when it is determined that the total estimated cost to complete a contract will
exceed the contract value. Revenues from the lease of products are recognized
ratably over the lease period.
Cost of Revenues
Cost of revenues includes all the costs attributable to the sale and the
lease of our products, including direct material, direct labor, overhead,
installation and delivery. Cost of lease revenues primarily represents
depreciation expense on fuel cell stacks held for lease which is recorded on a
straight-line basis over an estimated average useful life of 4.4 years.
Research and Development Costs, Net
Research and development costs, which include personnel costs,
manufacturing expenses and outsourcing services, consist of expenditures for
research conducted by Nuvera and include the net costs incurred under research
grants with the U.S. and Italian governments and the European Union. The
research grants, which generally require us to absorb 12% to 60% of the total
costs incurred for a particular development project, qualify as best-efforts
arrangements and, therefore, are recorded as an offset to our research and
development expenses.
Contracts are deemed to be best-efforts arrangements when all of the
following elements are met:
o the sole or principal customer is the U.S. or Italian government or
European Union;
o the activities performed qualify as research and development under
Statement of Financial Accounting Standards, or SFAS, No. 2,
"Accounting for Research and Development Costs";
o we retain a right to the data and results of the research and
development;
o the total costs at the inception of the contract are expected to
exceed the amount of the grant; and
o we are obligated to perform only on a best-efforts basis to achieve
the agreed-upon objectives.
The total costs incurred under these arrangements and the total amount of
funding netted against research and development during the years ended December
31, 1997, 1998 and 1999, the six months ended June 30, 1999 and 2000, and
cumulative from inception to June 30, 2000 were as follows (dollars in
thousands):
<TABLE>
Six Months Cumulative From
December 31, Ended June 30, March 30, 1989
------------------------------- ----------------- (Inception) To
1997 1998 1999 1999 2000 June 30, 2000
------- ------ ------ ---- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Research and development costs incurred... $1,751 $3,409 $1,757 $971 $3,301 $14,022
Government funding offset against costs... 632 1,421 753 359 1,627 6,297
------ ------ ------ ---- ------ -------
Research and development costs, net....... $1,119 $1,988 $1,004 $612 $1,674 $ 7,725
====== ====== ====== ==== ====== =======
</TABLE>
29
<PAGE>
Selling, General and Administrative Expense
Selling, general and administrative expense is primarily comprised of
personnel costs, sales expenses, administrative services, professional fees,
rents and stock-based compensation expense as well as the amortization of
goodwill and other intangible assets resulting from the merger.
Allocations from Norfin S.p.A. and AD Little
The financial statements of Nuvera Fuel Cells, Inc. and subsidiary (a
development stage company) included elsewhere in this prospectus include
allocations of general corporate overhead expenses related to the corporate
headquarters and common support activities of Norfin S.p.A., including
information technology, financial, treasury, legal, insurance and other
corporate functions as well as certain costs of operations including office rent
and facility charges. These costs have been allocated to De Nora Fuel Cells
S.p.A. using methodologies primarily based on headcount and usage. The total
costs allocated to Nuvera were $465,000, $465,000 and $403,000 for the three
years ended December 31, 1999. Although management believes the allocations are
reasonable, the costs of these services to Nuvera may not be indicative of the
costs that would have been incurred if De Nora Fuel Cells S.p.A had been a
stand-alone entity.
Non-Cash Stock Compensation Expense
On October 10, 2000, we granted 17,500 shares of our common stock
contributed to us by AD Little to certain of our long-term employees, including
some of our executive officers, in recognition of their past service to us. We
have provided $1.8 million of loans to the grantees to enable them to pay the
income taxes related to the grants. The loans will carry interest at a rate of
8.5% and the principal of and interest on these loans will be forgiven from
repayment by the employee over a period of two years if the employee remains an
employee of Nuvera. The grants were fully vested immediately. We will record
additional compensation expense as these loans are forgiven in an amount equal
to the principal and accrued interest forgiven. In addition, we will record
stock-based compensation expense in the three months ending December 31, 2000
relating to this grant. In connection with these transactions, AD Little will
make an additional capital contribution to us of approximately $2.2 million.
The portion of the stock grants collateralizing the employee loans will be
accounted for under variable plan accounting. Therefore, additional stock-based
compensation will be recorded in the future on the collateralized grants based
on the difference between the value of the common stock at date of grant and the
fair value of the common stock at each reporting date.
Our stockholders also approved our 2000 stock incentive plan in September
2000, pursuant to which options to purchase up to 176,124 shares of our common
stock may be granted to employees, directors and consultants. The options will
vest over a period of 4 years from the date of grant. To the extent these
options are granted at an exercise price below the fair market value at the date
of grant, we will record deferred compensation for the difference between the
fair market value at the date of grant and the exercise price. The deferred
compensation will be amortized and recognized as stock-based compensation
expense as the options vest over the related four-year vesting period.
Currency Translations
We translate the financial statements of our international operations
according to SFAS No. 52. Where the functional currency is the local currency,
all translation adjustments are reflected as an adjustment to stockholders
equity. Where the functional currency is the U.S. dollar, all translation
adjustments are recorded as components of income and loss. All transaction
gains and losses, which have not been material in the past, are reflected as
components of income and loss.
30
<PAGE>
Comparison of the Six Months Ended June 30, 2000 to the Six Months Ended
June 30, 1999
Revenues. Sales and contracts revenues increased $420,000, or 117%, to
$780,000 for the six months ended June 30, 2000 from $360,000 for the six
months ended June 30, 1999 due to the delivery of 18 fuel cell stacks with a
total electrical power of 150 kW in the 2000 period compared to 18 fuel cell
stacks with a total electrical power of 54 kW in the 1999 period, and to the
inclusion of Epyx in the 2000 period. Lease revenues increased $55,000 to
$62,000 for the six months ended June 30, 2000 from $7,000 for the six months
ended June 30, 1999 due to the addition of a new lease. Three customers
accounted for 56% of our revenues in 2000 and one customer accounted for 82% of
our revenues in 1999.
Cost of revenues. Cost of sales and contracts revenues increased $1.077
million to $1.235 million or 158% of revenues for the six months ended June 30,
2000 from $158,000 or 44% of revenues for the six months ended June 30, 1999
due primarily to $662,000 in amortization of developed technology and patents
resulting from the merger, and to the inclusion of Epyx in the 2000 period.
Cost of lease revenues was $33,000 or 53% of revenues for the six months ended
June 30, 2000 compared to $43,000 or 614% of revenues for the six months ended
June 30, 1999 due to depreciation expense on fuel cell stacks held for lease in
1999.
In-process research and development. Upon consummation of the merger, the
in-process research and development that was acquired in the merger was
expensed in the amount of $20.3 million in the six months ended June 30, 2000
since it had not yet reached technological feasibility and had no other
alternative use.
Research and development expense, net. Research and development expense,
net, increased $1.062 million, or 174%, to $1.674 million for the six months
ended June 30, 2000 from $612,000 for the six months ended June 30, 1999 due to
the inclusion of Epyx in the 2000 period and the result of the growth of our
research and development activities. The total amount of research grants offset
against costs in the 2000 and 1999 periods were $1.627 million and $359,000,
respectively due to the inclusion of Epyx for the 2000 period.
Selling, general and administrative expense. Selling, general and
administrative expense increased $2.764 million to $2.995 million for the six
months ended June 30, 2000 from $231,000 for the six months ended June 30, 1999
primarily due to $1.479 million in amortization of goodwill and other
intangible assets resulting from the merger and $772,000 due to the
inclusion of Epyx in the 2000 period.
Interest expense. Interest expense was $20,000 for the six months ended
June 30, 2000 due to borrowings from Norfin S.p.A., the parent company of one of
our stockholders, and due to borrowings under our line of credit. There was no
interest expense for the six months ended June 30, 1999.
Other (income) expense, net. Other (income) expense, net of $28,000 for
the six months ended June 30, 2000 represents foreign currency transaction
losses. No foreign currency transaction gains or losses were realized for the
six months ended June 30, 1999.
Income tax benefit. The income tax benefit of $1.274 million for the six
months ended June 30, 2000 primarily relates to the amortization of the
intangibles recorded in the merger, excluding goodwill. There was no income tax
benefit in 1999.
Comparison of the Year Ended December 31, 1999 to the Year Ended
December 31, 1998
Revenues. Sales and contracts revenues were $574,000 for the year ended
December 31, 1999 compared to zero for the year ended December 31, 1998 due to
the delivery of 20 fuel cell stacks in 1999. Lease revenues decreased $189,000,
or 67%, to $95,000 for the year ended December 31, 1999 from $284,000 for the
year ended December 31, 1998. The increase in sales and contracts revenue and
the decrease in lease revenue are directly related to a change in our sales
practices as described above. Three customers accounted for 71% of our revenues
in 1999 and two customers accounted for 89% of our revenues in 1998.
31
<PAGE>
Cost of revenues. Cost of sales and contracts revenues was $216,000 or 38%
of revenues for the year ended December 31, 1999 compared to zero for the year
ended December 31, 1998. Cost of lease revenues was $86,000 or 91% of revenues
for the year ended December 31, 1999 compared to $178,000 or 63% of revenues
for the year ended December 31, 1998 due to fewer fuel cell stacks leased in
1999 as a result of a change in our sales practices described above.
Research and development expense, net. Research and development expense,
net, decreased $984,000, or 49%, to $1.004 million for the year ended December
31, 1999 from $1.988 million for the year ended December 31, 1998 primarily due
to the completion of a contract with Italy's National Agency for Alternative
Energy in 1998. The total amount of research grants offset against costs for
the years ended December 31, 1999 and 1998 were $753,000 and $1.421 million,
respectively.
Selling, general and administrative expense. Selling, general and
administrative expense increased $241,000, or 60%, to $644,000 for the year
ended December 31, 1999 from $403,000 for the year ended December 31, 1998
primarily due to professional fees and other costs incurred to establish De
Nora Fuel Cells S.p.A. as a separate subsidiary in October 1999 and to an
increase in other infrastructure costs following its establishment.
Interest expense. Interest expense was $2,000 for the year ended December
31, 1999 due to borrowings from Norfin S.p.A. There was no interest expense for
the year ended December 31, 1998.
Other (income) expense, net. Other (income) expense, net of $7,000 for the
year ended December 31, 1999 represents foreign currency transaction losses. No
foreign currency transaction gains or losses were realized for the year ended
December 31, 1998.
Comparison of the Year Ended December 31, 1998 to the Year Ended
December 31, 1997
Revenues. As described above, we did not offer fuel cell stacks for sale
in 1998 or 1997. Lease revenues decreased $66,000 or 19%, to $284,000 for the
year ended December 31, 1998 from $350,000 for the year ended December 31, 1997
due to the expiration of a lease contract with a major customer. Two customers
accounted for 89% of our revenues in 1998 and 85% of our revenues in 1997.
Cost of revenues. Cost of lease revenues was $178,000 or 63% of revenues
for the year ended December 31, 1998 compared to $106,000 or 30% of revenues
for the year ended December 31, 1997 due to depreciation expense on fuel cell
stacks held for lease in 1998.
Research and development expense, net. Research and development expense,
net, increased $869,000, or 78%, to $1.988 million for the year ended December
31, 1998 from $1.119 million for the year ended December 31, 1997 due to our
research and development activities related to a contract with Italy's National
Agency for Alternative Energy. The total amount of research grants offset
against costs for the years ended December 31, 1998 and 1997 were $1.421
million and $632,000, respectively.
Selling, general and administrative expense. Selling, general and
administrative expense decreased $62,000 or 13%, to $403,000 for the year ended
December 31, 1998 from $465,000 for the year ended December 31, 1997 due to
savings in professional fees and other related costs.
Liquidity and Capital Resources
Summary
Our cash requirements depend on numerous factors, including completion of
our product development activities, ability to commercialize our products,
market acceptance of our products and other factors. We expect to devote
substantial capital resources to continue our development programs directed at
commercializing our products in our target markets, hire and train additional
staff, expand our research and development activities, develop and expand our
manufacturing capacity and begin production activities.
32
<PAGE>
During the years ended December 31, 1997, 1998 and 1999, the six months
ended June 30, 2000 and cumulative for the period from inception to June 30,
2000, we have incurred net losses of $1.340 million, $2.285 million, $1.290
million, $24.169 million and $31.763 million, respectively. Since inception, our
operations have been financed primarily from advances, loans and capital
contributions by our stockholders and grants awarded under our
government-sponsored research and development contracts. In addition, we have
raised additional funds through the issuance of common stock to Amerada Hess
and, to a lesser extent, bank financing. We anticipate incurring substantial
additional losses over at least the next several years.
On November 3, 2000, Nuvera, Nuvera Europe, AD Little, Norfin International
S.A., the parent of De Nora New Energy Investments B.V., De Nora New Energy
Investments B.V. and Amerada Hess entered into a capital contribution agreement.
Under this agreement, AD Little, Norfin International S.A. and Amerada Hess each
agreed to provide up to a maximum of $30 million to Nuvera when needed to
sustain its operations, upon written request from the board of directors of
Nuvera. All unexercised or undischarged rights and obligations to provide
capital contributions to Nuvera under the investment and exchange agreement,
including that of AD Little and De Nora New Energy Investments B.V. to
contribute at least $8 million each to Nuvera by December 31, 2000, were waived
under the capital contribution agreement. The capital contribution agreement
will terminate on the earlier of the date of the consummation of this offering
with proceeds to Nuvera of at least $30 million, the date on which capital
contributions under the capital contribution agreement by AD Little, Norfin
International S.A. and Amerada Hess exceed $30 million or December 31, 2001.
We believe that our current cash balance of $2.177 million as of June 30,
2000, as well as the commitments we have received from our principal
stockholders under the capital contribution agreement will provide us with
sufficient capital to fund a base level of operations for the next 12 months.
However, this level of capital would be insufficient for us to continue to
pursue our product development and commercialization efforts and this would
affect our ability to achieve our milestones and become profitable. With the net
proceeds from this offering in lieu of the further stockholder commitments, we
expect to be able to continue to adequately fund our product development and
commercialization efforts and other operations for at least the next 12 months.
Cash flow used by operating activities was $1.682 million, $2.623 million,
$1.857 million, $0.771 million and $3.223 million for the years ended December
31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and 2000,
respectively. Cash provided by financing activities, primarily advances, loans
and capital contributions from our stockholders, was $1.860 million, $2.991
million, $2.355 million, $1.218 million and $5.402 million for the years ended
December 31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and
2000, respectively.
Capital Contributions by Stockholders
In connection with the establishment of De Nora Fuel Cells S.p.A. as a
separate subsidiary on October 1, 1999, its sole stockholder, De Nora New Energy
Investments B.V., forgave $7.058 million of advances owed to it by De Nora Fuel
Cells S.p.A. The debt forgiveness has been treated as a contribution to capital
in our consolidated financial statements.
In the investment and exchange agreement, AD Little and De Nora New Energy
Investments B.V., each committed to provide up to $11 million in additional cash
to fund our operations through December 31, 2000, as needed. In accordance with
this commitment, AD Little and De Nora New Energy Investments B.V. each
contributed $3 million to us during April 2000. The $6 million has been treated
as a contribution to capital. The capital contribution requirements of the
investment and exchange agreement have been superseded by the $30 million
capital contribution agreement described above.
Simultaneous with the merger on April 4, 2000, Amerada Hess purchased
50,000 shares of our common stock and an option to acquire additional shares as
discussed above, from AD Little for $10 million. On July 31, 2000, Amerada Hess
purchased 67,416 newly-issued shares of our common stock from us for an
aggregate price of $15 million.
33
<PAGE>
Related Party Loans
In October 1999, Norfin S.p.A., the parent of De Nora New Energy
Investments B.V., agreed to loan De Nora Fuel Cells S.p.A. up to 2 billion
Italian lira, or approximately $987,000 to fund its working capital needs. De
Nora Fuel Cells S.p.A. borrowed a total of $864,000 under this arrangement
($545,000 remained outstanding as of December 31, 1999). The loan, plus accrued
interest, was fully repaid in March 2000 using proceeds received from borrowings
under the line of credit referred to below. Interest expense of $2,000 and
$7,000 was recorded in 1999 and 2000, respectively.
Line of Credit
On March 21, 2000, De Nora Fuel Cells S.p.A. entered into a financing
agreement with an Italian bank to provide up to 2 billion Italian lira, or
approximately $987,000, under a line of credit. The line of credit bears
interest at a variable rate (5% per annum at June 30, 2000), has no stated
maturity date and is guaranteed by Norfin S.p.A. In March 2000, De Nora Fuel
Cells S.p.A. borrowed approximately $759,000 under the line of credit. These
borrowings were repaid in June 2000 using proceeds received from the capital
contributions by our stockholders in connection with the merger. The full amount
of the line of credit was available as of June 30, 2000.
Recent Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 was amended by SFAS No. 137 which requires
adoption of the provisions of SFAS No. 133 for periods beginning January 1,
2001. We are currently evaluating the effect, if any, SFAS No. 133 will have on
our financial position and our results of operations. We will adopt this
accounting standard on January 1, 2001, as required.
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition. We believe that our revenue recognition practices for
sales are substantially consistent with SAB No. 101. Our revenue practices for
government and other contracts fall within and are in compliance with AICPA
Audit and Accounting Guide, "Audits of Federal Government Contractors", and
AICPA Statement of Position ("SOP") No. 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." SAB No.101 did not
modify the principles of the Audit and Accounting Guide or SOP No. 81-1. We do
not expect that SAB No. 101 will have a material effect on our consolidated
financial position or results of operations.
Qualitative and Quantitative Disclosures About Market Risk
We invest excess cash in interest-bearing, investment-grade securities and
time deposits in high-quality institutions and government securities. We do not
utilize derivative financial instruments, derivative commodity instruments,
positions or transactions in any material manner. Accordingly, we believe that,
while the investment- grade securities and time deposits we hold are subject to
changes in financial standing of the issuer of such securities, the principal
is 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. Since we do
invest in locations outside the United States, we are subject to cross-border
risks.
Since De Nora Fuel Cells S.p.A. operates in Italy, we will be subject to
certain foreign currency exposure. Historically, currency translation gains and
losses have been reflected as adjustments to stockholders equity, while
transaction gains and losses have been reflected as components of income and
loss. In the past, the translation and transaction gains and losses have not
been material. However, translation and transaction gains and losses could be
material in the future, depending upon changes in the exchange rate
relationships between the Italian lira, the euro and the U.S. dollar.
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed statements of operations for
the six months ended June 30, 2000 and the year ended December 31, 1999 give
effect to the merger of De Nora Fuel Cells S.p.A and Epyx Corporation as if it
had occurred at January 1, 2000 and January 1, 1999, respectively. These
unaudited pro forma condensed statements of operations have been prepared by
applying pro forma adjustments to the historical consolidated financial
statements of Nuvera Fuel Cells, Inc. and subsidiary (a development stage
company) included elsewhere in this prospectus. The historical financial data of
Epyx Corporation (a development stage company) are derived from its financial
statements included elsewhere in this prospectus.
The merger has been accounted for under the purchase method of accounting
and was treated as a reverse acquisition because the stockholder of De Nora
Fuel Cells S.p.A. received the controlling interest in the combined enterprise.
Therefore, De Nora Fuel Cells S.p.A. was considered the acquiror for accounting
purposes and recorded Epyx's assets and liabilities based upon their estimated
fair values at the date of acquisition. Since the transaction has been
accounted for as a reverse acquisition, the historical consolidated financial
statements of Nuvera Fuel Cells, Inc. and subsidiary (a development stage
company) included elsewhere in this prospectus reflect the results of
operations, financial position and cash flows of De Nora Fuel Cells S.p.A. for
all periods prior to the merger on April 4, 2000 and reflect the results of
operations, financial position and cash flows of both De Nora Fuel Cells,
S.p.A. and Epyx for all periods subsequent to April 4, 2000.
The pro forma adjustments, as described in the notes to the unaudited pro
forma condensed financial information, are estimates based on currently
available information and certain adjustments that management believes are
reasonable. These unaudited pro forma condensed statements of operations are
presented for informational purposes only and are not necessarily indicative of
the operating results or financial position that would have occurred had the
merger been consummated on or as of the dates indicated nor is it necessarily
indicative of future operating results or financial position. This unaudited pro
forma condensed financial information should be read in conjunction with
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the notes thereto included elsewhere in this prospectus.
35
<PAGE>
NUVERA FUEL CELLS, INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Dollars in thousands, except per share data)
<TABLE>
Historical
Epyx
Historical Corporation Pro Forma
Nuvera Fuel January 1, Adjustments
Cells, Inc. and 2000 to for the
Subsidiary April 3, 2000 Merger Pro Forma
--------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Sales and contracts........................... $ 780 $ 61 $ - $ 841
Lease......................................... 62 -- - 62
-------- ------- -------- ----------
Total revenues.............................. 842 61 - 903
Cost of revenues
Sales and contracts........................... 1,235 1,237 662 (A) 3,134
Lease......................................... 33 -- - 33
-------- ------- -------- ----------
Total cost of revenues...................... 1,268 1,237 662 3,167
In-process research and development............ 20,300 -- - 20,300
Research and development expense, net.......... 1,674 574 39 (A) 2,287
Selling, general and administrative expense.... 2,995 300 18 (A) 5,175
1,462 (B)
400 (C)
-------- ------- -------- ----------
Loss from operations.......................... (25,395) (2,050) (2,581) (30,026)
Interest expense............................... 20 -- - 20
Other (income) expense, net.................... 28 -- - 28
-------- ------- -------- ----------
Loss before income tax benefit................. (25,443) (2,050) (2,581) (30,074)
Income tax benefit............................. 1,274 -- 287 (D) 1,561
-------- ------- -------- ----------
Net loss...................................... $(24,169) $(2,050) $ 2,294 $ (28,513)
======== ======= ======== ==========
Net loss per common share- basic and diluted... $ (32.53) $ (28.51)
======== ==========
Shares used in computing basic and diluted net
loss per common share......................... 743,094 1,000,000 (E)
======= =========
</TABLE>
36
<PAGE>
NUVERA FUEL CELLS, INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands, except per share data)
<TABLE>
Historical
Epyx
Corporation
Historical January 1,
Nuvera Fuel 1999 to Pro Forma
Cells, Inc. and December 31, Adjustments
Subsidiary 1999 for the Merger Pro Forma
--------------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
Revenues
Sales and contracts................................ $ 574 $ 458 - $ 1,032
Lease.............................................. 95 124 - 219
-------- ------- ------- ----------
Total revenues................................... 669 582 - 1,251
Cost of revenues
Sales and contracts................................ $ 216 $ 1,101 $ 2,646 (A) $ 3,963
Lease.............................................. 86 124 - 210
-------- ------- ------- ----------
Total cost of revenues........................... 302 1,225 2,646 4,173
Research and development expense, net............... 1,004 2,430 154 (A) 3,588
Selling, general and administrative expense......... 644 533 72 (A) 8,106
5,846 (B)
1,011 (C)
-------- ------- ------- ----------
Loss from operations............................... (1,281) (3,606) (9,729) (14,616)
Interest expense.................................... 2 - - 2
Other (income) expense, net......................... 7 - - 7
-------- ------- ------- ----------
Loss before income tax benefit...................... (1,290) (3,606) (9,729) (14,625)
Income tax benefit.................................. - - 1,149 (D) 1,149
-------- ------- ------- ----------
Net loss........................................... $ (1,290) $(3,606) $(8,580) $ (13,476)
======== ======= ======= ==========
Net loss per common share-basic and diluted......... $ (2.58) $ (13.48)
======== ==========
Shares used in computing basic and diluted net loss
per common share.................................. 500,000 1,000,000 (E)
======= =========
</TABLE>
37
<PAGE>
NUVERA FUEL CELLS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
(A) The adjustment reflects the recognition of amortization of the
developed technology, assembled workforce and patents on a
straight-line basis over an estimated useful life of 6 years, 4 years
and 5 years, respectively.
The amortization expense adjustment for the period January 1, 2000 to
April 3, 2000 is allocated as follows:
<TABLE>
Selling, General
Research and and
Cost of Development Administrative
Description Revenues Expense, net Expense Total
----------- --------- ------------ ----------------- --------
<S> <C> <C> <C> <C>
Amortization of developed technology....... $379,000 $ -- $ -- $379,000
Amortization of assembled workforce........ 13,000 39,000 18,000 70,000
Amortization of patents.................... 270,000 -- -- 270,000
-------- -------- ------- --------
Total................................. $662,000 $ 39,000 $18,000 $719,000
======== ======== ======= ========
</TABLE>
The amortization expense adjustment for the year ended December 31, 1999
is allocated as follows:
<TABLE>
Selling, General
Research and and
Cost of Development Administrative
Description Revenues Expense, net Expense Total
----------- --------- ------------ ----------------- --------
<S> <C> <C> <C> <C>
Amortization of developed technology...... $1,517,000 $ -- $ -- $1,517,000
Amortization of assembled workforce....... 49,000 154,000 72,000 275,000
Amortization of patents................... 1,080,000 -- -- 1,080,000
---------- -------- ------- ----------
Total................................ $2,646,000 $154,000 $72,000 $2,872,000
========== ======== ======= ==========
</TABLE>
(B) The adjustment reflects the recognition of amortization of goodwill
on a straight-line basis over an estimated useful life of 7 years.
(C) Effective October 1, 1999, De Nora Fuel Cells S.p.A entered into
services agreements with De Nora S.p.A and Norfin S.p.A for certain
administrative assistance. Effective April 4, 2000, Epyx Corporation
entered into a lease and administrative services agreement with AD
Little at a rate of $2,460 per employee. In accordance with the rules
and regulations of the SEC governing the preparation of pro forma
information for carve-out businesses, the pro forma adjustments
reflect what the allocated or omitted corporate costs would have been
had the merger taken place and the agreements entered into at the
beginning of the periods presented.
Accordingly, the adjustment reflects the recognition of selling,
general and administrative expense pursuant to these agreements for
the six months ended June 30, 2000 and the year ended December 31,1999
assuming these agreements were in place at January 1, 2000 and 1999,
respectively, which expense is allocated as follows:
38
<PAGE>
<TABLE>
Year Ended
Six Months Ended December 31,
June 30, 2000 1999
---------------- ------------
<S> <C> <C>
Agreement
---------
De Nora S.p.A services agreement................................... $ -- $ 230,000
Norfin S.p.A services agreement.................................... -- 124,000
AD Little lease and administrative services agreement.............. 400,000 657,000
-------- ----------
Total............................................................ $400,000 $1,011,000
======== ==========
</TABLE>
(D) The adjustment reflects the income tax effect of the pro forma
adjustments for the merger at a rate of 40%.
(E) Pro forma shares used in computing basic and diluted net loss per
common share for the six months ended June 30, 2000 and the year ended
December 31, 1999 gives effect to the issuance of the shares in
connection with the merger as if it had occurred on January 1, 2000
and January 1, 1999, respectively.
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BUSINESS
Overview
Nuvera is a designer and developer of fuel processors, PEM fuel cell
stacks and integrated fuel cell systems for stationary and transportation
applications. We are a leading developer of fuel processors that can be
operated on most commonly available hydrocarbon fuels. Our fuel processors and
PEM fuel cell stacks have been successfully tested and evaluated by major
automobile and appliance manufacturers, research institutions and industrial
energy companies. To date, we have built and tested approximately 34 fuel
processors and 255 fuel cell stacks. By combining our fuel processors and our
fuel cell stacks into an integrated unit, we are designing, building and
testing power modules in the 1 kW, 5 kW and 10 kW power ranges.
Our objective is to extend our leadership in the design, development and
testing of fuel cell technologies and to bring about the successful
commercialization of our products. We plan to market our products both as
components to be integrated with other technologies and as power modules or
integrated fuel cell systems. We intend to accelerate the commercialization of
our products by initially targeting the stationary market, specifically the
premium power market, a market we believe will be the first to adopt fuel cell
technology on a widespread basis. We believe this strategy of initially
targeting the premium power market will enable us to compete more effectively
in residential, transportation and other markets. Accordingly, we plan to bring
to market our first premium power stationary products in 2002, our first
residential stationary products in 2003 and our first transportation products
in 2005.
In its forthcoming 2000 report entitled "Fuel Cells: On the Verge,"
Business Communications Co., Inc. states that the current fuel cell technology
market is approximately $218 million, and that it will grow at an annual
average rate of over 60% to approximately $2.4 billion by 2005. We expect that
the demand for fuel cell technologies will continue to increase as fuel cell
technologies gain market acceptance and become cost-competitive with
traditional generating technologies. We expect this demand to be driven by the
increasing worldwide need for distributed, off- grid electric power, as well as
consumer preference for smaller, environmentally cleaner power sources with
long operating lives.
We believe our fuel cell technologies will provide power and heat that are
more energy efficient, environmentally cleaner and quieter than the current
electric transmission grid, most current backup power alternatives and the
internal combustion engine. We intend to leverage our core technological
strengths by establishing strategic alliances and other relationships with
selected technology companies, component suppliers, manufacturers, distributors
and end-users, a strategy that we believe will help us gain access to a stable
customer base and provide us with global marketing, distribution and servicing
advantages over our competitors.
Our Heritage
Nuvera was formed in April 2000 through the merger of De Nora Fuel Cells
S.p.A., the fuel cell division of the Italian engineering and electrode
manufacturing concern De Nora S.p.A., and Epyx Corporation, the fuel processing
division of the American business and technology consulting firm Arthur D.
Little, Inc., or AD Little. Prior to the merger, De Nora and AD Little had been
conducting research, development and testing of fuel cell technologies since
1989 and 1991, respectively. In 1998, the two companies worked together to
develop, produce and demonstrate a 300 W propane-fueled power module that
combined De Nora's fuel cell stack and AD Little's fuel processor. Both
companies recognized that by combining their complementary technologies, they
could develop, produce and market power modules and integrated fuel cell
systems in a manner that could give them a long-term competitive advantage.
The merger was completed in an investment and share exchange transaction
whereby De Nora New Energy Investments B.V., the parent of De Nora Fuel Cells
S.p.A. and a subsidiary of Norfin S.p.A., received 50% of the capital stock of
Epyx Corporation in exchange for Epyx receiving 100% of the capital stock of De
Nora Fuel Cells, S.p.A. Epyx Corporation was renamed Nuvera Fuel Cells, Inc.,
and De Nora Fuel Cells S.p.A., subsequently renamed Nuvera Fuel Cells Europe
S.p.A. and later becoming Nuvera Fuel Cells Europe S.r.l., became our wholly-
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owned subsidiary. Simultaneously with the merger, Amerada Hess, a leading
independent energy company, purchased 5% of Nuvera's capital stock from AD
Little. Amerada Hess increased its equity ownership in Nuvera to 11% in July
2000.
De Nora S.p.A. is part of the Oronzio De Nora Group, a family-owned group
of companies established in 1923, which employs over 700 people worldwide. The
Oronzio De Nora Group is a long-time technology licensor and supplier of
membrane electrolyzers for the chlor-alkali industry and a large worldwide
supplier of catalyst-coated metal electrodes for the chlor-alkali industry.
Invited by Italy's National Agency for Alternative Energy, or ENEA, to study
the viability of fuel cell technology, De Nora began in 1989 to develop and
advance PEM fuel cell technology by capitalizing on its technical expertise in
membrane-based electrochemical processes. Since 1993, De Nora has worked
together with automobile manufacturers, utility and energy companies,
universities and research institutions to design and develop its PEM fuel cell
stacks. De Nora's past experience in entering into cooperative joint ventures
for production and commercialization of industrial equipment for
electrochemical plants and electrodes in North and South America, Asia and
Europe led it to explore an alliance with Epyx in the field of fuel cell
technologies. In October 1999, De Nora S.p.A. spun off its fuel cell business
to form De Nora Fuel Cells S.p.A.
In 1991, the U.S. Department of Energy selected AD Little to conduct a
study of PEM fuel cell technology. Since then, AD Little has worked together
with the U.S. Department of Energy and numerous automobile and appliance
manufacturers, research institutions and industrial energy companies to design
and develop fuel processors capable of reforming a variety of hydrocarbon fuels
into hydrogen for use in fuel cell stacks. In December 1997, AD Little spun off
its fuel processor division to form Epyx Corporation. Between 1997 and 2000,
Epyx conducted demonstrations that integrated its fuel processors with the fuel
cell stacks of seven different fuel cell stack companies, including De Nora,
and recognized the advanced technological design of De Nora's fuel cell stacks.
We plan to maintain corporate and operational facilities in both
Cambridge, Massachusetts and Milan, Italy. As a result of the merger, we
believe we are uniquely positioned to compete in global stationary and
transportation markets due to our ability to integrate our fuel processors and
our fuel cell stacks into power modules and integrated fuel cell systems that
we expect will generate clean, reliable and efficient energy using a variety of
commonly available hydrocarbon fuels.
Favorable Industry and Market Trends
We believe a number of industry and market trends indicate significant
opportunities for our fuel cell technologies in the stationary and
transportation markets.
Increasing demand for lower-cost, continuous and reliable primary and backup
electrical power worldwide
Demand for electricity is rising rapidly and is expected to continue to
rise, in part as a result of technological advances and economic expansion in
the United States and other industrialized nations. According to the U.S.
Department of Energy, Energy Information Administration's report Annual Energy
Outlook 2000, a projected 300 gigawatts of new generating capacity will be
needed by 2020 to meet the growing demand for electricity in the United States
and to offset planned retirements of existing generating capacity. The report
projects that by 2020, annual investment in new generating capacity will be
nearly $30 billion. Internationally, the U.S. Department of Energy, Energy
Information Administration's report International Energy Outlook 2000, projects
that global electricity consumption is expected to rise from approximately 12
trillion kilowatt-hours in 1997 to approximately 22 trillion kilowatt-hours in
2020.
High electricity prices are one of the key drivers of demand for
alternatives to conventional utility service. For example, in 1997, 12 West
European countries had residential electricity prices between 10 and 20
cents/kWh and Japan had residential electricity prices averaging 21 cents/kWh,
while the U.S. average was approximately 8.5 cents/kWh. Even within the United
States, in 1998, prices in some states exceeded 13 cents/kWh.
In addition to the need for lower-cost electricity, there is significant
evidence that some users are demanding a more reliable source of power than is
currently available on the existing power grid. Reliability requirements have
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intensified with respect to some industries such as telecommunications, where
the proliferation of computers, the Internet and communication networks calls
for more reliable power than is available on the current electric grid. In
1999, the Electric Power Research Institute estimated that deficient power
quality and related power disturbances cost the U.S. economy over $30 billion
annually. In March 2000, the U.S. Department of Energy released a report of the
findings and recommendations of its Power Outage Study Team. This panel of U.S.
Department of Energy, national laboratory and academic experts provided
recommendations based on a review of six power outages and two power system
disturbances that took place in the United States between early June and early
August 1999. Their recommendations to help avoid future power outages included
lowering barriers to entry for distributed generation and adopting
energy-efficient technologies.
Moreover, many developing countries have inadequate or no existing
electric power infrastructure. According to International Energy Outlook 2000,
net electricity consumption of developing countries in 1997 was 3,489 billion
kilowatt-hours, and is expected to increase by an average of 4.3% annually to
9,203 billion kilowatt-hours in 2020. The limited financial capabilities of
many of these countries are increasing the demand for sources of power, such as
PEM fuel cell technologies, that require less capital investment than
enhancements of the current electric grid.
Increasing regulation of and attention to the environmental effect of
hydrocarbon emissions and the generation, transmission and distribution of
electricity
Because the use of the internal combustion engine in transportation
applications is a major source of air pollution, increasingly stringent
government laws and regulations requiring vehicle emission reductions and
increases in efficiency have been enacted or proposed on both national and
regional levels in the United States and many other industrialized nations. The
first of these laws, adopted by the State of California, as amended, requires
that at least 10% of the new cars and certain light duty trucks sold in
California by large and intermediate volume vehicle manufacturers be "zero
emission vehicles" by 2003. Manufacturers can meet this requirement through the
sale of specific combinations of conventional or new vehicle classes, such as
low, ultra-low, super ultra-low and zero emission vehicles. Manufacturers can
also meet this requirement by the use of emission credits which are granted if
manufacturers meet emission standards more stringent than, or produce more zero
emission vehicles than, required by the law. Various northeastern states, such
as New York and Massachusetts, have adopted laws similar to the California law.
The U.S. federal government has also promulgated vehicle emission laws and
regulations, but these laws do not currently require the manufacture of zero
emission vehicles.
In Europe, automobile manufacturers that are members of the European
Automobile Manufacturers' Association have agreed voluntarily to reduce carbon
dioxide emissions by 25% to 140 g/km by 2008, and possibly to 120 g/km by 2012.
In addition to these initiatives, the 1997 Kyoto Protocol to the United Nations
Framework Convention on Climate Change, or the Kyoto Protocol, addressed the
release of carbon dioxide, a byproduct of burning fossil fuels, into the
atmosphere. The Kyoto Protocol, if ratified by each signatory nation, will
require the reduction of six "greenhouse" gases, including carbon dioxide, over
the next 10 years. Signatories to the treaty include the United States, Japan
and the European Community. In addition to these regulatory requirements, we
believe that, irrespective of government regulation, the desire of consumers to
reduce air pollution is rising. We also believe that the changes in vehicle and
engine manufacturing objectives and strategies that will be required to meet
the regulatory and market-driven demands will provide a significant market
opportunity for fuel cell technologies, which we believe are capable of
providing power that is environmentally cleaner than the internal combustion
engine.
Despite the increasing demand for power, 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. As a result, we expect the market for alternative
sources of power generation, such as fuel cell technologies, to expand.
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Continuing privatization and deregulation of utilities
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 in the United States are being separated into their generation,
transmission and distribution components so that they will no longer be
integrated providers of electricity to a captive geographic area. In the United
States, legislatures and regulatory organizations at the federal, state and
local level are revising the manner in which electric service is provided. Most
legislation aims to create competitive markets in the generation and marketing
of power while leaving the distribution function as a regulated operation, much
the way natural gas was deregulated in the late 1980s and early 1990s. New
entrants have become significant participants in the generation of electricity
as the industry moves toward open competition.
Internationally, such as in some European countries, deregulation and
privatization of the electric industry have already occurred. Deregulation in
Germany is also rapidly creating a market for reliable and inexpensive
alternative sources of heat and power. In April 1995, Japan amended its
Electricity Business Act, seeking to deregulate the power generation industry
and to allow non-traditional suppliers to engage in direct sales of
electricity. In May 1999, the Japanese legislature approved measures to
implement limited retail competition. We believe the continuing deregulation of
utilities in the United States and internationally will allow new entrants into
the electricity generation business, as customers will be free to choose power
producers and marketers.
Continuing consumer demand for higher fuel efficiency and fuel economy
We expect that consumers will continue to demand fuel efficient
automobiles due in part to volatile and unpredictable fluctuations in oil
prices and high prices for gasoline, particularly in Europe and Japan. We
believe that automotive applications of our products will provide consumers not
only with higher fuel efficiency, but also lower noise and vibration, improved
performance and potentially lower capital and maintenance costs. While
environmental considerations may have provided the initial impetus for
automobile manufacturers to seek alternatives to the internal combustion
engine, we believe that fuel cell technologies offer an opportunity to deliver
products that are more attractive to consumers than the current internal
combustion engine.
In addition, European and Japanese residential consumers have begun to
realize that cogeneration of heat and electricity offers efficiencies relative
to reliance upon separate sources of heat and power. Fuel cell stacks produce
heat as a co-product of electricity generation. This heat, along with the waste
heat of the fuel processor, can be used directly or in conjunction with a heat
generating device, such as a boiler, to provide hot water for space heating or
domestic use.
Our Products
We design and develop fuel processors, fuel cell stacks, power modules and
integrated fuel cell systems for stationary and transportation applications. We
plan to market our products selectively as components to be integrated with
other technologies and as power modules or integrated fuel cell systems. We
believe the competitiveness of our products will depend on several factors,
including the application and the environment in which they will be operated,
which, in turn, will determine the particular fuel, fuel processing technology
and the ultimate cost to the customer.
Fuel Processors
All PEM fuel cells require hydrogen in order to generate electricity.
There is currently no infrastructure for the supply of pure hydrogen. In
addition, storing hydrogen on-board vehicles on a mass-market basis is
currently impractical. As a result, a fuel processor, the central component of
which is a fuel reformer, is necessary to extract hydrogen from commonly
available fuels. Our fuel processors have demonstrated the ability to extract
hydrogen from a number of commonly available hydrocarbon fuels, including
gasoline, ethanol, methanol, natural gas, kerosene, propane, butane, home
heating oil and diesel. The extracted hydrogen can be used in fuel cell stacks
to produce electricity and heat.
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Three basic techniques are used to separate hydrogen atoms from
hydrocarbon fuels. Hydrogen can be separated from carbon atoms through
catalytic reactions in a process known as steam reforming, through fuel
decomposition at high temperatures in a process known as partial oxidation, and
through the use of both catalytic reactions and fuel decomposition at high
temperatures in a process known as autothermal reforming.
Our fuel reformers, which are the central components of our fuel
processors, can be designed to utilize steam reforming, autothermal reforming
or partial oxidation technologies, depending upon the needs of a particular
market and the application within that market. We intend to focus on steam and
autothermal reforming technologies as we continue to develop our fuel
processors. Steam reforming yields higher fuel efficiencies but requires
greater space and may be used in residential markets in which size is not a
determining factor. Autothermal reformers are more likely to be used in
automotive applications and in those residential markets that favor more
compact power systems, given their smaller size.
[DIAGRAM OF FUEL REFORMING TECHNOLOGIES]
A fuel processor consists of a fuel reformer, a shift reactor, carbon
monoxide cleanup devices, a catalyst subsystem, fuel, water and air management
systems and a residual gas burner known as the anode tail gas burner. Air
entering the reformer through tubes and heated by the air preheater vaporizes
the hydrocarbon fuel and water as they enter the reformer, thereby producing,
in the presence of catalysts, hydrogen gas, carbon monoxide and residual fuel.
The shift reactor converts carbon monoxide to carbon dioxide and produces
additional hydrogen gas in a catalytic reaction known as the water-gas shift.
In the final step, the carbon monoxide cleanup catalyst subsystem removes the
remaining carbon monoxide, a known poison to the fuel cell stack. Any remaining
hydrogen that is not used in the fuel cell stack is fed into the anode tail gas
burner, where it is combusted to produce heat which is used in other parts of
the fuel reforming process.
[DIAGRAM OF A FUEL PROCESSOR]
Our fuel processors contain all the components necessary to power a fuel
cell stack. Moreover, our fuel processors enhance most of the key performance
parameters of an integrated fuel cell system, such as electrical efficiency,
emissions and byproduct heat. We have built and tested fuel processors capable
of powering a fuel cell stack in the 500 W to 250 kW power range achieving fuel
efficiencies that approach the theoretical maximum, namely between 70% and 90%,
depending on the fuel and reforming technology used. To date, we have built and
tested approximately 34 fuel processors, comprising a total of about 1 megawatt
of hydrogen energy production capability and have delivered 6 fuel processors,
comprising a total of about 170 kilowatts of hydrogen energy production
capability to automobile manufacturers and other companies for testing and
evaluation.
We believe our fuel processors will provide the following benefits:
o Our multi-fuel capability will permit flexibility and
cost-effectiveness, as well as use in many applications, thereby
providing a critical link to rapidly commercializing our integrated
fuel cell systems and competing in multiple markets.
o Our extensive knowledge of advanced fuel processor catalysts has
enabled us to develop fuel processors that are sufficiently compact
for practical applications in our target markets, including
transportation applications, where size and weight are critical
factors.
o Our carbon monoxide clean up technology will reduce the carbon
monoxide in the hydrogen-rich gas stream produced by the fuel
processor to acceptable levels before the hydrogen gas stream enters
the fuel cell stack, resulting in enhanced performance of the fuel
cell stack.
o Our control systems and carbon monoxide cleanup technology will
enable our fuel processors to meet rigorous changes in demands for
power.
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o Our fuel processors, capable of reforming gasoline, can utilize the
existing fuel refining and distribution infrastructure, thereby
giving us an advantage in the transportation market.
o Our fuel processor anode tail gas burner design incorporates low
emission technologies that currently meet vehicle emission standards
established on national and regional levels in the United States,
including the super ultra-low emission vehicle standards established
by the CA LEV program.
Fuel Cell Stacks
Fuel cell stacks combine hydrogen and air to make electricity, heat and
water without combustion, harmful byproducts or noise. The basic fuel cell
technology was invented over 100 years ago and has offered significant promise
as an alternative power solution to increase energy efficiency, reduce
pollution and minimize dependence on imported oil.
PEM fuel cell stacks are well-suited for small stationary applications and
transportation applications, our target markets, because they are able to
deliver higher power density relative to other types of fuel cell stacks.
Higher power density is expected to result in reduced weight, cost and volume
and improved performance relative to other types of fuel cell stacks, such as
phosphoric acid fuel cell stacks. In addition, PEM fuel cell stacks operate at
lower temperatures than other types of fuel cell stacks, i.e., less than
212(0)F, allowing faster start-up time. PEM fuel cell stacks also respond well
to changes in the demand for power. For these reasons, we believe PEM fuel cell
stacks are particularly suitable for transportation and small stationary
applications.
PEM fuel cell stacks combine pure hydrogen or hydrogen-rich streams of gas
from a fuel processor and oxygen from the air to produce electricity without
combustion. The core of the fuel cell consists principally of two gas diffusion
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. The electrodes and the membrane are pressed together on both sides by
flat, bipolar metallic plates and held together by a plastic gasket. Hydrogen
fuel is fed into the anode and air enters through the cathode. In the presence
of the platinum-based catalyst, each hydrogen molecule splits into two protons
and two electrons. The electrons from the hydrogen molecules flow through an
external circuit creating an electric current. Protons from the hydrogen
molecules are transported through the polymer electrolyte membrane and combine
at the cathode with the electrons and oxygen from the air to form water and
generate byproduct heat.
Individual fuel cells are positioned between electrically conducting
bipolar plates and combined into fuel cell stacks. The voltage of a stack of
fuel cells is proportional to the number of fuel cells. The number of fuel
cells in a stack and the cell surface area determine the amount of electrical
power and heat that can be generated. The DC power produced by a fuel cell
stack is either applied directly to a DC load or converted to AC power by an
inverter. Through the use of a heat exchanger, the heat generated in the
process can be used in cogeneration heating or cooling applications.
[DIAGRAM OF A FUEL CELL STACK]
We have built and tested fuel cell stacks in the 100 W to 50 kW range that
have achieved electrical efficiencies of between 50% and 55% in tests conducted
by third parties. Our fuel cell stacks feature sheet metal bipolar plates, gas
diffusion electrodes and advanced catalysts, all of which we believe will
contribute to the durability and electrical efficiency of our fuel cell stacks
and reduce the cost of production and operation. To date, we have built and
tested approximately 255 fuel cell stacks, comprising a total of about 980
kilowatts, and have delivered approximately 94 fuel cell stacks, comprising a
total of about 510 kilowatts, to automobile manufacturers, utility and energy
companies, universities and research institutions.
We believe our fuel cell stacks will provide the following benefits:
o The advanced gas diffusion electrodes and catalysts that we use will
significantly increase the efficient operation of our fuel cell
stacks.
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o Our proprietary stack design utilizing sheet metal bipolar plate
technology will facilitate low-cost, high- volume assembly.
o Our fuel cell stacks are designed to withstand severe vibration and
shock and have been delivered to and successfully tested by the TNO
Institute of Environmental Sciences, Energy Research and Process
Innovation on behalf of the Dutch navy.
o Our advanced stack-sealing structures will reduce maintenance costs
by permitting us to bypass a damaged fuel cell and continue the
operation of the fuel cell stack.
Power Modules and Integrated Fuel Cell Systems
By combining our fuel processors and our fuel cell stacks into an
integrated design, we believe that our power modules and integrated fuel cell
systems will cleanly and efficiently produce electricity from most commonly
available hydrocarbon fuels, including gasoline. Our power modules, which form
part of our integrated fuel cell systems, include a fuel processor, a fuel cell
stack, a fuel supply subsystem, an air supply subsystem, a water management
loop, a thermal management system, a microprocessor-based control unit and a
battery. Our integrated fuel cell systems, such as a complete automobile engine
or power generator, include a power module and an inverter or power conditioner
to convert the DC power produced by the fuel cell stack into the AC power
required by some electrical equipment and transmission systems.
[DIAGRAM OF AN INTEGRATED FUEL CELL SYSTEM]
Depending on the needs of a particular market, both geographical and by
application, we believe that we will be able to build integrated fuel cell
systems by combining our power modules
o with the technologies of manufacturers of furnaces, water heaters and
boilers for cogeneration applications that will produce heat and
electricity in European and Japanese residences and
o with power electronics and control systems that will provide AC power
for United States residences and premium power applications.
We are designing our power modules and integrated fuel cell systems to
achieve electrical efficiencies of between 35% and 45%, depending on the fuel
used and power range. To date, we have built and tested 4 integrated fuel cell
systems, operating on propane and natural gas, in the 300 W to 5 kW power
ranges.
We believe our power modules and integrated fuel cell systems will provide
the following benefits:
o Our integrated design control should yield efficiencies in overall
cost, size and energy. We believe our power modules and integrated
fuel cell systems can be manufactured less expensively than those of
our competitors, due in part to our ability to use low-cost
components developed with our proprietary technologies, such as our
patented high temperature membrane technology.
o We expect to be able to design our power modules and integrated fuel
cell systems for cogeneration, non- cogeneration, baseload and
load-following applications, depending on the particular requirements
of each customer within our target markets.
o Our technology can be scaled up or down between 500 watts and 250
kilowatts with minimal loss in performance, thereby placing us in a
position to meet the growing needs of both the stationary and
transportation markets.
o The small size and relatively lightweight design of our power modules
and integrated fuel cell systems should facilitate easy
transportation and installation with minimal site preparation in
stationary
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applications. We expect our products designed for automotive
applications to fit into the engine cavity of a standard mid-size
vehicle.
Our Target Markets
We are targeting specific sectors of both the stationary and
transportation markets for electrical power. Within the stationary market, we
are focusing on premium power, residential power and, to a lesser extent, small
commercial power applications. In the premium power market, we intend to
provide a reliable power supply for telecommunications and industrial equipment
applications. In the U.S. residential power market, we intend to focus
on providing standby and primary electrical power. In the European and Japanese
residential power markets, we intend to address demands for both heat and
electrical power, such as space heating and air conditioning. In the small
commercial power market, we expect that our products will provide an alternate
source of heat and electricity for small businesses. Within the transportation
market, we are initially focusing our efforts on light duty vehicles.
Stationary Market
In its 1999 report entitled "Small-Scale Power Generation: How Much? What
Kind?," Business Communications Co., Inc. states that fuel cells have emerged as
one of the most promising technologies for meeting growing worldwide energy
needs. They project that during the period between 1998 and 2003, distributed
generation, defined as "any small scale power generation technology that
provides electric power at a site closer to customers than central station
generation," will grow at an average annual rate of 14.9% in the United States
and 28.4% worldwide. They further project that the annual market in 2003 for
fuel cells for stationary applications can be expected to reach $1.1 billion in
the United States. We expect this trend to grow beyond 2003 as fuel cells gain
market acceptance and fuel cell product cost begins to challenge the product
cost of traditional generating technologies. According to a report published in
1999 by Allied Business Intelligence, Inc., total global stationary fuel cell
generating capacity is expected to grow to 13,669 megawatts in 2010.
Premium Power Market
The premium power market is one in which customers are willing to pay a
premium for a secure and reliable source of quality power. The market
opportunity for standby, auxiliary, highly reliable and high quality power -
known as uninterruptible power supply - was estimated by Frost & Sullivan in
2000 to be in excess of $5.5 billion annually. We intend initially to focus on
telecommunications applications within the premium power market in an attempt
to address the rapidly growing need for reliable, high quality power. Because
of the willingness of participants in this market to pay a premium for
increased reliability, our strategy is to target the telecommunications sector
as our first commercial market. We intend to bring our first commercially
available premium power stationary products to the telecommunications market in
2002. We expect that these products will be 1 kW to 5 kW power modules suitable
for manufacturers of telecom backup systems, telephone switching centers and
cellular transmission towers. As the premium power market develops, we also
intend to design and develop power modules under 10 kilowatts for industrial
equipment and industrial vehicles, such as forklifts. In Japan, we believe the
premium power market will also call for higher power applications of our
products in the 10 kW to 50 kW power range, for example, for use in automatic
teller machines.
Residential Power Market
We believe that residential customers will purchase integrated fuel cell
systems for their homes in order to reduce their total energy cost and increase
the quality and environmental safety of the energy they use. We believe that
the demand for our products in the European and Japanese residential markets
will be focused primarily on combined heat and electrical power, or
cogeneration, applications. We plan to focus first on the German residential
market for cogeneration, as we believe that the deregulation of utilities in
Germany sets the stage for alternative sources of power. Within this market, we
expect our power modules in the 1 kW to 3 kW power range to be integrated and
distributed with the cogeneration systems of third parties. In the United
States, there is also a growing need for alternative sources of electrical
power. According to the Energy Information Administration's May 1998 report
entitled Deliverability on the Interstate Natural Gas Pipeline System, there
were 55.1 million
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residential natural gas customers in the United States in 1996; these customers
have access to a fuel source from which our fuel processors can extract hydrogen
for use in a fuel cell stack. In addition, the American Gas Association
estimates that 70% of newly-built single-family homes use natural gas heating,
and that 4.5 million households in the United States use propane as the main
heating fuel, which can also be converted into hydrogen by our fuel processors.
Within the residential market, we believe demand for our integrated fuel cell
systems in the 5 kW power range will first arise from new home construction,
off-grid applications and grid-enhancement. In Japan, as deregulation of
utilities progresses in the next five to six years, we plan to provide power
modules in the 1 kW power range that will be integrated with the cogeneration
systems of third parties. We plan to bring to market our first commercially
available residential stationary products in 2003.
Approximately the size of a home furnace or boiler, we are designing our
residential power modules to generate between 1 kilowatt and 5 kilowatts of
electrical power, depending on the needs of specific geographical markets
around the world. We expect that our residential power modules for the European
and Japanese markets, when combined with the technologies of third parties with
whom we intend to form manufacturing, marketing or distribution relationships,
will be able to create enough heat to provide households with hot water as well
as electrical power. We believe we will have the ability to vary and modify our
basic residential power modules to accommodate a variety of applications. We
expect that our residential power modules will operate:
o connected to the electric utility grid;
o on a stand-alone basis; or
o in dual mode, where the fuel cell stack operates in parallel with the
grid or, when the grid is unavailable, on a stand-alone basis.
Small Commercial Power Market
We expect that with the deregulation of utilities, commercial enterprises
will increasingly adopt on-site power generation systems. These commercial
enterprises will seek power sources that are less expensive or more reliable
than the current electric grid, as well as those that provide cogeneration of
heat and electricity. As residential customers select distributed generation
solutions to meet their energy needs, we expect small commercial enterprises,
requiring up to 50 kilowatts of power, to choose similarly distributed sources
of power. Although we are not currently developing our products for the small
commercial power market, we expect to monitor the development of this market
and capture future opportunities as they arise.
Transportation Market
The pace at which the transportation market for our fuel cell technologies
will develop is largely dependent upon the business strategy of automobile
manufacturers. Nevertheless, in order for our transportation products to be
attractive to manufacturers, we plan to focus on reducing cost and size,
minimizing start-up and transient response times and optimizing life span. We
believe that automobile manufacturers, depending on their needs, will purchase
our fuel processors and our fuel cell stacks separately as components.
Depending on the roll-out plans of automobile manufacturers, we plan to bring
to market our first commercially available transportation products in 2005.
Our fuel processors and fuel cell stacks for transportation applications
are being designed for integration into transportation power modules which will
generate between 30 kilowatts and 250 kilowatts of electrical power to provide
power for passenger car, bus and truck applications. We are designing
components of transportation power modules to meet the specifications of
various automobile manufacturers so that the complete power module will fit
under the hood of a mid-size vehicle. To date, based on the testing and
evaluation of our components for transportation power modules, we have met or
exceeded several automotive target specifications set by the Partnership for a
New Generation of Vehicles for 2004, including those for transient response
time, emission levels and energy efficiency. Our transportation products are
achieving super low emission vehicle, or SULEV, standards established by the
State of California and less than 10 second transient response time. Our fuel
processor for
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transportation applications has achieved fuel efficiency of 80% in laboratory
tests. Our goal is to produce products for transportation applications that
allow vehicles to achieve up to triple the fuel economy of today's vehicles and
meet all safety and environmental requirements, while maintaining the comfort,
utility and performance of today's vehicles. We believe that our innovative
technology will enable us to be leaders in this transformation process. Our
transportation products are being designed to operate:
o on currently available fuels such as gasoline or on future fuels such
as alcohols or those derived from biomass;
o in a fully transient mode to allow power over the complete drive
cycle while maintaining SULEV or better emission standards; and
o as primary driving power, as part of a hybrid vehicle system or as an
auxiliary power unit.
We believe we were the first company to demonstrate publicly the use of a
fuel processor to reform gasoline into hydrogen to generate power from a fuel
cell stack. We believe our gasoline fuel processing technology will give us a
competitive advantage in the transportation market, as we believe it would
utilize the existing fuel delivery infrastructure. We recently delivered two
complete gasoline-powered fuel processors designed for testing transportation
applications of fuel cell stacks. We expect to deliver two additional
gasoline-powered fuel processors designed for testing transportation
applications of fuel cell stacks in 2001.
We believe that the hybrid battery-fuel cell vehicle market, in addition
to the market for electric vehicles operating entirely on fuel cell systems,
represents a significant opportunity and will expand as governments and
consumers demand cost-efficient, reliable and environmentally friendly mobile
electric power, particularly in urban areas. We expect that hybrid battery-fuel
cell vehicles will have significantly lower emissions than hybrid
battery-internal combustion engine vehicles. We are actively pursuing the
hybrid battery-fuel cell light duty vehicle market and have supplied fuel
processors and fuel cell stacks to seven automobile manufacturers, including
Renault of France for its FEVER car project and Fiat of Italy, for testing and
evaluation.
Hydrogen Market
We believe hydrogen may in the future become a widely used fuel as public
awareness of its potential and the supply infrastructure evolve. We believe we
will be well positioned to capitalize on the emergence of an improved hydrogen
infrastructure as a result of our experience with fuel cell technology.
Given the versatility of our technologies and the possibility of changes
in industry and market demands, we may decide to enter into relationships with
third parties to pursue non-core markets such as the hydrogen market, including
hydrogen recovery from chemical plants. We may establish alliances with major
industrial companies involved in the storage, handling and servicing of
industrial gases and hydrogen recovery from chemical plants. If we enter into
such alliances, we may pursue premium power stationary applications and
transportation applications where hydrogen may become an extremely attractive
fuel. For example, we have delivered our fuel cell stacks to a European bus
manufacturer operating a prototype bus on hydrogen gas.
In Europe, there are buses and cars that currently run on hydrogen, and
hydrogen distribution lines already exist. For example, BMW of Germany has
presented a commercial car with an internal combustion engine operating on
liquid hydrogen, and a liquid hydrogen filling station has been installed at
the Munich airport. Hamburg, Germany, Lisbon, Portugal and Milan, Italy have
signed a cooperation protocol to expand the number of vehicles operating on
hydrogen in order to reduce air pollution. Buses operating on hydrogen have
been demonstrated in several cities in North America, and major automobile
manufacturers have demonstrated cars operating on hydrogen.
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Our Strategy
Our objective is to extend our leadership in the design, development and
testing of fuel processors, fuel cell stacks, power modules and integrated fuel
cell systems and to bring about the successful commercialization of our
products. Key elements of our strategy to achieve this objective include:
Extend Our Technology Leadership
We believe our comprehensive knowledge of fuel cell technology, from fuel
processors to fuel cell stacks, will position us to be a market leader in the
field of power modules and integrated fuel cell systems. We believe we are
designing and developing the most flexible fuel cell technologies and products,
due in part to the development of our fuel processor which is capable of
operating on a variety of commonly available hydrocarbon fuels. The scientists
in our catalysis group have conducted extensive research and development of
advanced catalysts for use in fuel processors, and we intend to continue to
improve the performance of such catalysts. We believe our proprietary stack
design, which incorporates sheet metal bipolar plates, makes our fuel cell
stacks less expensive and more robust than the fuel cell stacks of our
competitors. In addition, the catalysts we use in our fuel cell stacks are
highly efficient and durable.
We intend to continue to invest substantially in research and development
and to increase the performance and functionality of our fuel cell products. We
believe our concurrent research and development efforts in designing products
for both stationary and transportation applications will achieve reciprocal
breakthroughs; we expect that our continuing effort to meet challenging targets
in one market will result in advances in our technology that will benefit the
development of our products for other target markets. We believe that our
technology should enable us to be an industry leader in designing and
developing fuel cell technologies.
Exploit Design Integration Advantage
We believe we are one of the most vertically integrated developers of fuel
cell technologies, and that design integration will provide us with an
important competitive advantage over component suppliers. We have access to
materials such as catalysts and gas diffusion electrodes, and we plan to
manufacture and assemble fuel processors and fuel cell stacks and integrate
these components into efficient power modules and integrated fuel cell systems.
We believe that such vertical integration not only prevents a bottleneck in the
supply of components, but will also help us become a leader in developing and
manufacturing versatile, efficient and cost effective products. For example, we
have already demonstrated that our versatile and scalable technology and
products have the potential to serve both stationary and transportation
markets. We believe our systems integration technology will also provide key
performance benefits such as quick start-up and increased electrical efficiency
of our integrated fuel cell systems. For example, because we are able to
configure the interfaces between our fuel processors and our fuel cell stacks,
we can enhance our understanding of carbon monoxide tolerance levels and
optimize start-up techniques and start-up times of our integrated fuel cell
systems.
Exploit Multi-Fuel Advantage
Because the infrastructure for a reliable and affordable supply of
hydrogen is not foreseeable in the near future, the hydrogen necessary for
power generation by a fuel cell stack will need to be derived from readily
available hydrocarbon fuels. We believe that the multi-fuel capability of our
fuel processor, as well as our ability to deliver a fuel processor that can
reform fuel by utilizing steam reforming, autothermal reforming or partial
oxidation technologies, will enable us to compete in multiple markets. In
addition, we expect that the multi-fuel capability of our fuel processor will
enable us to compete regardless of which fuel eventually becomes the industry
standard.
Focus on Early-Adopter Markets
We believe that the need for reliable and environmentally sound primary
and backup power in premium power markets such as the telecommunications market
and the need for low-cost reliability in the residential market make these
sectors the most promising candidates for early adoption of fuel cell
technology. We believe that due to less
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stringent size and cost constraints, the stationary market, in particular, the
premium power market, will be the first to adopt fuel cell technology. We expect
the early adoption process to start with applications where power quality is at
a premium and where traditional distribution is costly. In the United States, we
intend first to target applications in the telecommunications market, where we
have identified telephone switching stations and cellular towers as promising
applications of our technology. We believe this focus will enable us to extend
our technological leadership and commercialize our products more rapidly than if
we first targeted other markets.
Exploit Multi-Market Advantage
By simultaneously developing and testing our products in a number of
markets, we believe we will be able to apply technological advances in products
developed for one market to our products in other markets. For example, in
order to be competitive in the transportation market, fuel cell technologies
will have to meet aggressive targets for weight, volume, start-up time and
cost. These targets are far more aggressive than those for fuel cell
technologies in other markets and therefore require advanced research and
technology. Our objective is to apply any resulting breakthroughs in developing
our products for the transportation market to our products for the stationary
market. We believe that our multi-market strategy will help us to achieve
leadership in fuel cell technology while reducing development and manufacturing
costs in the stationary market.
Leverage Strategic Relationships
We believe strategic relationships will help us understand the
requirements of customers, provide us with the engineering, testing and
analytical resources to commercialize our products more rapidly, help us gain
access to a stable customer base and provide us with global marketing,
distribution and servicing advantages over our competitors. Since we anticipate
multiple third-party distribution channels to service our customers, we also
plan to form strategic alliances and other relationships with selected
technology companies, component suppliers, manufacturers, distributors and
end-users to facilitate the commercialization of our products. One key aspect
of this strategy is to leverage the success of our joint development programs
and other field tests of our products into long-term manufacturing, distributor
and supplier relationships. For example, we are currently developing and plan
to demonstrate, jointly with a major telecommunications provider, a fully
integrated fuel cell system with a capacity of 5 kilowatts for the premium
power market. We also plan to continue to participate in existing
government-funded fuel cell technology research and development programs, such
as with the U.S. Department of Energy, the U.S. Department of Commerce and the
European Union.
Marketing & Distribution
We intend to market and distribute our products in two primary markets --
the stationary market and the transportation market. We believe we will be able
to enter early adopter markets while we transition our products from more
limited, premium-priced applications, such as telecommunications, to broader
mass-market applications, such as residential. We plan to form a range of
manufacturing, marketing and distribution alliances in order to commercialize
our products. We believe that a multi-partner model will be effective in
addressing the unique characteristics of our target markets.
Stationary Market
In the U.S. premium power market, we intend to work with end-users to
develop products according to industry-acceptable standards. For example, we
have entered into a memorandum of understanding with a major telecommunications
provider, under which we will develop and demonstrate a fully integrated fuel
cell system with a capacity of 3 kilowatts to 5 kilowatts. In Europe, we are
working with Air Liquide S.A., Alcatel Spain and other partners as part of a
publicly-funded project commissioned by the European Union, to develop
integrated fuel cell systems for telecommunications applications.
In the residential market, our strategy is to introduce our power modules
and integrated fuel cell systems into consumers' homes as an appliance that
will take its place alongside furnaces, water heaters and boilers. We expect
the power module to be a "connected" device with interfaces to the electric
grid, the gas line, the phone system, the
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heating, ventilating and air conditioning, or HVAC, system, and other appliances
in the home. As the home becomes a connected network of devices, we believe an
intelligent power module will be the central element of this network. We believe
that the most credible entry into the residential market in the United States
will involve forming a relationship with a third party that understands the
residential customer and the appliance business, and who has the ability to
deliver, install and maintain an integrated fuel cell system in the home for the
provision of electricity. Because of the novelty of this technology in people's
homes, a high quality image and a name people trust will be necessary to gain
consumer acceptance. Accordingly, we plan to pursue relationships with suitable
manufacturers and distributors who share our vision of the networked home. These
include natural gas and propane distributors, electric and telephone utilities,
manufacturers and distributors of electric and heating equipment and home
builders. We expect that these manufacturers and distributors will have existing
sales organizations and that some of them will have the capability, or will
acquire the capability, to install and service our products.
Since the European and Japanese residential markets call for the provision
of combined heat and power, we intend to establish relationships with
manufacturers of furnaces, water heaters and boilers in order to integrate our
power modules with their cogeneration technologies and components and
distribute our combined co-branded products to homes. In Europe, particularly
in Germany, we believe the recently privatized utilities offer the most
promising path to commercialization in the residential market.
We are tailoring our marketing and distribution strategies to pursue the
residential market on a global basis. A number of important differences between
the U.S. market, on the one hand, and the European and Japanese markets, on the
other hand, will drive our global marketing and distribution approaches:
o Utility deregulation is at a more advanced stage in some countries in
Europe, making the utility market more attractive to third parties
with whom we intend to form marketing and distribution relationships.
Micro grids that serve small neighborhoods may be easier to implement
and more cost effective.
o Cogeneration of heat and electrical power has obtained greater
penetration in Europe and Japan than in the United States. As a
result, we expect to pursue relationships with European and Japanese
HVAC manufacturers.
Transportation Market
We intend to develop technology relationships with a number of automobile
companies rather than relying heavily on a single alliance with one automobile
manufacturer. We expect these technology relationships to lead to the
production of light and heavy duty fuel cell or hybrid battery-fuel cell
vehicles. We intend to manufacture key components for sale to the joint
ventures we plan to establish with these manufacturers and to license our fuel
cell technologies on a non-exclusive basis to the manufacturers or the joint
ventures.
To date, we have delivered, or have entered into agreements to deliver,
approximately 20 fuel cell stack prototypes to major automobile manufacturers
for evaluation and testing. We have also built approximately 13 fuel processors
designed for transportation applications. We are currently engaged in joint
development programs with three major automobile manufacturers and we have
supplied fuel cell stacks to three others. These development programs all
involve the integration of our fuel processors or fuel cell stacks into
integrated fuel cell systems that have been designed by the manufacturers.
Several of these programs involve joint cost and durability analyses with the
manufacturers, the results of which the manufacturers will share exclusively
with us.
We intend to develop the Nuvera brand name around our technology and seek
continued visibility for our brand once our products are integrated into
vehicles. We have filed for a trademark in our name in the United States, the
European Union and Japan. We value the transportation market not only for its
size, but also for its rapid product development cycles, demands for low-cost
performance and stringent size and weight constraints, as a result of which we
believe this market will serve as the impetus for important technological
innovations that we can then apply to the premium, residential and small
commercial power markets.
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Key Relationships
We believe that developing and maintaining relationships with a variety of
companies is important to our research, development and commercialization
efforts. Among other benefits, we believe these relationships will help us to
understand the requirements of consumers, provide us with the engineering,
testing and analytical resources to develop a superior product more rapidly,
provide global manufacturing, marketing, distribution and servicing
opportunities and enable us to lower our component costs. While we intend to
develop other strategic relationships to enlarge our access to consumers,
technologies and markets, the following are some of our key relationships.
Joint Development Programs
From inception through June 30, 2000, Nuvera and its predecessor companies
have been funded in excess of $18 million under government-sponsored fuel cell
technology research and development contracts. This research has fostered the
development of advanced technologies while allowing Nuvera to retain the rights
to these technologies for commercialization. We are currently involved in three
programs with the U.S. Department of Energy and the U.S. Department of Commerce
and seven programs funded by the European Union, and we expect to enter into two
additional European Union-funded programs by the end of 2000. We will continue
to evaluate government-sponsored research opportunities where the program
objectives are clearly aligned with our strategy.
In addition, we have entered into joint development programs with a number
of companies, either under the framework of a government-funded project or
separately, under private agreements. We anticipate that these relationships
may develop into supply relationships in the future.
As part of a cooperative agreement we have entered into with the U.S.
Department of Energy to develop, design, build and demonstrate two 50 kW
multi-fuel processors for transportation applications, some of our suppliers of
key components or materials are working with us in cooperative joint
development programs to improve and optimize the performance of our fuel cell
technologies. In October 1999, we entered into a 3 1/4-year cost-shared joint
development contract with Corning, Inc., the world's largest supplier of
ceramic substrates used in automotive exhaust catalyst systems as well as a
major supplier to the telecommunications industry. The objective of the joint
development program is to develop compact, lightweight catalyst systems and
substrates specific to our fuel processors that can be economically produced
and can withstand the rigorous vibration environment of transportation and some
premium power applications. Under the agreement, the intellectual property
rights in jointly-developed inventions will vest jointly in both parties;
however, we have a royalty-free, exclusive license, including to the exclusion
of Corning, to any of these inventions relating to fuel processors and fuel
processing methods for the production of hydrogen. This license will
automatically lapse and each party will obtain full joint ownership rights if
it has been demonstrated that we are not making an effort to commercialize our
fuel processors within four years of the first issuance of any patent on such
inventions. We are entitled to share royalties on any jointly-owned invention.
We expect to utilize the catalyst systems we develop under this program in
products we deliver to the automotive industry in late 2000.
In addition, under the same U.S. Department of Energy program, we entered
into a joint development agreement with United Catalysts, Inc. United Catalysts
is a division of Sud-Chemie, A.G., the world's largest supplier of fuel
processing catalysts. Under the agreement, we and United Catalysts are engaged
in a cost-shared development program to design compact, low-cost fuel
processing catalysts specifically designed for our fuel processors and based on
the substrates of Corning. Intellectual property rights in jointly-developed
catalysts will vest jointly in both parties; however, we have a royalty free,
exclusive license, including to the exclusion of United Catalysts, to
inventions relating to fuel processors and fuel processing methods for the
production of hydrogen. We are entitled to share royalties arising from jointly
developed catalysts. Under this program, we have jointly developed a compact
shift catalyst that lowers carbon monoxide levels and increases the
concentration of hydrogen in the hydrogen-rich gas stream entering the fuel
cell stack.
Also under this U.S. Department of Energy program, we have entered into a
joint development program with STC Catalysts, Inc. to develop preferential
oxidation catalyst technology for removal of carbon monoxide from the
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hydrogen gas produced by the fuel processor. Under this agreement, we retain the
intellectual property rights for all jointly-developed inventions applicable to
use in fuel processing for use with fuel cell technologies. This agreement also
provides that STC Catalysts will grant to Nuvera an exclusive, irrevocable,
worldwide, royalty-free license in and to each invention developed solely by STC
Catalysts applicable to use in fuel processing for use with fuel cell
technologies.
Market Alliances
In the premium power market, we entered into a memorandum of understanding
with AD Little and a major telecommunications provider in July 2000. The
memorandum of understanding envisions a program to develop fuel cell technology
customized for the on-site generation of power for telecommunications
equipment. This equipment will typically be housed in dedicated structures,
either aboveground huts or community energy vaults. The power rating of the DC
generators that must operate in these structures is approximately 5-10
kilowatts. Nuvera and this telecommunications provider are currently engaged in
demonstrating and testing telecommunications applications of our products, the
first phase of a three-phase joint development program to develop a fuel cell
power system to meet telecommunications requirements. The first phase of the
program commenced in July 2000. This telecommunications provider is under no
obligation to proceed with the second and third phases of the program.
In the transportation market, we have demonstrated our fuel processors and
our fuel cell stacks to a number of automobile manufacturers and we are
currently engaged in joint development programs with three of these companies to
build our products to their specifications and jointly test the results.
As part of programs funded by the U.S. Department of Energy and the
European Union, we have worked together with automobile manufacturers, a
European bus manufacturer, industrial companies, four universities and nine
research and development institutions to develop, test and evaluate various
fuel cell technologies. We intend to develop other strategic relationships and
alliances to provide us with access to consumers and to traditional
manufacturing, marketing, distribution and service capabilities.
Product Development and Commercialization
Technology Development and Product Engineering
Our approximately 20,000 square feet of technology development facilities
leased in Cambridge and Milan together contain 29 test stations, to be
increased to 43 by the end of the year, for the purpose of designing,
developing and testing fuel processors, fuel cell stacks, power modules, carbon
monoxide clean-up devices, catalysts and electronic controls for use in premium
power, residential and transportation applications. Our advanced research and
development facilities allow design optimization and verification testing,
accelerated-aging testing, failure mode and effects analysis, and endurance
testing in an effort to accelerate the development and commercialization of our
integrated fuel cell systems.
Our total research and development expense, before any offset for amounts
received by De Nora Fuel Cells S.p.A. and Epyx Corporation from governments,
government agencies and our customers, was $2.520 million in 1997, $8.176
million in 1998 and $8.843 million in 1999.
Fuel Processor Product Development
The mandate of our fuel processor development team, located in Cambridge,
Massachusetts, is to improve the performance, cost and reliability of our fuel
processors. This team uses extensive computer-aided analysis to develop and
refine fuel processor designs. Evaluation of fuel processor catalysts and other
components is conducted in sub-scale and full-scale test reactors. Specialized
test stands are used to evaluate heat exchangers and other critical components.
We have constructed a fuel processor test facility in Cambridge that allows
24-hour testing and extensive monitoring of performance. Thus far in 2000, we
have built 11 fuel processors, 4 of which are located in this facility. We also
collect additional performance and endurance data from fuel processor tests
conducted in the laboratories of our customers.
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Fuel Cell Stack Product Development
Our current generation of fuel cell stacks is approaching the
commercialization stage. As a result, we are focusing on increasing the
durability and reducing the cost of our current generation fuel cell stacks,
while turning to the development of next generation fuel cell stacks. We are
refining the design of our current fuel cell stacks in our Milan facility,
where we expect to have 18 fuel cell stack test stations installed by the end
of 2000. These test stations will be used to evaluate stacks, sub-stacks and
single cell configurations under conditions designed to simulate real world
conditions. In our Milan facility we are developing direct methanol fuel cell
stacks, high temperature proton exchange membranes and composites to replace
structural elements of the fuel cell stack. Our advanced research and
development capabilities allow us to optimize fuel cell stack design through
the use of computer-aided analysis and accelerated aging testing.
Power Module and Integrated Fuel Cell System Product Development
To date, all power module and integrated fuel cell system product
development has been conducted in our Cambridge facility. In late 2000, we also
plan to conduct power module and integrated fuel cell system product
development in our Milan facility. Computer-aided design and packaging tools
and prototype development laboratories support the engineering of our
integrated fuel cell systems. We continue to develop computer and embedded
control systems for our power modules and integrated fuel cell systems using
dynamic models and a real-time operating system. We have separate laboratories
and test facilities to test components such as control systems, power
conversion devices and balance of plant components, such as pumps and valves.
Pre-Commercial Testing
In 2001, we expect to begin small-scale production of our initial
prototype systems. A major telecommunications provider has agreed to
participate in field trials and evaluations designed to test system design and
performance, as well as to set final product specifications. As part of the
first phase of these field trials, we intend to operate the telephone systems
of AD Little and Nuvera on our 5 kW natural gas power modules by the end of
2000. We intend to use the data resulting from these field trials to optimize
product design and speed commercialization. Continuing this process, late in
2001, we expect to produce and test prototypes that are designed to achieve
specific customer product specifications. We expect that the results of our
initial field trials will lead to the development and advancement of other
products for our stationary markets. By 2002, we expect to conduct field trials
of these stationary premium power products operating on natural gas and
propane.
Manufacturing and Commercialization
As a first step toward commercialization, we have 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
September 2000, we completed construction of a 5,200 square foot fuel cell
stack production facility in Milan with production lines that will allow us to
begin manual assembly and manufacturing of our pre-commercial and initial
commercial fuel cell stacks up to a volume of 1,000 one hundred-cell fuel cell
stacks per year. Once we complete our 9,000 square foot Cambridge production
facility in November 2000, we expect to be able to assemble and manufacture
fuel processors and assemble up to 1,000 power modules per year with the fuel
cell stacks manufactured in Milan. During 2001, we intend to produce and
assemble power modules and integrated fuel cell systems in our production
facility in Cambridge, with the fuel cell stacks being produced in our
production facility in Milan, and the gas diffusion electrodes for the fuel
cell stacks being supplied by De Nora Elettrodi S.p.A. By the beginning of
2003, we plan to have semi-automated production in our Milan workshops and
increase production capacity to approximately 14,000 one hundred-cell fuel cell
stacks per year, while we plan to expand our production capacity to produce up
to 4,000 power modules per year at or near our Cambridge production facilities.
We intend to perform significant quality testing before we integrate any
third-party subsystems or components into our final assembled products. We
believe that we can realize both purchase economies from existing vendors and
economies of scale related to our product development costs as unit volume
increases. Based on our
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commercialization plan, we anticipate that our current production facilities
will provide sufficient manufacturing and assembly capacity through 2002.
Thereafter, in order to achieve mass market production by 2003, we will need to
enter into joint ventures or, alternatively, develop our own large-scale
manufacturing capability.
Historical Achievements
To date, Nuvera has built and tested a substantial number of fuel
processors and fuel cell stacks. We have also delivered a substantial number of
fuel processors and fuel cells stacks to automobile manufacturers and other
companies for testing and evaluation:
Total Built and Tested
<TABLE>
2000
1993 1994 1995 1996 1997 1998 1999 YTD Total
---- ---- ---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fuel Processors Units 1 1 2 3 4 4 8 11 34
kW 2 250 100 110 61 46 280 176 1,025
Fuel Cell Stacks Units 18 48 21 25 28 28 46 41 255
---- ---- ---- ---- ---- ---- ---- ----- -----
kW 14 38 72 160 88 157 160 292 981
</TABLE>
Total Delivered
<TABLE>
1993 1994 1995 1996 1997 1998 1999 2000 YTD Total
---- ---- ---- ---- ---- ---- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fuel Processors Units 1 1 1 3 6
kW 10 10 50 100 170
Fuel Cell Stacks Units 1 1 11 5 12 5 27 32 94
kW 1 5 47 40 47 35 119 214 508
</TABLE>
In addition, some of our recent technical and commercial milestones with
respect to durability, efficiency and other key commercialization requirements
include:
2000
o Achieved over 1,900 hours of continuous operation on 10 kW
autothermal fuel processor
o Achieved over 1,100 hours of continuous operation and 450 hours of
discontinuous operation on a single fuel cell stack
o Achieved over 915 hours of field operation on a 5 kW fuel cell stack
o Achieved 7 years of discontinuous testing on a 0.6 kW fuel cell stack
o Achieved 0.65 kW/liter power density on a fuel cell stack operating
on hydrogen
o Achieved over 3,000 hours of field operation on ten fuel cell stacks
integrated with a fuel processor
1999
o Developed and tested our first 10 kW autothermal stationary fuel
processing unit
o Developed and tested our 10 kW gasoline fuel processor which met
SULEV standards
o Demonstrated a 190 kW gasoline fuel processing system
o Demonstrated 6 minute start-up time for an automotive fuel processor
o Achieved 0.22 kW/liter power density on a fuel cell stack operating
on hydrogen
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1998
o Demonstrated Epyx's fuel processor capability on multiple fuels
including gasoline, ethanol, methanol, natural gas, propane and
kerosene
o Demonstrated the integration of Epyx's fuel processor and De Nora's
fuel cell stack in a 300 W application using propane as fuel
o Operated a fuel processor suitable for transportation applications
for 3,500 hours
o Achieved 0.13 kW/liter power density on a fuel cell stack operating
on hydrogen
1997
o Converted gasoline into electricity for the first time using a fuel
processor and fuel cell stack
o Chrysler illustrated their vision of automotive fuel cell technology
at the Detroit Auto Show using our fuel processor design
o Delivered three 10 kW fuel cell stacks to Renault of France for the
FEVER car project
Intellectual Property
We rely primarily on a combination of patent, copyright, trademark and
trade secret laws, as well as confidentiality agreements and inventors' rights
agreements with our employees and companies with which we engage in joint
development programs, to protect our proprietary rights relating to technical
know-how, designs, special materials, manufacturing techniques and test
equipment and procedures for fuel processors, fuel processor components, fuel
cell stacks, fuel cell stack components, power modules and integrated fuel cell
systems.
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 power modules and integrated fuel cell systems. Despite
the inability to achieve a significant proprietary position on the basic
technologies of power modules and integrated fuel cell systems, we believe that
certain technological advances, including the design and integration of the
fuel cell system and system components, our fuel processor and its components
as well as some of the low-cost manufacturing processes that we have developed,
can be protected. The objective of our patent strategy is to obtain an
exclusive and preferential position in product features, performance and cost
compared to our competitors, while ensuring for ourselves the widest possible
application and broadest potential market for our products. We seek to patent
the key concepts and components we believe will provide us with a significant
advantage over our competitors and the inventions we consider to have
commercial value.
To date, patents have been issued and patent applications have been filed
on inventions covering various aspects of our fuel cell stack and its
components, including designs for reactant and coolant flow fields, improved
polymers for use as electrolytes and low-cost sheet metal bipolar plates,
designs for effective removal of byproduct water, ultra-lightweight structures
and designs and structures for operating on low pressure air. Additional
inventions involve various aspects of reforming hydrocarbon fuels, including
fuel processor design and reduction of carbon monoxide. Further inventions
cover fuel systems and control strategies, including hydrogen and air systems,
methanol and natural gas systems and stack control strategies. As of October
18, 2000, we have 8 U.S. and 16 international patents, in some cases covering
the same technology in multiple jurisdictions, covering our fuel processing and
fuel cell stack technology. In addition, we have allowed 1 U.S. patent
application and 1 allowed European patent application. We have also submitted
11 U.S. and 47 international patent applications, including 5 European Patent
Convention patent applications. We have also submitted 4 Patent Cooperation
Treaty patent applications. The patents that we have obtained will expire
between 2010 and 2018, and the average remaining life of our patents is
approximately 15 years.
It should be noted, however, that there can be no assurance that 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 that they will not be challenged or invalidated.
There can be no assurance that our competitors will not independently develop
or patent technologies that are substantially equivalent or superior to our
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technology. Some of our intellectual property is not covered by any patent or
patent application and includes trade secrets and other know-how that is not
patentable, particularly as it relates to our manufacturing processes and
engineering designs. In addition, some of our intellectual property includes
technologies and processes that may be similar to the patented technologies and
processes of third parties.
Some of our patents are in part the result of research and development
programs funded in part by the government and are subject to the risk of the
exercise of "march-in" rights by the government. March-in rights refer to the
right of the 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 take effective
steps to achieve practical application of the technology. In addition, these
"march-in" rights permit the government to take title to these patents and
license the patented technology to third parties if the contractor fails to
utilize the patents.
In Europe, Nuvera has entered into three association agreements with
Italy's National Agency for Alternative Energy, or ENEA. Under one of these
agreements, Nuvera owns a patent on certain fuel cell hardware technology. Upon
the commercialization of products using such patented technology, ENEA may
request Nuvera to pay royalties for recovery of a portion of the funding ENEA
provided under the agreement. In addition, Nuvera is a party to various
development contracts funded by the European Union. Under one of these
contracts, we own a patent on the development of technology relating to the
humidification and cooling of a fuel cell stack achieved by the same stream of
water. The European Union has no march-in rights with respect to any of the
technology developed under its development contracts with Nuvera. However,
pursuant to our development contracts funded by the European Union, the Joint
Research Centre of the European Union has a non-exclusive, royalty-free license
and right to access and use certain information generated under such contracts.
In addition, we rely on confidentiality agreements to protect our
unpatented information, know-how and trade secrets. We believe that our success
is substantially dependent on the knowledge, experience and technical expertise
of our employees. In this regard, our U.S. employees are required to enter into
agreements providing for confidentiality and the assignment of rights to
inventions made by them while employed by us. These agreements also contain
non-solicitation clauses for the term of employment and for one year thereafter.
There can be no assurance, however, that these agreements will not be breached,
that we would have adequate remedies for any breach or that our trade secrets
will not otherwise become known or be independently developed by competitors.
Employees of Nuvera Europe are not bound by any contractual confidentiality
agreements; however, Italian legislation requires employees to keep confidential
the proprietary information of their employer. Italian legislation also
stipulates that any invention created by an employee using the resources of his
or her employer is the property of his or her employer.
Raw Materials
The raw materials and supplies required for the production of our
principal products are generally available in quantities adequate to meet our
needs. There is a limited number of suppliers for some of the key components of
our products, but we do not anticipate difficulties in obtaining these
components from those suppliers.
Government Regulation
We do not believe that we will be subject to existing U.S. federal and
state regulatory commissions governing traditional electric utilities and other
regulated entities. We anticipate, however, that our residential products and
the installation of these products 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. Any
government regulation may depend, in part, upon whether an integrated 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 products or the
installation of our products. We also do not know the extent to which any
existing or new regulations may affect our ability to distribute, install and
service our products. Once our products reach the commercialization stage and
we begin distributing them to our early target markets, federal, state or local
government entities or competitors may
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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.
We are also subject to various international, federal, state and local
laws and regulations relating to, among other things, land use, safe working
conditions, handling and disposal of hazardous and potentially hazardous
substances and emissions of pollutants into the atmosphere. Our business
exposes us to the risk of harmful substances escaping into the environment,
resulting in potential personal injury or loss of life, damage to or
destruction of property, and natural resource damage. Depending on the nature
of the claim, our current insurance policies may not adequately reimburse us
for costs incurred in settling environmental damage claims, and in some
instances, we may not be reimbursed at all. To date, we are not aware of any
claims or liabilities under these existing laws and regulations that would
materially affect our results of operations or financial condition.
Facilities
Our principal executive offices are located in Cambridge, Massachusetts.
The corporate headquarters facility, which we sublease from AD Little, houses
our administrative, research and development, engineering, information systems,
marketing, sales and service and support groups. The current agreement
terminates on December 31, 2000. We expect to enter into a new sublease of
space and agreement for use of facilities, equipment and services with AD
Little before December 31, 2000. We are currently developing a 9,000 square
foot production facility in Cambridge which we expect to be ready for operation
in November 2000.
We also occupy offices of approximately 3,000 square feet, research and
development and engineering facilities with a combined area of approximately
5,000 square feet and a recently-built production facility of approximately
5,200 square feet in Milan, Italy, all of which we lease from Finisola S.p.A.,
the real estate company of the Oronzio De Nora Group. The leases are due to
expire on June 30, 2006, and each will automatically be renewed for an
additional six-year term unless either party notifies the other that it wishes
to terminate the relevant lease at least six months prior to its expiration.
Payments, which total 178 million Italian lira, or approximately $87,000 plus
taxes, per year, are made on a quarterly basis.
Competition
There are a number of companies located in the United States, Canada,
Europe and Japan that are developing fuel processor and PEM fuel cell
technology. Many of these companies possess greater financial and personnel
resources than we do and represent significant competition.
Competitors in the development of fuel processors include Gas Tech Inc.,
Hydrogen Burner Technology Inc., IdaTech, International Fuel Cells, Johnson
Matthey plc, McDermott International and Universal Oil Products, Inc. We are one
of the few companies that has developed a fuel processor capable of operating on
a variety of commonly available hydrocarbon fuels. We believe we were the first
company to demonstrate publicly the use of a fuel processor to reform gasoline
into hydrogen to generate power from a fuel cell stack. We have published the
results of tests and demonstrations of our fuel processors for transportation
applications in a number of articles published by the Society of Automotive
Engineers, Inc. Although other companies have claimed to have the ability to
convert gasoline into hydrogen, we are unaware of any public demonstrations of
this reforming technology to generate power from a fuel cell stack.
Competitors in the market for PEM fuel cell stacks for stationary
applications include Avista Labs, Ballard Power Systems, Inc., Energy Partners
L.C., H Power Corp., International Fuel Cells, Plug Power Inc. and Sanyo
Electric Co., Ltd. Competitors in the market for PEM fuel cell stacks for
transportation applications include Ballard Power Systems, Inc., General Motors
Corporation and International Fuel Cells. A number of major automobile 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 Power Systems, Inc. and International Fuel Cells, appear to
have been directed toward the development of PEM fuel cell systems for
automotive and large stationary power applications.
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We believe that our technology is more advanced than that of our potential
PEM fuel cell technology competitors. We plan to maintain our lead by diligent
prosecution of patents, continuing research and development advancements,
commercialization of our products and the formation of strategic relationships
with leading companies within each of the industry groups that comprise our
targeted market base. Once we begin selling our products, we intend to compete
primarily on the basis of cost, reliability, efficiency and environmental
considerations.
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 the most practical in small-scale applications.
In premium power applications, our products will also compete with current
conventional power sources such as batteries and providers of on-grid
electricity. To be competitive with electricity provided by the grid, we
believe that our products need to be at or near parity with on-grid electricity
on the basis of cost and provide additional benefits. We expect that the most
important additional benefit will be immunity to utility "brown-outs" and
"black-outs" that have affected many areas of the U.S., particularly in the
summertime.
In residential applications, our products will compete with other
distributed generation technologies, including reciprocating engines and solar
and wind power. We believe that our integrated 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 our integrated fuel cell systems will be
quieter, environmentally cleaner and more efficient than reciprocating engines,
and less expensive to install, service and maintain than solar and wind power.
Unlike solar and wind power, our integrated fuel cell systems will provide
continuous power.
In transportation applications, advanced batteries are expected to be
another competitor of our products. Research and development in battery
technology is being conducted to improve performance, reduce weight, lower cost
and decrease recharging time to meet the requirements for an electric vehicle
for the zero emission vehicle market. We believe our products can complement the
use of batteries in hybrid battery-fuel cell vehicles for the zero emission
vehicle market.
Employees
As of October 20, 2000, we had 161 employees and independent contractors,
120 based in Cambridge, Massachusetts and 41 based in Milan, Italy. Of these 161
individuals, approximately 100 were engineers, scientists and other degreed
professionals. None of our U.S. employees are covered by any collective
bargaining arrangements. Our employees in Italy are covered by a collective
bargaining agreement pursuant to Italian law. We believe that our relationships
with our employees are good. Each employee in the United States is required to
execute a confidentiality and non-solicitation agreement as part of the terms of
employment. Our employees in Italy are required by the Italian civil code to
keep confidential our proprietary information. In addition, some of our key
European employees have signed non-competition agreements.
Legal Proceedings
We may from time to time be involved in legal proceedings in the ordinary
course of our business. We are not currently subject to any pending legal
proceedings and claims in the ordinary course of business that, either
individually or taken as a whole, would have a material adverse impact on our
financial position, results of operations or cash flows.
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MANAGEMENT
Directors, Executive Officers and Key Employees
Our directors, executive officers and key employees, and their ages and
positions, as of November 1, 2000 are as follows:
<TABLE>
Name Age Position
---- --- --------
<S> <C> <C>
Directors and Executive Officers
Mark A. Brodsky.......................... 44 President, Director
Jeffrey Bentley ......................... 46 Chief Operating Officer, Senior Vice President
Michele Tettamanti....................... 40 Chief Operating Officer, Senior Vice President
William Mitchell......................... 34 Vice President, Engineering
J. Barclay Collins....................... 56 Director
Federico De Nora......................... 32 Director
John A. Gartman.......................... 52 Director
Franco Ladavas........................... 58 Director
Lorenzo C. Lamadrid...................... 49 Director
John Lavin............................... 53 Director
Eugenio Morpurgo......................... 39 Director
Mauro Saponelli.......................... 44 Director
Key Employees
James Calvin Cross III................... 35 Director, Research and Development
Antonio Maggiore......................... 36 Technical Manager, Nuvera Europe
Lawrence G. Clawson...................... 62 Principal Engineer
Srinivasa K. Prabhu...................... 33 Senior Manager
Prashant S. Chintawar.................... 31 Senior Manager
Alessandro Delfrate...................... 38 Sales Manager, Nuvera Europe
Giampaolo Sibilia........................ 36 Production Manager, Nuvera Europe
Lou Persico.............................. 45 Treasurer
Anne O'Brien Troutman.................... 44 Secretary and Acting General Counsel
Danny Wong............................... 36 Controller
Silvio Monti............................. 35 Controller, Nuvera Europe
Stephen Gustave Block.................... 43 Program Manager
Katia Franchi............................ 30 Manager of Experimental Activities and Laboratories,
Nuvera Europe
</TABLE>
Directors and Executive Officers
Mark A. Brodsky has been President and a director since April 2000. He has
also served as Executive Vice President, Finance and Development of AD Little, a
business and technology consulting firm and one of our significant stockholders,
since July 1999 and supervised fuel cell technology activities at Epyx
Corporation. Mr. Brodsky has been a member of the board of directors of Pyxsys
Corporation, a storage systems company, since October 1999. He served on the
board of directors of c-quential, Inc., a global management and technology
consulting firm serving the telecommunications, information technology, media
and electronics industries, from March 2000 to August 2000. From September 1996
to June 1999, Mr. Brodsky served as Commercial Director of Enron Corp., an oil
and gas company, and from September 1992 to September 1996 served as Vice
President, Finance of Merrill International, an international large-scale
project development company. From 1986 to 1992, he was Finance Manager for
International Operations at GE Aerospace.
Jeffrey Bentley has been Chief Operating Officer and Senior Vice President
since April 2000. Prior to joining Nuvera, Mr. Bentley was employed at AD
Little since April 1986, becoming Vice President in 1996, then Chief Operating
Officer of Epyx Corporation since its inception in 1997. From 1982 to 1986, he
served as Manager of
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Manufacturing and Design Engineering at Computervision, a company specializing
in the development of computer-aided design and drafting systems. Prior to 1982,
he was a thermodynamic engineer and program manager for General Dynamics in San
Diego, California, assisting in the development of the Tomahawk Cruise Missile.
Mr. Bentley holds a S.B. and S.M. in Mechanical Engineering from the
Massachusetts Institute of Technology.
Michele Tettamanti has been Chief Operating Officer and Senior Vice
President of Nuvera and Chief Operating Officer of Nuvera Europe since April
2000. Prior to joining Nuvera, he was Chief Operating Officer of De Nora Fuel
Cells S.p.A. from October 1999. Mr. Tettamanti joined De Nora S.p.A., an
affiliate of Nuvera, in 1985, becoming Sales Manager in 1995, and General
Manager of the company's fuel cell division in January 1999. Mr. Tettamanti
holds a degree in Industrial Chemistry from Universita degli Studi of Milan,
Italy.
William Leonard Mitchell joined Nuvera, then Epyx Corporation, as Vice
President in February 1998, and was made Vice President, Engineering in April
2000. From March 1995 to February 1998, Mr. Mitchell was Program Manager of the
Hydrogen Technologies Unit at AD Little. From June 1991 to March 1995, he was a
faculty member at Pennsylvania State University. Mr. Mitchell holds a B.S. and
M.S. in Mechanical Engineering from Pennsylvania State University.
J. Barclay Collins has been a director since August 2000. He has served as
Executive Vice President and General Counsel of Amerada Hess Corporation, a
leading independent energy company and a stockholder of Nuvera, since 1985 and
has been a director of Amerada Hess since 1986. Mr. Collins has also served as
director of Dime Bancorp, Inc. since 1993.
Federico De Nora has been a director since April 2000. He has been
employed by various entities of the Oronzio De Nora Group, an affiliate of
Nuvera, since 1988, serving as Planning and Organization Manager from 1993 to
1997 and as Executive Vice President from 1998 to May 2000 of De Nora S.p.A.
Since May 2000, Mr. De Nora has served as Chief Executive Officer of both De
Nora Impianti S.p.A. and De Nora Elettrodi S.p.A.
John A. Gartman has been a director since April 2000. He has served as
Senior Vice President, Energy Marketing of Amerada Hess Corporation since
September 1997. From June 1969 to September 1997, Mr. Gartman served as Vice
President of Public Service Electric and Gas Company, a utilities company.
Franco Ladavas has been a director since April 2000. He has served as
President of Nuvera Europe since October 1999. Mr. Ladavas has also been the
Industrial Strategy Director of Norfin S.p.A., the holding company of the
Oronzio De Nora Group, since January 2000. Mr. Ladavas has worked for the
Oronzio De Nora Group since 1968, serving as Commercial Director of De Nora
S.p.A. from 1993 to 1995, Managing Director of De Nora S.p.A. and President of
DNP Services from 1996 to May 2000, and a member of the board of directors of
De Nora S.p.A. from 1993 to December 1999. He has also served as a member of
the board of directors of Titanor Components Ltd., a subsidiary of the Oronzio
De Nora Group, since July 1994, and President from June to September 2000.
Lorenzo C. Lamadrid has been a director since April 2000. Since July 1999,
he has served as President, Chief Executive Officer and a member of the board
of directors of AD Little. Mr. Lamadrid also serves as Chairman of the board of
directors of c-quential, Inc. Prior to accepting his positions at AD Little,
Mr. Lamadrid was employed by Western Resources Inc., serving as President of
Western Resources International, Ltd. from 1996 to 1999 and as Managing
Director and founding partner of The Wing Group, a leading international
electric power project-development company, from 1993 to 1999. Prior to joining
Western Resources, Mr. Lamadrid spent eight years with the General Electric
Company. He was a corporate officer, serving as Vice President and General
Manager with GE Aerospace and head of International Operations from 1986 to
1992, and a Corporate Staff Executive for strategic planning and business
development from 1984 to 1986. Mr. Lamadrid was also one of the founders of the
Boston Beer Company (Samuel Adams). Prior to working for GE, Mr. Lamadrid
worked for six years at the Boston Consulting Group. Mr. Lamadrid holds a dual
bachelor's degree in Chemical Engineering and Administrative Science from Yale
University, a M.S. in Chemical Engineering from the Massachusetts Institute of
Technology and an M.B.A. from the Harvard Business School.
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John Lavin has been a director since April 2000. He has served as a Senior
Vice President of AD Little since January 1999. Mr. Lavin has also served as the
Chairman of the board of directors of DiRad Technologies, Inc., a computer
telephony systems company, since October 1995. From 1998 to June 1999, he was
President of the Utility Cable Division of BICC Cables Corp. Previously, he held
a series of executive positions at General Electric. Mr. Lavin holds a B.S.E.E.
from the University of Notre Dame, an M.B.A. from Harvard Business School and an
M.S.E.E. from Cornell University.
Eugenio Morpurgo has been a director since April 2000. He has served as
Chief Executive Officer of Fineurop Soditic S.p.A., an Italian corporate
finance advisory services firm, since April 1998. From January 1993 to March
1998, Mr. Morpurgo was the head of the Mergers and Acquisitions department of
SOPAF, an Italian investment bank. From 1987 to 1993, he was in the investment
banking department of Deutsche Bank Group in Frankfurt, London and Milan. Prior
to joining Deutsche Bank, Mr. Morpurgo spent over two years at the Corporate
Finance Department of Matuschka Group in Munich, Germany. In 1984, he
graduated, magna cum laude, from the University Bocconi in Milan, Italy, with a
degree in Business Administration.
Mauro Saponelli has been a director since April 2000. From October 1986 to
June 1995, he served as Chief Financial Officer to Norfin S.p.A., and from June
1995 to the present has been serving as Chief Operating Officer of Norfin
S.p.A.
Key Employees
James Calvin Cross III joined Nuvera, then Epyx Corporation, as Director,
Research and Development in January 1999 and was made Director, Technology
Development in January 2000. Prior to holding his positions at Nuvera, Mr.
Cross worked at AD Little as a consultant since January 1996, specializing in
the development of fuel processors.
Antonio Maggiore has served as Technical Manager of Nuvera Europe since
April 2000. Mr. Maggiore previously worked at De Nora S.p.A. since April 1995
as Program Manager of the Fuel Cell Research and Development Department, and
was made Technical Manager of the fuel cell division in February 1999. Mr.
Maggiore holds a degree in Mechanical Engineering from Milan Polytechnic.
Lawrence G. Clawson joined Nuvera, then Epyx Corporation, in 1997 as
Principal Engineer. From 1994 to 1997, he was a consultant at AD Little. Mr.
Clawson holds an S.B. and S.M. in Mechanical Engineering from the Massachusetts
Institute of Technology and an S.M. in Management from the Massachusetts
Institute of Technology Sloan School of Management.
Dr. Srinivasa K. Prabhu joined Nuvera, then Epyx Corporation, in January
1999 and was made Senior Manager in April 2000. Prior to working at Nuvera, he
was Program Manager at AD Little from 1997 to 1998. Previously, Dr. Prabhu
earned a M.S. in Mechanical and Environmental Engineering and a Ph.D. in
Mechanical Engineering from Drexel University.
Dr. Prashant S. Chintawar joined Nuvera, then Epyx Corporation, in April
1998 and was made Senior Manager in June 2000. From May 1997 to April 1998, he
was Senior Research Engineer at KSE, Inc. Previously, Dr. Chintawar earned a
Ph.D. in Chemical Engineering from the University of Akron in 1997.
Alessandro Delfrate has served as Sales Manager of Nuvera Europe since
April 2000. Mr. Delfrate previously worked at De Nora S.p.A. since November
1996 as Product Manager in charge of product development and global sales of
titanium anodes for cathodic protection. From March 1994 to October 1996, he
served as Technical Manager for Nuova Polmet S.r.l., an Italian company
specializing in the design and installation of cathodic protection systems for
steel in concrete. Mr. Delfrate holds a degree in Chemistry from the University
of Milan.
Giampaolo Sibilia has served as Production Manager of Nuvera Europe since
September 2000. Prior to assuming this position, Mr. Sibilia worked at ST
Microelectronics, a semiconductor manufacturing company, as
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Equipment Engineer from 1995 to December 1997 and was made Mechanical Test
Equipment Selection Leader for semiconductor testing in January 1998. Mr.
Sibilia holds a degree in Aeronautical Engineering from Milan Polytechnic.
Lou Persico has been Treasurer since July 2000. He has also served as
Chief Financial Officer of AD Little since June 2000. From 1997 to April 2000,
Mr. Persico was Vice President and Chief Accounting Officer of Cambridge
Technology Partners, a technology concern. From 1996 to 1997, he was Vice
President and Controller of the Hosiery Division of the Sara Lee Corporation, a
manufacturer and marketer of consumer packaged goods. From 1993 to 1996, he was
Senior Vice President, Finance and Administration of Technicolor, Inc., a
provider of laboratory and other services to motion picture producers. Mr.
Persico holds an M.B.A. from Pace University and is a certified public
accountant.
Anne O'Brien Troutman joined Nuvera in October 2000 as Secretary and
Acting General Counsel. From July 1988 to September 2000, she served as an
attorney at AD Little and was made Vice President in July 1996.
Danny Wong joined Nuvera in May 2000 as Controller. Prior to joining
Nuvera, he was Finance Manager at Dove Consulting Group, Inc., a management
consulting firm, from November 1998 and was made Controller in September 1999.
From February 1990 to November 1998, Mr. Wong served in various positions at AD
Little, including as North America Consulting Business Manager and Technology
and Product Development Assistant Director of Finance. Mr. Wong holds a B.S. in
Accountancy from Bentley College.
Silvio Monti has served as Controller of Nuvera Europe since April 2000.
From November 1994 to March 2000, Mr. Monti was Accounting Manager in charge of
accounting and import export services of DNP Services S.p.A., a trading company
for components used by electrochemical plants.
Stephen Gustave Block has served as Program Manager since April 2000.
Prior to joining Nuvera, he was a consulting engineer at AD Little since
January 1996.
Katia Franchi has served as Manager of Experimental Activities and
Laboratories of Nuvera Europe since April 2000. Ms. Franchi previously worked
at De Nora S.p.A. since July 1995 as Process Engineer of the Fuel Cell Research
and Development Department, and in January 1998 was made Project Manager of
projects funded by the European Union. Upon the spin-off of De Nora Fuel Cells
S.p.A. from De Nora S.p.A., as of October 1999, Ms. Franchi became Manager of
the Purchase Department. Ms. Franchi holds a degree in Chemical Engineering
from Milan Polytechnic.
Board Composition
Effective upon the completion of this offering, the number of our
directors will be fixed at thirteen. Following this offering, our board of
directors will be divided into three classes, each of whose members will serve
for a staggered three-year term. As a result, a portion of our board of
directors will be elected each year. The board of directors will consist of
five class I directors, four class II directors and four class III directors.
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. The terms of the class I directors, class II directors and
class III directors expire upon the election and qualification of successor
directors at the annual meeting of stockholders held during the calendar years
2003, 2002 and 2001, respectively. There are no family relationships among any
of our directors, executive officers or key employees.
Board Committees
Audit Committee
We expect to form an Audit Committee composed of three independent
directors. The Audit Committee will review and, as it deems appropriate, will
recommend to the board of directors the internal accounting and financial
controls for Nuvera and the accounting principles and auditing practices and
procedures to be employed in
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preparation and review of the financial statements of Nuvera. The Audit
Committee will also make recommendations to the board of directors concerning
the engagement of independent public auditors and the scope of the audit to be
undertaken by such auditors.
Finance Committee
The Finance Committee is comprised of Mr. Brodsky, Mr. Saponelli and Mr.
Gartman. The Finance Committee reviews and, as it deems appropriate, recommends
to the board of directors policies, practices and procedures relating to the
compensation of our officers and other managerial employees and the
establishment and administration of employee benefit plans, including our 2000
stock incentive plan. The Finance Committee also consults with our officers as
may be requested regarding managerial personnel policies.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or Finance
Committee.
Director Compensation
Our directors who are not officers or employees of Nuvera will be awarded
stock options upon their joining the board of directors, paid a fee of
$ for each meeting attended of the board of directors or of a committee of
the board and awarded an annual grant of stock options. We will establish
a plan which provides for automatic grants of options to non-employee directors
commencing upon the consummation of this offering.
Executive Compensation
The following table sets forth information concerning the compensation
paid to and Nuvera's four other most highly compensated executive officers
during Nuvera's fiscal year ended December 31, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
----------------------------------------- ------------------------ -------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Bonus Compensation Awards Options Payouts Compensation
Name and Principal Position Year Salary ($) ($) ($) (#) ($) ($)
--------------------------- ---- ------ ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Stock Option Grants in Last Fiscal Year
The following table sets forth information concerning grants of stock
options made to the executive officers named in the Summary Compensation Table
under our 2000 stock incentive plan during Nuvera's fiscal year ended December
31, 2000.
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<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR (2000)
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for Grant Date
Individual Grant Option Term Value
-------------------------------------------------------------------- ------------------ -------------
Number of
Securities Percent of Total
Underlying Options Granted Exercise or
Options Granted to Employees in Base Price Expiration 5% 10% Grant Date
Name (#) Fiscal Year ($/Sh) Date ($) ($) Present Value
-------- --------------- ---------------- ----------- ---------- ----- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information concerning option exercises by
the executive officers named in the Summary Compensation Table during Nuvera's
fiscal year ended December 31, 2000.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (2000)
AND FISCAL YEAR END OPTION VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options At Fiscal Year In-the-Money Options
Shares Acquired on End (#) At Fiscal Year End ($)
Exercise Value Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
----------------- ------------------ -------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
</TABLE>
2000 Stock Incentive Plan
Our board of directors has adopted the Nuvera Fuel Cells, Inc. 2000 stock
incentive plan pursuant to which employees, directors and consultants of Nuvera
and its subsidiaries are eligible to receive stock options, restricted stock
and other stock-based awards, including stock appreciation rights and rights to
dividends and dividend equivalents. The purposes of the plan are to promote the
interests of Nuvera and its stockholders by strengthening our ability to
attract, motivate and retain employees, directors and consultants of
exceptional ability and to provide a means to encourage stock ownership and a
proprietary interest in Nuvera by its selected employees, directors and
consultants upon whose judgment, initiative and efforts the financial success
and growth of our business largely depends.
Shares Available for Awards
The maximum number of shares of common stock that may be issued pursuant
to awards granted under the plan is 176,124, and no participant may receive
stock options or stock appreciation rights in any calendar year that relate to
more than 20,000 shares, subject to adjustment by the Finance Committee for
stock splits and other events as set forth in the plan. Substitute awards, or
equity awards granted in assumption of, or in substitution for, outstanding
awards previously granted by a company which we acquire or with which we
combine, will not reduce the number of shares available for issuance under the
plan.
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Material Features of the Plan
Our board of directors has authorized the Finance Committee to administer
the plan. The committee will have, among other powers, the power to interpret
the plan, to determine the terms and provisions of the award agreements, to
adopt rules and regulations relating to the plan and to make all other
determinations necessary or advisable for plan administration. Decisions of the
committee are final, conclusive and binding upon all parties.
The Finance Committee will have sole discretion to grant to eligible
participants one or more equity awards. The committee will determine the number
of shares subject to any award granted to any participant. If the committee
determines that a dividend or other distribution, recapitalization, stock split
or other corporate transaction (as more fully described in the plan) affects
the shares in such a way that an adjustment is appropriate to prevent dilution
or enlargement of the benefits, or potential benefits, intended to be made
available under the plan, the Committee may equitably adjust:
o the number and type of shares (or other securities or property) which
may be made the subject of awards,
o the number and type of shares (or other securities or property)
subject to outstanding awards, and
o the grant, purchase or exercise price with respect to any award.
Any shares of stock deliverable under the plan may consist of authorized
and unissued shares or treasury shares.
The exercise price of stock under any stock option, the grant price of any
stock appreciation right, and the purchase price of any security which may be
purchased under any other stock-based award may be less than 100% of the fair
market value of the stock or other security on the date of the grant of the
option, right or award. The Finance Committee will determine the times at which
options and other purchase rights may be exercised and the methods by which and
the forms in which payment of the purchase price may be made. The committee may
determine and set forth in the award agreement the terms under which any awards
vest and become exercisable. Upon a change of control as defined in the plan,
all awards will generally become fully vested and exercisable.
The Finance Committee may impose restrictions on restricted stock at its
discretion. These restrictions may lapse as the committee determines.
Without our prior written consent, no award granted under the plan may be
transferred, assigned or encumbered by the individual to whom it is granted,
other than by will, designation of a beneficiary or the laws of descent and
distribution.
No awards may be granted under the plan after the tenth anniversary of the
effective date of the plan.
Amendment and Termination
The board of directors may amend, alter, suspend, discontinue or terminate
the plan or any portion of the plan at any time. However, stockholder approval
must be obtained if such approval is necessary to comply with any tax or
regulatory requirement for which or with which the board deems it necessary or
desirable to qualify or comply.
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RELATED PARTY TRANSACTIONS
Merger and Related Transactions
Investment and Exchange Agreement
In April 2000, pursuant to an investment and exchange agreement, Epyx
Corporation, De Nora Fuel Cells S.p.A., De Nora New Energy Investments B.V. and
AD Little consummated the merger of De Nora Fuel Cells S.p.A. and Epyx
Corporation by the sale of 50% of the capital stock of Epyx Corporation to De
Nora New Energy Investments B.V. in exchange for 100% of the capital stock of
De Nora Fuel Cells S.p.A. Epyx Corporation was renamed Nuvera Fuel Cells, Inc.,
and De Nora Fuel Cells S.p.A., subsequently renamed Nuvera Fuel Cells Europe
S.r.l., became our wholly-owned subsidiary.
As of the consummation of the merger, all of the assets of AD Little used
by Epyx in the development of fuel processors and the development of fuel cell
system integration expertise were transferred to Nuvera, including all
intellectual property consisting of inventions, patents, patent applications,
copyrights, know-how and other intellectual property rights relating to fuel
reforming and fuel cell system integration, other than two U.S. Department of
Energy research and development contracts relating to the design of a 50 kW PEM
fuel cell system and the design of next generation PEM fuel cell stacks,
respectively. Similarly, all of the assets of De Nora New Energy Investments
B.V. and its affiliates used by De Nora Fuel Cells S.p.A. in the development
and manufacture of fuel cell stacks and the development of fuel cell system
integration expertise were transferred to Nuvera Europe, including all
intellectual property consisting of inventions, patents, patent applications,
copyrights, know-how and other intellectual property rights relating to fuel
cell stacks and fuel cell system integration.
Pursuant to the investment and exchange agreement, AD Little, De Nora New
Energy Investments B.V. and their respective subsidiaries and affiliates are
prohibited from performing any work in the reformate fueled direct hydrogen or
direct methanol-fueled PEM fuel cell systems field in competition with Nuvera
prior to April 4, 2004. AD Little's non-competition agreement, however, permits
AD Little to work in the fields of use in which it has been provided a license
pursuant to the license agreement discussed below, and to continue to work
under the government contracts referred to above, provided that it grants to
Nuvera a royalty-free non-exclusive license in any intellectual property
arising out of these contracts. AD Little, De Nora New Energy Investments B.V.
and their respective subsidiaries and affiliates may engage in
government-sponsored projects in the field of reformate fueled direct hydrogen
or direct methanol-fueled PEM fuel cell systems if Nuvera is given an
opportunity to pursue the project and elects not to pursue the project.
In accordance with the investment and exchange agreement, as of April 10,
2000, each of AD Little and De Nora New Energy Investments B.V. made capital
contributions to Nuvera in the amount of $3 million. On November 3, 2000,
Nuvera, Nuvera Europe, AD Little, Norfin International S.A., De Nora New Energy
Investments B.V. and Amerada Hess entered into a capital contribution agreement.
Under this agreement, AD Little, Norfin International S.A. and Amerada Hess each
agreed to provide up to a maximum aggregate of $30 million to Nuvera when needed
to sustain its operations. Pursuant to this agreement, until Norfin
International S.A. and AD Little have contributed, in the aggregate, $1 million
under the agreement, the obligation of Norfin International S.A. and AD Little
with respect to the $30 million in additional equity financing is $15 million
each. Thereafter, the obligation of each stockholder is 46.8% for Norfin
International S.A., 42.2% for AD Little and 11.0% for Amerada Hess. All
unexercised or undischarged rights and obligations to provide capital
contributions to Nuvera under the investment and exchange agreement, including
that of AD Little and De Nora New Energy Investments to contribute at least $8
million each to Nuvera by December 31, 2000, were waived under the capital
contribution agreement. The capital contribution agreement will terminate on the
earlier of the date of the consummation of this offering with proceeds to Nuvera
of at least $30 million, the date on which capital contributions under the
capital contribution agreement by AD Little, Norfin International S.A. and
Amerada Hess exceed $30 million or December 31, 2001.
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Amerada Hess Investment Agreement
In connection with the merger, pursuant to a separate investment agreement,
Amerada Hess purchased 50,000 shares of common stock, or 5% of our outstanding
capital stock, from AD Little, for aggregate consideration of $10 million. AD
Little also granted Amerada Hess the right to purchase 50,000 additional shares
of common stock of Nuvera from AD Little, upon the occurrence of specified
"liquidity events" including Nuvera's initial public offering, at a price equal
to the midpoint between the price per share paid by Amerada Hess in its initial
purchase of shares and the price of shares in the liquidity event. The capital
contribution agreement discussed above terminated the provisions of this
investment agreement that related to Amerada Hess's ability to fund capital
needs in lieu of AD Little. In July 2000, Amerada Hess purchased 67,416
newly-issued shares of common stock from Nuvera for aggregate consideration of
$15 million.
Stockholders' Agreement
In connection with the merger, Nuvera, AD Little, De Nora New Energy
Investments B.V. and Amerada Hess entered into a stockholders' agreement which
provides AD Little, De Nora New Energy Investments B.V. and Amerada Hess with
the right, subject to certain exceptions, to include their common stock in any
registration of common stock made by Nuvera for its own account or for the
account of other stockholders of Nuvera. Each of the parties has waived its
registration rights with respect to this offering. The stockholders' agreement,
as amended, also provides that AD Little, De Nora New Energy Investments B.V.
and Amerada Hess would vote their shares of Nuvera in such a way as to cause
three directors nominated by AD Little, four directors nominated by De Nora New
Energy Investments B.V. and two directors nominated by Amerada Hess to be
elected to our board of directors. All provisions of the stockholders'
agreement, including the provisions relating to the nomination of directors,
other than those pertaining to registration rights will terminate upon
consummation of this offering.
License Agreement
Under a license agreement, Nuvera granted to AD Little a royalty-free,
world-wide, non-exclusive right and license, with the right to sublicense, to
use all of the intellectual property rights relating to fuel reforming and fuel
cell system integration that AD Little assigned and transferred to Nuvera in
connection with the merger. The license terminates in 2010 and is limited to the
fields of gas-to-liquids fuel processing and fuel conversion for internal
combustion engines.
Transactions with AD Little
License and Services Agreements
Nuvera subleases its offices, laboratory space and production facility from
AD Little. Under a license and services agreement, AD Little has granted to
Nuvera a license to occupy and use office and laboratory space in AD Little's
headquarters. The agreement terminates on December 31, 2000, subject to
six-month renewals by mutual consent of the parties. The license and services
fee under the agreement is $2,460 per Nuvera employee at the Cambridge facility
per month. The total allocated charges for the six months ended June 30, 2000
under this agreement were $404,000. We expect to enter into a new sublease of
space and agreement for use of facilities, equipment and services with AD Little
before December 31, 2000.
Tax Indemnification Agreement
Under a tax indemnification agreement dated October 26, 2000, AD Little
has agreed to indemnify Nuvera and its subsidiaries for any income tax
liabilities that may be imposed on Nuvera and its subsidiaries arising solely
from Nuvera or any of its subsidiaries having been a member of AD Little's
consolidated, combined or unitary group.
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Stock Grants
On October 10, 2000, we granted 17,500 shares of our common stock
contributed to us by AD Little to some of our long-term employees, including
some of our executive officers, in recognition of their past service to us. We
will provide forgivable loans to these employees in an aggregate amount of
approximately $1.8 million to enable them to pay the income taxes related to
the grants. AD Little will make an additional capital contribution to us in an
amount equal to the total loan value. The loans will carry interest at a rate
of 8.5% and will be forgiven from repayment by the employee over a period of
two years if the employee remains an employee of Nuvera.
Subcontracted Services
In addition, since the merger, we have subcontracted various services to AD
Little under our contracts with other parties. AD Little charges us 85% of the
rate it would charge a third party for these services. We paid $118,000 to AD
Little for services of this nature during the six months ended June 30, 2000.
Finisola S.p.A. Leases
Nuvera Europe leases its offices, laboratory space and production facility
from Finisola S.p.A., a subsidiary of Norfin S.p.A., which also owns De Nora New
Energy Investments B.V., pursuant to leases entered into in July 2000. The
leases expire on June 30, 2006, and each lease is automatically renewed for an
additional six-year term unless either party notifies the other party that it
wishes to terminate the relevant lease six months prior to its expiration. The
total lease payments under the leases are 178 million Italian lira, or
approximately $87,000, plus taxes, per year.
Previously, De Nora Fuel Cells S.p.A. leased laboratory and office space
from Finisola under leases entered into in October 1999 and providing for
payments of 60 million Italian lira, or approximately $26,000 per year. These
leases were terminated in connection with the new leases entered into in July
2000.
Norfin S.p.A. Services Agreement
In January 2000, De Nora Fuel Cells S.p.A., now Nuvera Europe, entered into
a services agreement effective October 1999 with Norfin S.p.A., the parent of De
Nora New Energy Investments B.V., whereby Norfin S.p.A. agreed to provide to
Nuvera Europe assistance and cooperation in financial, accounting,
organizational, commercial, tax and legal matters for daily fees ranging from
600,000 Italian lira, or approximately $296, to 3 million Italian lira, or
approximately $1,481. The agreement terminates December 31, 2000 and is
automatically renewed for successive one-year terms unless either party notifies
the other party that it wishes to terminate the agreement at least 60 days prior
to December 31 of each year.
De Nora S.p.A. Services Agreement
In January 2000, De Nora Fuel Cells S.p.A., now Nuvera Europe, entered into
a services agreement effective October 1999 with De Nora S.p.A., its affiliate.
Under the agreement, De Nora S.p.A. agreed to provide De Nora Fuel Cells S.p.A.
with certain services, including assistance in protecting the intellectual
property rights of De Nora Fuel Cells S.p.A., cooperation in research and
development, secondment of De Nora S.p.A. personnel and assistance in
import-export and other administrative matters for hourly fees of (U)60 or,
approximately $52, and daily fees of (U)350, or approximately $304, per business
trip. De Nora S.p.A. also agrees to provide De Nora Fuel Cells S.p.A. specified
laboratory services for scheduled fees. The agreement terminates December 31,
2000 and is automatically renewed for successive one-year terms unless either
party notifies the other party that it wishes to terminate the agreement at
least 30 days prior to December 31 of each year. The total costs incurred by us
under this agreement and the Norfin S.p.A. services agreement referred to above
were $222,000 and $421,000 during the year ended December 31, 1999 and the six
months ended June 30, 2000, respectively.
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De Nora Elettrodi S.p.A. Services Agreement
In May 2000, Nuvera Europe entered into a services agreement with De Nora
Elettrodi S.p.A., an affiliate of Norfin S.p.A., whereby De Nora Elettrodi
S.p.A. agrees to provide to Nuvera Europe personnel for packaging,
transportation and mechanical tasks for an hourly fee of (U)60, or approximately
$52, and daily fees of (U)350, or approximately $304, per business trip and
assistance in import-export and other administrative matters for a fee of
200,000 Italian lira, or approximately $99, per task. The agreement terminates
December 31, 2000 and is automatically renewed for successive one-year terms
unless either party notifies the other party that it wishes to terminate the
agreement at least 30 days prior to December 31 of each year. We incurred no
costs under this agreement for the six months ended June 30, 2000.
Norfin S.p.A. Loan
Since October 1999, Norfin S.p.A., the parent of De Nora New Energy
Investments B.V., has loaned 1.65 billion Italian lira, or approximately
$814,000, to De Nora Fuel Cells S.p.A., which amount was repaid in March 2000.
In addition, Norfin S.p.A. currently guarantees the obligations of Nuvera Europe
under a 2 billion Italian lira, or approximately $987,000, line of credit with
an Italian bank.
Relationship with Fineurop Soditic S.p.A.
Fineurop Soditic, whose chief executive officer, Eugenio Morpurgo, is a
director of Nuvera, has assisted Nuvera Europe, formerly known as De Nora Fuel
Cells S.p.A., in its formation of a business plan and in financial analysis
generally. Nuvera Europe paid Fineurop Soditic 250,000,000 Italian lira, or
approximately $123,000, as compensation for these services.
In August 2000, Fineurop International Limited, an affiliate of Fineurop
Soditic, acquired from Norfin International S.A. 1.6% of the capital stock of De
Nora New Energy Investments B.V. for $1.6 million, as well as a right to
exchange such shares with De Nora New Energy Investments B.V. for 8,539 shares
of Nuvera upon the earlier of June 30, 2001 or notice of the filing of a
registration statement for this offering. Fineurop International exercised that
right in October 2000 and subsequently transferred 2,625 of its shares of Nuvera
to its affiliate Fineureka S.A. As a result, both Fineurop International and
Fineureka have the right to register their shares of our common stock on the
terms and conditions specified in the stockholders' agreement described above.
Each of Fineurop International and Fineureka S.A. has waived its registration
rights with respect to this offering.
As compensation for its advisory services in connection with this offering,
we have agreed to pay Fineurop Soditic a retainer of $90,000 and 0.7% of the net
proceeds of this offering less the $90,000 retainer.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of October 20, 2000, and as adjusted to
reflect the sale of ___ shares offered hereby, by:
o each person known by us to own beneficially 5% or more of our common
stock;
o each executive officer named in the summary compensation table on
page 65;
o each of our directors; and
o all of our directors and executive officers as a group.
In accordance with the rules of the SEC, beneficial ownership includes
voting or investment power with respect to securities and 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 of October 20,
2000 through the exercise of any warrant, stock option or other right. The
inclusion of such shares in this prospectus, however, does not constitute an
admission that the named stockholder is a direct or indirect beneficial owner
of such shares. Shares issuable pursuant to stock options are deemed
outstanding for computing the percentage of the person holding such options but
are not outstanding for computing the percentage of any other person. The
percentage of beneficial ownership for the following table is based on
1,067,416 shares of common stock outstanding as of October 20, 2000, and __
shares of common stock outstanding after the completion of this offering
assuming no exercise of the underwriters' over-allotment options. Unless
otherwise indicated, the address for each listed stockholder is: c/o Nuvera
Fuel Cells, Inc., 15 Acorn Park, Cambridge, MA, 02140. To our knowledge, except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to the shares of common stock beneficially owned
by the stockholder.
<TABLE>
Shares Beneficially Shares Beneficially
Owned Before the Offering Owned After the Offering
-------------------------- ------------------------
Name and Address of
Beneficial Owner Number Percent Number Percent
------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
De Nora New Energy Investments B.V.
Herengracht 548
Postbus 990
1000AZ Amsterdam, The Netherlands 491,461 46.0%
Arthur D. Little, Inc.
25 Acorn Park
Cambridge, MA 02140 432,500 40.5%
Amerada Hess Corporation
1185 Avenue of the Americas
New York, NY 10036 117,416 11.0%
Mark A. Brodsky -- *
J. Barclay Collins -- *
Federico De Nora -- *
John A. Gartman -- *
Franco Ladavas -- *
Lorenzo C. Lamadrid -- *
John Lavin -- *
Eugenio Morpurgo (1) *
Mauro Saponelli -- *
Shares held by all directors and executive
officers as a group (including the above) 17,046 1.6%
</TABLE>
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---------
* Less than 1%
(1) Mr. Morpurgo, a director of Nuvera, is Chief Executive Officer of Fineurop
Soditic S.p.A. Fineurop International Limited, which holds 5,914 shares of
Nuvera's common stock, and Fineureka S.A., which holds 2,625 shares of
Nuvera's common stock, are both affiliates of Fineurop Soditic S.p.A.
Accordingly, Mr. Morpurgo may be deemed the beneficial owner of 8,539
shares of Nuvera's common stock for the purposes of Rule 13d-3 under the
Securities Exchange Act of 1934. Mr. Morpurgo disclaims beneficial
ownership of any shares of Nuvera's common stock.
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DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will
consist of shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share. The following descriptions
are summaries of the material terms of and are qualified in their entirety by
reference to, our Amended and Restated Certificate of Incorporation and Bylaws,
copies of which are filed with the SEC as exhibits to the registration
statement of which this prospectus is a part. Statements contained in this
prospectus relating to these provisions are not necessarily complete. The
descriptions of common stock and preferred stock reflect changes to our capital
structure that will occur upon the closing of this offering in accordance with
the terms of the Amended and Restated Certificate of Incorporation that we will
adopt immediately prior to the closing of this offering.
Common Stock
As of October 20, 2000, there were 1,067,416 shares of common stock
outstanding which were held of record by 36 stockholders. There will be
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment options, after giving effect to the issuance and sale of the
shares of common stock offered by us hereby. The holders of common stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our board of
directors out of funds legally available therefor. See "Dividend Policy." In
the event of the liquidation, dissolution or winding up of Nuvera, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The holders of common stock have no
preemptive, conversion or subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and non-assessable, and the shares of common
stock to be issued upon completion of this offering will be fully paid and
non-assessable.
Preferred Stock
Upon the completion of this offering, we will not have any shares of our
preferred stock outstanding. Our board of directors has the authority to issue
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by our stockholders.
If we issue preferred stock, it would have priority over our common stock with
respect to dividends and other distributions, including the distribution of
assets upon liquidation. In addition, we may be obligated to purchase or redeem
our preferred stock. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of Nuvera without further
action by the stockholders and may adversely affect the voting and other rights
of the holders of our common stock. The issuance of preferred stock with voting
and conversion rights may adversely affect the voting power of the holders of
our common stock, including the loss of voting control to others. At present,
we have no plans to issue any preferred stock.
Certain Anti-Takeover Effects of Delaware Law and our Amended and Restated
Certificate of Incorporation and Bylaws
Delaware Anti-Takeover Statute
Following consummation of this offering, we will be subject to the
"business combination" provisions of Section 203 of the Delaware General
Corporation Law. In general, such provisions prohibit a publicly held Delaware
corporation from engaging in various "business combination" transactions with
any interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless:
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o the transaction was approved by the board of directors prior to the
date the interested stockholder obtained such status;
o upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the stockholder owned
at least 85% of the voting stock of the corporation outstanding at
the time the transaction commenced; or
o on or subsequent to such date, the business combination is approved
by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the interested
stockholder. For purposes of Section 203, a "business combination" is
defined to include mergers, asset sales and other transactions
resulting in financial benefit to a stockholder. In general, an
"interested stockholder" is a person who, together with affiliates
and associates, owns (or within three years, did own) 15% or more of
a corporation's voting stock. The statute could prohibit or delay
mergers or other takeover or change in control attempts with respect
to Nuvera and, accordingly, may discourage attempts to acquire Nuvera
even though such a transaction may offer our stockholders the
opportunity to sell their stock at a price above the prevailing
market price.
In addition, certain provisions of our Amended and Restated Certificate of
Incorporation and Bylaws, which will become effective immediately prior to the
closing of this offering, and which are summarized in the following paragraphs,
may be deemed to have an anti-takeover effect and may discourage takeover
attempts not first approved by the 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 the ability of our board of
directors to issue preferred stock without further stockholder action, could
also 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 could also discourage or make more
difficult a merger, tender offer or proxy contest, even if favorable to the
interests of our 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 Nuvera and of our stockholders.
Limits on written consents and special meetings of stockholders
Our Amended and Restated Certificate of Incorporation provides that
stockholders may not take action by written consent, but may only take action
at a duly called annual or special meeting of stockholders. Our Amended and
Restated Certificate of Incorporation further provides that special meetings of
our stockholders may be called only by the board of directors, the Chairman of
the board of directors or the president or the secretary of Nuvera. These
provisions could have the effect of delaying stockholder actions that are
favored by the holders of a majority of our outstanding voting securities until
a meeting is called. In addition, the limited ability of the stockholders to
call a special meeting of stockholders may make it more difficult to change the
existing board and management.
Staggered board; removal and filling of vacancies
Our Amended and Restated Certificate of Incorporation provides that upon
the closing of this offering our board of directors shall be divided into three
classes as nearly equal in size as possible with staggered three-year terms. In
addition, our Amended and Restated Certificate of Incorporation provides that
directors may be removed only for cause and only by the affirmative vote of
holders of not less than a majority of the total voting power of all
outstanding securities of Nuvera then entitled to vote. Any vacancy on the
board of directors, regardless of the reason for the vacancy, may be filled
only by a vote of a majority of the directors then in office or by the sole
remaining director. The limitations on the removal of directors and the filling
of vacancies could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, control of
us.
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Supermajority provisions
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority in interest of the shares entitled to vote on
any matter is required to amend a corporation's certificate of incorporation or
bylaws, unless a corporation's certificate of incorporation or bylaws, as the
case may be, requires a greater percentage. Our Amended and Restated
Certificate of Incorporation provides that the provisions described above may
be amended only by a vote of 66 2/3% or more of all of the outstanding shares
of our stock entitled to vote.
Authorized but unissued shares
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval, subject to
limitations imposed by the Nasdaq National Market. These additional shares may
be utilized for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions, employee benefit
plans and stockholder rights plans. The existence of authorized but unissued
and unreserved common stock and preferred stock could render more difficult or
discourage an attempt to obtain control of the company by means of a proxy
contest, tender offer, merger or otherwise.
Quotation on the Nasdaq National Market
We expect our common stock to be approved for quotation on the Nasdaq
National Market under the symbol "NVRA."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be .
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SHARES ELIGIBLE FOR FUTURE SALE
Rule 144
After this offering, we will have common shares outstanding,
assuming no exercise of the underwriters' over-allotment options and excluding
common shares reserved for issuance under the 2000 stock
incentive plan. All of the common shares sold in this offering will be freely
tradeable under the Securities Act, unless held by our "affiliates," as that
term is defined in Rule 144 under the Securities Act. In addition, 1,067,416
common shares have been issued in transactions that were not registered with the
SEC and thus are "restricted securities," as that term is defined in Rule 144
under the Securities Act. Upon the expiration of the lock-up agreements
discussed below between Nuvera, all of our existing stockholders, directors and
executive officers and the underwriters, these common shares will become
eligible for sale, subject to compliance with Rule 144 under the Securities Act
as described below.
In general, under Rule 144 as currently in effect, a stockholder who has
beneficially owned restricted securities for at least one year can sell in any
three-month period a number of shares of our common stock that does not exceed
the greater of 1% of:
o the number of shares of our common stock then outstanding, or
approximately common shares immediately after this
offering, or
o the average weekly trading volume of our common stock during the four
calendar weeks immediately preceding the filing of a notice on Form
144 with respect to that sale.
Sales under Rule 144 are subject to certain requirements relating to manner
of sale, notice and availability of current public information about Nuvera. A
stockholder who is not deemed to have been an affiliate at any time during the
90 days immediately preceding the sale and who has beneficially owned restricted
securities for at least two years is entitled to sell such shares under Rule
144(k) without regard to the limitations and requirements described above.
We, our executive officers and directors and all existing stockholders have
agreed, with exceptions, not to sell or transfer any common stock for 180 days
after the date of this prospectus without first obtaining the prior written
consent of Merrill Lynch.
Stock Plans
An aggregate of 176,124 shares of our common stock are reserved for
issuance under the 2000 stock incentive plan. As of , options to
purchase shares of common stock were issued and outstanding under the
2000 stock incentive plan, none of which have vested. We intend to file a
registration statement on Form S-8 covering the sale of the shares of common
stock issued under the 2000 stock incentive plan. Accordingly, the shares of
common stock registered under any such registration statement will be available
for sale in the public market upon issuance of such shares of common stock
pursuant to the plan, unless such shares are subject to vesting restrictions and
subject to limitation on resale by "affiliates" pursuant to Rule 144 and under
the lock-up agreements described above.
Registration Rights
Nuvera, AD Little, De Nora New Energy Investments B.V., Amerada Hess,
Fineurop International Limited and Fineureka S.A. have entered into agreements
that provide each of them the right, subject to certain exceptions, to include
their 1,049,916 shares of our common stock in any registration of common stock
made by Nuvera for its own account or for the account of other stockholders of
Nuvera. Nuvera does not currently have any other registration rights
outstanding. Each of the parties has waived its registration rights with respect
to this offering.
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<PAGE>
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF COMMON STOCK
The following describes the material U.S. federal income tax consequences
of the ownership and disposition of common stock by a beneficial owner that is
a "Non-U.S. Holder." A "Non-U.S. Holder" is a person or entity that, for U.S.
federal income tax purposes, is a non-resident alien individual, a foreign
corporation, a foreign partnership, or a foreign estate or trust.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), and administrative interpretations as of the date of this
prospectus, all of which are subject to change, including changes with
retroactive effect. This discussion does not address all aspects of U.S.
federal income taxation that may be relevant to Non-U.S. Holders in light of
their particular circumstances and does not address any tax consequences
arising under the laws of any state, local or foreign jurisdiction. Prospective
holders should consult their tax advisors with respect to the particular tax
consequences to them of owning and disposing of common stock, including the
consequences under the laws of any state, local or foreign jurisdiction.
Dividends
As discussed under "Dividend Policy" above, Nuvera does not currently
anticipate paying any cash dividends on its common stock in the foreseeable
future. In the event that Nuvera does pay dividends, dividends paid to a
Non-U.S. Holder of common stock generally will be subject to withholding tax at
a 30% rate or a reduced rate specified by an applicable income tax treaty. In
order to obtain a reduced rate of withholding for dividends paid after December
31, 2000, a Non-U.S. Holder will be required to provide an Internal Revenue
Service Form W- 8BEN certifying its entitlement to benefits under a treaty. In
addition, in certain cases where dividends are paid to a Non-U.S. Holder that
is a partnership or other pass-through entity, persons holding an interest in
the entity may need to provide the required certification.
The withholding tax does not apply to dividends paid to a Non-U.S. Holder
that provides a Form W-8ECI, certifying that the dividends are effectively
connected with the Non-U.S. Holder's conduct of a trade or business within the
United States. Instead, the effectively connected dividends will be subject to
regular U.S. income taxation as if the Non-U.S. Holder were a U.S. resident. A
non-U.S. corporation receiving effectively connected dividends may also be
subject to an additional "branch profits tax" imposed at a rate of 30% (or a
lower treaty rate) on an earnings amount that is net of the regular tax.
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
on gain realized on a sale or other disposition of common stock unless:
o the gain is effectively connected with a trade or business of the
Non-U.S. Holder in the United States,
o in the case of certain non-resident alien individuals, the individual
is present in the United States for 183 or more days in the taxable
year of the disposition and certain other conditions are satisfied,
o the Non-U.S. Holder is subject to tax under the provisions of the
Code regarding the taxation of U.S. expatriates or
o Nuvera is or has been a U.S. real property holding corporation at any
time within the five-year period preceding the disposition or the
Non-U.S. Holder's holding period, whichever period is shorter.
Nuvera believes that it is not, and does not anticipate becoming, a U.S. real
property holding corporation.
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<PAGE>
Information Reporting Requirements and Backup Withholding
Nuvera must report to the IRS the amount of dividends paid, the name and
address of the recipient, and the amount of any tax withheld. A similar report
is sent to the Non-U.S. Holder. Under tax treaties or other agreements, the IRS
may make its reports available to tax authorities in the recipient's country of
residence. Dividends paid on or before December 31, 2000 at an address outside
the United States are not subject to backup withholding, unless the payor has
knowledge that the payee is a U.S. person. However, a Non-U.S. Holder may need
to certify its non- U.S. status in order to avoid backup withholding at a 31%
rate on dividends paid after December 31, 2000.
U.S. information reporting and backup withholding generally will not apply
to a payment of proceeds of a disposition of common stock where the transaction
is effected outside the United States through a non-U.S. office of a non-U.S.
broker. However, a Non-U.S. Holder may need to certify its non-U.S. status in
order to avoid information reporting and backup withholding at a 31% rate on
disposition proceeds where the transaction is effected by or through a U.S.
office of a broker. In addition, U.S. information reporting requirements may
apply to the proceeds of a disposition effected by or through a non-U.S. office
of a U.S. broker, or by a non-U.S. broker with specified connections to the
United States.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. When withholding results in an overpayment of taxes, a refund may be
obtained if the required information is furnished to the IRS.
79
<PAGE>
UNDERWRITING
We intend to offer the shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc., ABN AMRO Rothschild
LLC and Bear, Stearns & Co. Inc. are acting as U.S. representatives of the U.S.
underwriters named below. Subject to the terms and conditions described in a
U.S. purchase agreement among us and the U.S. underwriters, and concurrently
with the sale of __ shares to the international managers, we have agreed to sell
to the U.S. underwriters, and the U.S. underwriters severally have agreed to
purchase from us, the number of shares listed opposite their names below.
Number
U.S. Underwriter of Shares
---------------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................................
Lehman Brothers Inc.................................
ABN AMRO Rothschild LLC.............................
Bear, Stearns & Co. Inc.............................
---------
Total...............................................
=========
We have also entered into an international purchase agreement with the
international managers for sale of the shares outside the U.S. and Canada for
whom Merrill Lynch International, Lehman Brothers International (Europe), ABN
AMRO Rothschild and Bear, Stearns International Limited are acting as lead
managers. Subject to the terms and conditions in the international purchase
agreement, and concurrently with the sale of shares to the U.S. underwriters
pursuant to the U.S. purchase agreement, we have agreed to sell to the
international managers, and the international managers severally have agreed to
purchase shares from us. The initial public offering price per share and the
total underwriting discount per share are identical under the U.S. purchase
agreement and the international purchase agreement.
The U.S. underwriters and the international managers have agreed to
purchase all of the shares sold under the U.S. and international purchase
agreements if any of these shares are purchased. If an underwriter defaults,
the U.S. and international purchase agreements provide that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreements may be terminated. The closings for the sale of shares to be
purchased by the U.S. underwriters and the international managers are
conditioned on one another.
We have agreed to indemnify the U.S. underwriters and the international
managers against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the U.S. underwriters and
international managers may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters
of officers' certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.
Commissions and Discounts
The U.S. representatives have advised us that the U.S. underwriters propose
initially to offer the shares to the public at the initial public offering price
on the cover page of this prospectus and to dealers at that price less a
concession not in excess of $ per share. The U.S. underwriters may allow,
and the dealers may reallow, a discount not in excess of $ per share to
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
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<PAGE>
The following table shows the public offering price, underwriting discount
and proceeds before expenses to Nuvera. The information assumes either no
exercise or full exercise by the U.S. underwriters and the international
managers of their over-allotment options.
Without
Per Share Option With Option
--------- ------ -----------
Public offering price.......................$ $ $
Underwriting discount.......................$ $ $
Proceeds, before expenses, to Nuvera........$ $ $
The expenses of the offering, not including the underwriting discount,
are estimated at $ and are payable by Nuvera.
Over-allotment Options
We have granted options to the U.S. underwriters to purchase up to _______
additional shares at the public offering price less the underwriting discount.
The U.S. underwriters may exercise these options for 30 days from the date of
this prospectus solely to cover any over-allotments. If the U.S. underwriters
exercise these options, each will be obligated, subject to conditions contained
in the purchase agreements, to purchase a number of additional shares
proportionate to that U.S. underwriter's initial amount reflected in the above
table.
We have also granted options to the international managers, exercisable
for 30 days from the date of this prospectus, to purchase up to additional
shares to cover any over-allotments on terms similar to those granted to the
U.S. underwriters.
Intersyndicate Agreement
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the intersyndicate agreement, the U.S. underwriters and the
international managers may sell shares to each other for purposes of resale at
the public offering price, less an amount not greater than the selling
concession. Under the intersyndicate agreement, the U.S. underwriters and any
dealer to whom they sell shares will not offer to sell or sell shares to
persons who are non-U.S. or non-Canadian persons or to persons they believe
intend to resell to persons who are non-U.S. or non-Canadian persons, except in
the case of transactions under the intersyndicate agreement. Similarly, the
international managers and any dealer to whom they sell shares will not offer
to sell or sell shares to U.S. persons or Canadian persons or to persons they
believe intend to resell to U.S. persons or Canadian persons, except in the
case of transactions under the terms of the intersyndicate agreement.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares offered by this prospectus for sale to some
of our directors, officers, employees, distributors, dealers, business
associates and related persons. If these persons purchase reserved shares, this
will reduce the number of shares available for sale to the general public. Any
reserved shares that are not orally confirmed for purchase within one day of
the pricing of this offering will be offered by the underwriters to the general
public on the same terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We, our executive officers and directors and all existing stockholders
have agreed, with exceptions, not to sell or transfer any common stock for 180
days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch. Specifically, we and these other individuals have
agreed not to directly or indirectly:
o offer, pledge, sell, or contract to sell any common stock,
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o sell any option or contract to purchase any common stock,
o purchase any option or contract to sell any common stock,
o grant any option, right or warrant for the sale of any common stock,
other than in connection with the conversion of our preferred stock
and non-voting common stock into common stock and pursuant to our
employee benefit plan or non-employee director stock plan,
o lend or otherwise dispose of or transfer any common stock,
o request or demand that we file a registration statement related to
the common stock other than in connection with our employee benefit
plan or non-employee director stock plan, or
o enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition. The lock-up agreements described above
may be released at any time as to all or any portion of the shares subject to
such agreements at the sole discretion of Merrill Lynch. There are, however,
currently no agreements between Merrill Lynch and any of our executive
officers, directors or stockholders releasing them from these lock-up
agreements prior to the expiration of the 180-day period.
Quotation on the Nasdaq National Market
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "NVRA."
Offering Price Determination
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations among us and the U.S. representatives and lead managers. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are:
o the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
o our financial information,
o the history of, and the prospects for, our company and the industry
in which we compete,
o an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues,
o the present state of our development, and
o the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
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<PAGE>
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit the
underwriters and selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
In connection with the offering, the underwriters may make short sales of
the common stock and may purchase shares in the open market to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of shares than they are required to purchase in the offering.
"Covered" short sales are made in an amount not greater than the over-allotment
option described above. The underwriters may close out any covered short
position by either exercising the over-allotment option or purchasing shares in
the open market. In determining the source of shares to close out the covered
short position, the underwriters will consider, among other things, the price
of shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. "Naked" short
sales are sales in excess of the over-allotment option. The underwriters must
close out any naked short position by purchasing shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who purchase in
the offering. Purchases of the common stock to stabilize its price or to reduce
a short position may cause the price of the common stock to be higher than it
might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it may discourage resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
No Public Offering Outside the United States
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation, or distribution of this prospectus or any
other material relating to our company or shares of our common stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of our common stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering materials or advertisements in
connection with the shares of our common stock may be distributed or published,
in or from any country or jurisdiction except in compliance with any applicable
rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered by this prospectus may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price on the cover page of this
prospectus.
Electronic Distribution
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the website maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch website relating to this offering is not part of this prospectus.
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<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for Nuvera by Davis Polk & Wardwell, New York, New York and for
the underwriters by Winthrop, Stimson, Putnam & Roberts, New York, New York.
EXPERTS
The financial statements of Nuvera Fuel Cells, Inc. and subsidiary (a
development stage company) as of December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999 included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing in this prospectus (which report expresses an unqualified
opinion and includes an explanatory paragraph relating to the company as a
development stage enterprise), and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Epyx Corporation (a development stage company)
as of December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999 included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
in this prospectus (which report expresses an unqualified opinion and includes
explanatory paragraphs relating to the company as a development stage enterprise
and to the merger with De Nora Fuel Cells S.p.A.), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
exhibits and schedules, under the Securities Act with respect to the common
stock offered by this prospectus. This prospectus, which constitutes a part of
the registration statement, does not contain all of the information set forth
in the registration statement. Certain items are omitted in accordance with the
rules and regulations of the SEC. For further information about us and our
common stock, we refer you to the registration statement and the exhibits and
any schedules to the registration statement. Statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance, if the contract or document is
filed as an exhibit, we refer you to the copy of the contract or other document
filed as an exhibit to the registration statement. A copy of the registration
statement, including the exhibits and schedules to the registration statement,
may be read and copied at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov, from which
interested persons can electronically access the registration statement,
including the exhibits and schedules to the registration statement.
As a result of the offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934. We will fulfill
our obligations with respect to those requirements by filing periodic reports
and other information with the SEC. We intend to furnish our stockholders with
annual reports containing audited consolidated financial statements certified
by an independent public accounting firm. We also maintain an Internet site at
http://www.nuvera.com. The information contained in our website is not
incorporated by reference into this prospectus or the registration statement of
which it forms a part.
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INDEX TO FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS OF NUVERA FUEL CELLS, INC. AND
SUBSIDIARY (A Development Stage Company)
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Comprehensive Loss........................ F-5
Consolidated Statements of Stockholders' Equity (Deficit)............ F-6
Consolidated Statements of Cash Flows................................ F-7
Notes to Consolidated Financial Statements........................... F-8
FINANCIAL STATEMENTS OF EPYX CORPORATION (A Development Stage Company)
Independent Auditors' Report......................................... F-23
Balance Sheets....................................................... F-24
Statements of Operations............................................. F-25
Statements of Stockholder's Deficit.................................. F-26
Statements of Cash Flows............................................. F-27
Notes to Financial Statements........................................ F-28
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Nuvera Fuel Cells, Inc. and Subsidiary
Cambridge, Massachusetts
We have audited the accompanying consolidated balance sheets of Nuvera Fuel
Cells, Inc. and Subsidiary (a development stage company) (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, comprehensive loss, stockholders' equity (deficit), and cash flows
for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America.
The Company is in the development stage as of December 31, 1999. As discussed
in Note 1 to the financial statements, successful completion of the Company's
development program and successful commercialization of its products and,
ultimately, the attainment of profitable operations is dependent upon future
events, including maintaining adequate financing to fulfill its development and
marketing activities and achieving a level of sales adequate to support the
Company's cost structure.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
November 3, 2000
F-2
<PAGE>
NUVERA FUEL CELLS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
December 31,
------------------
1998 1999 June 30, 2000
------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ -- $ 19 $ 2,177
Accounts receivable -- trade (net of allowance for doubtful accounts of $25
in 2000)...................................................................... -- -- 688
Accounts receivable -- stockholders............................................. 115 400 870
Unbilled receivable -- trade (net of allowance for doubtful accounts of $-- in
1998, $-- in 1999 and $25 in 2000)............................................ -- -- 168
Unbilled receivable -- stockholder.............................................. 1,650 948 1,414
Due from stockholder.......................................................... -- -- 939
Inventories..................................................................... -- 628 915
Prepaid and other current assets................................................ 16 39 119
------- ------- -------
Total current assets.......................................................... 1,781 2,034 7,290
Property and equipment, net...................................................... 275 240 713
Intangible assets................................................................ -- -- 54,345
Other long term assets........................................................... 102 66 52
------- ------- -------
Total assets.................................................................. $ 2,158 $ 2,340 $62,400
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable - trade........................................................ $ -- $ 447 $ 969
Accounts payable - stockholder.................................................. 374 335 287
Notes payable - stockholder..................................................... -- 545 --
Advance payments from customers................................................. 1,241 357 1,072
Accrued compensation and other expenses......................................... 198 167 581
Estimated losses on uncompleted projects........................................ -- -- 873
Due to stockholder.............................................................. 5,248 -- --
------- ------- -------
Total current liabilities..................................................... 7,061 1,851 3,782
Deferred income taxes............................................................ -- -- 3,951
Other long-term liabilities...................................................... 201 207 242
------- ------- -------
Total non-current liabilities................................................. 201 207 4,193
Commitments and contingencies (Notes 8 and 12)................................... -- -- --
Stockholders' equity (deficit):
Preferred stock authorized 5,000,000 shares $.01 par value in 2000,
of which none were issued and outstanding
Common stock authorized 400,000 shares, $.55 par value, in 1998 and 1999,
of which 400,000 shares were issued and outstanding; authorized
2,000,000 shares, $.01 par value, in 2000, of which 1,000,000 were issued
and outstanding. ............................................................. 222 222 10
Additional paid-in capital...................................................... 626 7,684 86,096
Accumulated other comprehensive income (loss)................................... 352 (30) 82
Deficit accumulated during the development stage................................ (6,304) (7,594) (31,763)
------- ------- -------
Total stockholders' equity (deficit).......................................... (5,104) 282 54,425
------- ------- -------
Total liabilities and stockholders' equity (deficit).......................... $ 2,158 $ 2,340 $62,400
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
NUVERA FUEL CELLS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
Six Months Ended Cumulative From
Year Ended December 31, June 30, March 30, 1989
-------------------------------- -------------------- (Inception) to
1997 1998 1999 1999 2000 June 30, 2000
--------- -------- --------- -------- --------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Sales and contracts...................... $ -- $ -- $ 574 $ 360 $ 780 $ 1,903
Lease.................................... 350 284 95 7 62 698
--------- -------- --------- -------- --------- --------
Total revenues................................ 350 284 669 367 842 2,601
Cost of revenues
Sales and contracts...................... -- -- 216 158 1,235 1,481
Lease.................................... 106 178 86 43 33 453
--------- -------- --------- -------- --------- --------
Total cost of revenues........................ 106 178 302 201 1,268 1,934
In-process research and development............ -- -- -- -- 20,300 20,300
Research and development expense, net.......... 1,119 1,988 1,004 612 1,674 7,725
Selling, general and administrative expense.... 465 403 644 231 2,995 5,622
--------- -------- --------- -------- --------- --------
Loss from operations.......................... (1,340) (2,285) (1,281) (677) (25,395) (32,980)
Interest expense............................... -- -- 2 -- 20 22
Other expense, net............................. -- -- 7 -- 28 35
--------- -------- --------- -------- --------- --------
Loss before income tax benefit................. (1,340) (2,285) (1,290) (677) (25,443) (33,037)
Income tax benefit............................. -- -- -- -- 1,274 1,274
--------- -------- --------- -------- --------- --------
Net loss................................. $ (1,340) $ (2,285) $ (1,290) $ (677) $(24,169) $(31,763)
======== ======== ======== ======== ======== ========
Net loss per common share - basic and diluted.. $ (2.68) $ (4.57) $ (2.58) $ (1.35) $(32.53)
======== ======== ======== ======== =======
Shares used in computing basic and diluted net
loss per common share.......................... 500,000 500,000 500,000 500,000 743,094
======= ======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
NUVERA FUEL CELLS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
<TABLE>
Year Ended Six Months Ended Cumulative From
December 31, June 30, March 30, 1989
-------------------------------- ------------------- (Inception) to
1997 1998 1999 1999 2000 June 30, 2000
-------- ------- ------- ------- ------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net loss................................ $(1,340) $(2,285) $(1,290) $ (677) $(24,169) $(31,763)
Foreign currency translation adjustment. -- (276) (382) (416) 112 82
------- ------- ------- ------- -------- --------
Comprehensive loss...................... $(1,340) $(2,561) $(1,672) $(1,093) $(24,057) $(31,681)
======= ======= ======= ======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
NUVERA FUEL CELLS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
Common Stock Accumulated Deficit
------------------ Other Accumulated Total
Additional Comprehensive During the Stockholders'
Paid-in Income Development Equity
Shares Amount Capital (Loss) Stage (Deficit)
-------- ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998............ -- $ -- $ -- $ 628 $ (4,019) $ (3,391)
Payable to De Nora S.p.A. converted
into capital...................... 400,000 222 626 -- -- 848
Foreign currency translation
adjustment......................... -- -- -- (276) -- (276)
Net loss............................ -- -- -- -- (2,285) (2,285)
--------- ---- ------- ----- -------- --------
Balance, December 31, 1998.......... 400,000 222 626 352 (6,304) (5,104)
Payable to De Nora S.p.A. converted
into capital....................... -- -- 7,058 -- -- 7,058
Foreign currency translation
adjustment......................... -- -- -- (382) -- (382)
Net loss...................... -- -- -- -- (1,290) (1,290)
--------- ---- ------- ----- -------- --------
Balance, December 31, 1999.......... 400,000 222 7,684 (30) (7,594) 282
Unaudited:
Common stock held by former
Epyx stockholders................ 500,000 5 (5) -- -- --
Issuance of common stock in
connection with reverse merger... 500,000 5 495 -- -- 500
Adjustment to reflect exchange
of common stock in
connection with reverse
merger........................... (400,000) (222) 222 -- -- --
Adjustment to reflect assets and
liabilities of Epyx at fair value in
connection with reverse merger... -- -- 71,600 -- -- 71,600
Capital contributions from
stockholders..................... -- -- 6,100 -- -- 6,100
Foreign currency translation
adjustment....................... -- -- -- 112 -- 112
Net loss........................... -- -- -- -- (24,169) (24,169)
--------- ---- ------- ----- -------- --------
Balance, June 30, 2000 (unaudited).. 1,000,000 $10 $86,096 $ 82 $(31,763) $54,425
========= === ======= ===== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
NUVERA FUEL CELLS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
Cumulative From
December 31, June 30, March 30, 1989
----------------------------- ------------------ (Inception) to
1997 1998 1999 1999 2000 June 30, 2000
------- -------- ------- ------ -------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(1,340) $(2,285) $(1,290) $ (677) $(24,169) $ (31,763)
Adjustments to reconcile net loss in cash provided
used for operating activities:
In-process research and development............. -- -- -- -- 20,300 20,300
Depreciation and amortization................... 160 204 169 86 2,301 3,447
Deferred income taxes........................... -- -- -- -- (1,274) (1,274)
(Decrease) increase in cash from:
Receivables........................................... (374) (1,140) 416 340 (752) (2,101)
Inventories........................................... -- -- (628) -- (287) (915)
Prepaid and other current assets...................... -- (3) (23) (2) (80) (119)
Other long term assets................................ (66) (97) -- (8) (6) (505)
Accounts payable...................................... 312 (26) 408 (223) 461 1,245
Advance payments from customers....................... (17) 783 (884) (298) 605 961
Accrued compensation and other expenses............... (370) (87) (30) 16 189 356
Estimated losses on uncompleted projects.............. -- -- -- -- (546) (546)
Other long term liabilities........................... 13 28 5 (5) 35 242
------- ------- ------- ------ -------- --------
Cash used for operating activities............... (1,682) (2,623) (1,857) (771) (3,223) (10,672)
------- ------- ------- ------ -------- --------
Cash Flows from Investing Activities -
Expenditures for property and equipment........ (178) (92) (97) (31) (133) (1,086)
------- ------- ------- ------ -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable - stockholder..................... -- -- 848 -- -- 848
Repayment of notes payable - stockholder........ -- -- (303) -- (545) (848)
Borrowings under line of credit................. -- -- -- -- 759 759
Repayment of borrowings under line of credit.... -- -- -- -- (759) (759)
Due to stockholder.............................. 1,860 2,991 1,810 1,218 (153) (153)
Capital contribution from stockholders.......... -- -- -- -- 6,100 14,006
------- ------- ------- ------ -------- --------
Cash provided by financing activities............ 1,860 2,991 2,355 1,218 5,402 13,853
------- ------- ------- ------ -------- --------
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND
EQUIVALENTS...................................... -- (276) (382) (416) 112 82
INCREASE IN CASH AND EQUIVALENTS....................... -- -- 19 0 2,158 2,177
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... -- -- -- -- 19 --
------- ------- ------- ------ -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ -- $ -- $ 19 $ -- $ 2,177 $ 2,177
======= ======= ======= ====== ======== ========
Non-cash financing activities:
Issuance of common stock in connection with reverse
merger........................................... $ -- $ -- $ -- $ -- $ 500 $ 500
Acquisition of assets and liabilities of Epyx in
connection with reverse merger................... -- -- -- -- 71,600 71,600
Payable to De Nora S.p.A. converted into capital. 848 -- 7,058 7,058 -- 7,058
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
NUVERA FUEL CELLS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Six Months Ended June 30, 1999 and 2000 and
Cumulative From March 30, 1989 (Inception) to June 30, 2000 is Unaudited)
(Dollars in thousands, except per share amounts)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nuvera Fuel Cells, Inc. and subsidiary (a development stage company) (the
"Company") designs and develops fuel processors, proton exchange membrane
("PEM") fuel cell stacks and integrated fuel cell systems for stationary and
transportation applications that generate clean, reliable and efficient energy.
It is engaged in a single operating segment of the electric power generation
industry.
The Company was formed through the merger (Note 2) of De Nora Fuel Cells
S.p.A. ("De Nora"), a wholly owned subsidiary of De Nora New Energy Investments
B.V. ("DNNEI"), a subsidiary of Norfin S.p.A. (with its subsidiaries, "Norfin"),
and Epyx Corporation ("Epyx"), a wholly owned subsidiary of Arthur D. Little,
Inc. ("AD Little"), pursuant to an Investment and Exchange Agreement (the
"Investment Agreement") dated April 4, 2000. De Nora began its fuel cell
research operations on March 30, 1989 and conducted its activities as an
integral part of the overall operations of Norfin, until October 1, 1999 when De
Nora was established as a wholly owned subsidiary. Epyx began its operations in
1991 and all fuel cell development was conducted as an integral part of AD
Little's overall operations until December 18, 1997 when Epyx was incorporated
as a wholly owned subsidiary of AD Little.
The Company is in the development stage. The successful completion of the
Company's development program and successful commercialization of its products,
and, ultimately, the attainment of profitable operations is dependent upon
future events, including maintaining adequate financing to fulfill its
development and marketing activities and achieving a level of sales adequate to
support the Company's cost structure.
During the years ended December 31, 1997, 1998 and 1999, the six months
ended June 30, 2000 and cumulative for the period from inception to June 30,
2000, the Company incurred net losses of $1,340, $2,285, $1,290, $24,169 and
$31,763, respectively. In addition, the Company's operations have historically
depended primarily upon advances, loans and contributions to capital from its
stockholders and funds provided under its government-sponsored research and
development contracts. The Company has obtained commitments from its principal
stockholders to provide $30,000 in additional equity financing. Such commitments
have been evidenced by a capital contribution agreement entered into by these
stockholders on November 3, 2000. Pursuant to this agreement, until Norfin and
AD Little have contributed to the Company, in the aggregate, $1,000, the
obligation of Norfin and AD Little with respect to the $30,000 in additional
equity financing is $15,000 each. Thereafter, the obligation of each stockholder
is 46.8% for Norfin, 42.2% for AD Little and 11.0% for Amerada Hess Corporation
("Hess") (Note 2). This agreement will terminate on the earlier of the date of
the consummation of the Company's initial public offering with proceeds to the
Company of at least $30,000, the date on which capital contributions under this
agreement by AD Little, Norfin and Amerada Hess Corporation exceed $30,000 or
December 31, 2001. The Company believes that these commitments will provide
sufficient funding for it to operate for the next year.
The merger transaction has been accounted for under the purchase method of
accounting and was treated as a reverse acquisition as Norfin received the
controlling interest in the combined enterprise. Therefore, for accounting
purposes, De Nora is deemed to have acquired Epyx. The Company's consolidated
financial statements for all periods prior to the merger represent the
financial position, results of operations and cash flows of De Nora. The
Company's consolidated financial statements for periods subsequent to April 4,
2000 include the results of both De Nora and Epyx.
F-8
<PAGE>
The financial statements of De Nora, included in the accompanying
consolidated balance sheets and related statements of operations, comprehensive
loss, stockholders' equity (deficit), and cash flows, have been prepared on a
carve-out basis for the purpose of presenting the financial position, results
of operations and cash flows of the Company. The accompanying financial
statements include allocations of general corporate overhead expenses related
to the corporate headquarters and common support activities of Norfin,
including information technology, financial, treasury, legal, insurance and
other corporate functions as well as certain costs of operations including
office rent and facility charges. These costs have been allocated to De Nora
using methodologies primarily based on headcount and usage. Although management
believes the allocations are reasonable, the costs of these services to De Nora
may not be indicative of the costs that would have been incurred if De Nora had
been a stand-alone entity (Note 5).
Much of De Nora's revenue has historically been derived as a subcontractor
to De Nora S.p.A., its parent. Since the incorporation of De Nora Fuel Cells
S.p.A. in October 1999 and the merger in April 2000, all of Norfin's contracts
relating to fuel cells, and a significant number of AD Little's contracts
relating to fuel processors, have been assigned to the Company. Under the
subcontractor arrangements with its stockholders, the Company is subject to the
risk and rewards of the contracts in the same manner as if it were the prime
contractor. Accordingly, for financial reporting purposes, the Company
recognizes subcontractor revenues from its stockholders and discloses
concentration credit risks and significant customers in the same manner as if
it were the prime contractor.
2. MERGER TRANSACTION AND ALLOCATION OF VALUE OF SHARES EXCHANGED
Merger Transaction
Under the terms of the Investment Agreement, DNNEI received 500,000 newly
issued shares of the Company's common stock in exchange for its ownership
interest in De Nora. Simultaneously with the merger, Hess purchased 50,000
shares of the Company's common stock held by AD Little. Upon consummation of the
merger, Epyx, which is the legal acquirer and surviving legal entity, changed
its name to Nuvera Fuel Cells, Inc. On July 26, 2000, De Nora changed its legal
form and name to Nuvera Fuel Cells Europe, S.r.l. The merger costs incurred by
De Nora and Epyx were approximately $100 and $50, respectively.
Immediately after the merger, DNNEI owned 50% of the Company's common stock
and held control over four of the eight seats on the Company's Board of
Directors, enabling them to retain voting and operating control of the Company.
AD Little owned 45% of the Company's common stock and held control over three of
the Board seats. Hess owned 5% of the Company's common stock and held control
over one of the Board seats.
The merger of De Nora and Epyx constitutes a reverse acquisition, whereby
Epyx was effectively acquired by De Nora for accounting purposes. Accordingly,
the value of Epyx was allocated to the assets and liabilities of Epyx based on
their fair values at the date of acquisition. The Company engaged an independent
third party valuation firm to determine (a) the value of the shares exchanged in
the merger (which lead to the value of Epyx); (b) all identifiable intangible
assets acquired; and (c) the estimated useful life of each intangible asset
identified.
Value of Shares Exchanged
The Company was valued on a 100% basis for the purposes of allocating the
value of the shares exchanged to the identifiable intangible assets. For
accounting purposes, the effective consideration for a 100% interest in Epyx was
a 45% minority equity interest in the Company retained by AD Little.
On the date of acquisition, Hess purchased a 5% minority equity interest in
the Company from AD Little in an arm's length transaction for $10,000. Included
in the investment agreement between Hess and AD Little was an option to acquire
an additional 50,000 shares of the Company's common stock held by AD Little at a
per share price equal to the midpoint of the range between $200 and the fair
market value at the date of exercise. The third party valuation firm deemed the
fair market value of the stock option acquired by Hess to be $2,000 as of April
4, 2000 and the 5% minority equity interest in the Company to be $8,000.
F-9
<PAGE>
Since Hess purchased a minority equity interest in the Company for cash in
an arm's length transaction on the date of acquisition, the valuation firm
deemed this transaction to be the most relevant measurement of value of a
minority interest in the equity of the Company on April 4, 2000. Accordingly,
the fair market value of the consideration to acquire a 100% interest in Epyx (a
45% minority interest in the Company) was estimated to be $72,100 including $100
in merger costs.
Overall Methodology to Allocation of Value of Shares Exchanged
All identifiable intangible assets were assigned a portion of the value of
the shares exchanged in the merger on the basis of their calculated allocations
in accordance with the provisions of Accounting Principles Board (APB) Opinions
No. 16, "Business Combinations" and No. 17, "Intangible Assets". Intangible
assets identified were developed technology, in-process research and
development, an assembled workforce and patents. The excess of the value of the
shares exchanged over the fair value of identifiable intangible net assets was
allocated to goodwill.
The developed technology and in-process research and development were
determined using the income method. Revenue and expense projections as well as
technology assumptions were prepared through 2015 based on information provided
by management. Revenue assumptions reflect probable contract revenues from
various governmental and commercial funding sources, as well as projected
product sales. Total revenues include research and development/prototype
revenue, stationary power generation revenue and transportation revenue. The
total revenues were analyzed for each of the three primary categories of
products: developed/existing technology, in- process technology, and future
technology. For each category, revenue was projected based on the expected
development of technology for each product. Existing technology revenue relates
to the actual sales of prototype product that incorporate the existing
technology.
Cost of revenues, depreciation and general and administrative expenses were
estimated based on management's projections, review of market and industry data,
and discussions with management.
Research and development expenses were divided into: (i) costs to complete
projects related to current technology, (ii) costs for developed products that
have already been introduced to the market ("maintenance research and
development"), and (iii) costs to complete future technologies. Total research
and development was allocated between the costs to complete and maintenance
based on an allocation of a majority of the expenses to costs to complete with
the remainder allocated to maintenance based on management estimates. In 2000,
approximately 15% of the costs related to maintenance, while the balance related
to costs to complete in-process projects. The research and development that was
in-process at the valuation date have been assumed to be completed by the end of
2003. The remaining research and development costs were allocated between
maintenance and costs to complete future technologies.
The income tax rate was based on an estimated federal and state corporate
tax rate of 40%.
The patents were valued utilizing the relief from royalty method of the
income approach and the assembled workforce was valued on a replacement cost
basis.
Value of Shares Exchanged and Related Allocation
The following summarizes the overall allocation of the value of the shares
exchanged:
Value of shares exchanged:
Value of 100% interest in Epyx on April 4, 2000 (45% interest in the
combined enterprise)................................................$72,000
Acquisition costs incurred by De Nora.................................. 100
-------
Total..................................................................$72,100
=======
Allocation of value of shares exchanged:
Tangible net assets acquired........................................... $500
Intangible assets acquired - developed technology, assembled
workforce and patents............................................... 15,600
Deferred income tax liabilities........................................ (5,225)
F-10
<PAGE>
Value of shares exchanged:
In-process research and development.................................... 20,300
Goodwill............................................................... 40,925
-------
Total...................................................................$72,100
=======
Developed Technology
Revenue was attributed to developed technology in 2000. The revenue stream
from developed technology was assumed to cease in 2003, at which time Epyx
revenue would be generated by both stationary and transportation products. The
indicated lifecycles of the developed technologies were based on discussions
with management and industry and market data. The developed technology cash flow
also included a royalty stream from the in-process product research and
development cash flow benefiting from the core technology.
The resulting cash flow figures were discounted to the present by applying
a discount rate of 32%, consistent with venture capital rates of return for
start-up companies in the research and development stages. Based on the
analysis, the developed technology was valued at $9,100, which is being
amortized on a straight-line basis over an estimated useful life of 6 years.
In-Process Research and Development
The in-process research and development was evaluated in the context of
Interpretation 4 and Paragraph 11 of Financial Accounting Standards Board
("SFAS") Statement No. 2, which requires that costs to purchase research and
development be charged to expense as incurred.
In the identification and valuation of the research and development
projects, the valuation firm considered data provided by management concerning
the projects' respective stages of development, the time and resources needed
to complete them, their expected income generating ability, target markets, and
associated risks.
Management projected no product sales of stationary power and
transportation products until 2001 and 2003, respectively. The revenues
generated by sales related to stationary power and transportation products were
considered to be in-process research and development.
A royalty expense was charged to in-process product revenues to reflect
the benefit realized from the core technology. An additional calculation was
performed to reflect the cash flows attributable to the in-process technology
on a percentage of completion basis for each project. Based on an analysis of
chronological timeframe, completed milestones and costs incurred to date as
compared to the chronological timeframe, milestones and remaining costs to be
incurred to reach commercialization, management estimated the completion
percentage to be approximately 70%.
The resulting cash flow figures were discounted to the present by applying
an appropriate discount rate of 35% which is slightly higher than the discount
rate applied to the developed technology. The higher discount rate represents a
risk premium over the developed technology and the business as a whole due to
the uncertainty of the technology advances achieved as of the date of value.
The 35% is consistent with venture capital rates of return for start-up
companies in the research and development stages. Based on the analysis, the
in-process research and development was valued at $20,300, which was expensed
upon consummation of the merger, and reflected in the Company's statement of
operations for the six months ended June 30, 2000.
Patents
The relief from royalty method is based on the premise that in lieu of
ownership, a firm would be willing to pay a royalty for the use of patent
technology. Actual royalty rates paid for the use of various patents in the
industry were used to determine industry-specific royalty rates. As a result of
the above research on patents in the industry, considering the specific nature
of the subject patents, a 2.0% pretax royalty rate was assumed. Based on the
analysis, the fair market value of Epyx's patents and patent applications as of
April 4, 2000 was determined to be $5,400, which will be amortized on a
straight-line basis over an estimated useful life of 5 years.
F-11
<PAGE>
Assembled Workforce
An assembled workforce is the presence of a skilled employee base that is
knowledgeable about company procedures and possesses expertise in certain
fields that are important to continued profitability and growth of the company.
Benefits are attributable to an assembled workforce since it can be very
costly to locate, hire, and train a workforce, as evidenced by expenditures
related to retaining employees and reducing turnover. The more specialized the
workforce, the greater the cost of its assemblage, and the larger its benefit
to the enterprise.
The assembled workforce analysis estimates the allocation related to
Epyx's assembled workforce by determining, on a replacement cost basis, the
cost to find and interview candidates and to train new employees in their
positions. Based on the analysis, the assembled workforce was valued at $1,100
which is being amortized on a straight-line basis over an estimated useful life
of 4 years.
Deferred Income Taxes
Deferred income taxes primarily represents taxes related to the identified
intangible assets (excluding goodwill) at a rate of 40%. The net deferred tax
liability recorded at the date of acquisition was $5,225.
Goodwill
All identifiable assets acquired, including identifiable intangible
assets, were assigned a portion of the cost of the acquired enterprise. The
remaining value of the shares exchanged in excess of the identified assets was
allocated to goodwill which is being amortized by a systematic charge to income
over the periods that are expected to benefit from the asset. Accordingly,
value allocated to goodwill as of April 4, 2000 was $40,925, which is being
amortized on a straight-line basis over an estimated useful life of 7 years.
Pro Forma Disclosure (Unaudited) -- The following table presents the
unaudited pro forma results of operations for the year ended December 31, 1999
and the six months ended June 30, 2000 assuming the merger had occurred on
January 1, 1999 and January 1, 2000, respectively. These pro forma results have
been prepared for informational purposes only and are not necessarily
indicative either of what would have occurred had the merger occurred at those
dates or the results that may occur in the future.
(Unaudited)
December 31, June 30,
1999 2000
------------ -----------
Revenue.......................................... $ 1,251 $ 903
Loss from operations............................. (14,616) (30,026)
Net loss......................................... (13,476) (28,513)
Basis and diluted net loss per common share...... $ (13.48) $ (28.51)
Shares used in computing basic and diluted net
loss per common share.......................... 1,000,000 1,000,000
F-12
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- As described in Note 2, the Company
completed a merger on April 4, 2000 that has been accounted for as a reverse
acquisition. Accordingly, the Company's consolidated financial statements for
periods prior to April 4, 2000 represent those of De Nora, which is considered
to be the acquiror for accounting purposes. The consolidated financial
statements for periods subsequent to April 4, 2000 include the accounts of the
Company and its wholly owned subsidiary after elimination of all significant
intercompany balances.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition -- Revenues on products where title passes to the
customer and that are sold without the right to return and without customer
acceptance are recognized when the product has been shipped and the Company has
met its obligations under the sales contract. Revenues on products requiring
the Company to perform installation are recognized when the installation is
complete. Revenues on long-term contracts, primarily prototype fuel processors
used for research and development purposes where title does not pass to the
customer, are recognized on the percentage-of-completion method based on the
costs incurred to date as compared to the estimated total costs for each
contract. Revenues from consulting contracts are recognized as services are
performed. Losses on long-term contracts are charged to operations when the
total estimated cost to complete a contract exceeds the contract value. Lease
revenues are recognized ratably over the lease period.
Under certain arrangements in which a third-party funds a portion of the
research and development costs on a specific project, the direct materials and
labor costs of that project are recorded as a cost of revenue, while overhead
and general and administrative expenses allowable for inclusion in the cost
reimbursement calculation are recorded as selling, general and administrative
expenses.
Research and Development -- Research and development expenses consist
principally of expenditures for research conducted by the Company and include
the net costs incurred under contracts that qualify as best efforts
arrangements. Costs for contracts that qualify as best-efforts arrangements are
recognized as research and development expenses and include the net costs
incurred under the contracts.
Funding related to contracts which qualify as best-efforts arrangements
are recorded as an offset to the Company's research and development expenses
and the Company is generally required to absorb 12% to 60% of the total costs
incurred on best-efforts arrangements. Development costs generally include an
allocable share of allowable indirect costs such as overhead and general and
administrative expense.
Contracts are deemed to be best-efforts arrangements when all of the
following conditions are met: (a) the sole or principal customer is the U.S. and
Italian governments or the European Union; (b) the activities performed qualify
as research and development under SFAS No. 2, "Accounting for Research and
Development Costs"; (c) the Company retains a right to the data and results of
the research and development; (d) the total costs at the inception of the
contract are expected to exceed the amount of the grant; and (e) the Company is
obligated to perform only on a best efforts basis to achieve the agreed-upon
objectives. The total costs incurred under these arrangements and the total
amount of funding netted against research and development during the years ended
December 31, 1997, 1998 and 1999, the six months ended June 30, 1999 and 2000,
and cumulative from inception to June 30, 2000 were as follows:
<TABLE>
Year Ended Six Months
December 31, Ended June 30, Cumulative From
------------------------------ ---------------- Inception To
1997 1998 1999 1999 2000 June 30, 2000
------ ------ ------ ---- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Research and development costs incurred... $1,751 $3,409 $1,757 $971 $3,301 $14,022
Government funding offset against costs... 632 1,421 753 359 1,627 6,297
------ ------ ------ ---- ------ ------
Research and development costs, net....... $1,119 $1,988 $1,004 $612 $1,674 $7,725
====== ====== ====== ==== ====== ======
</TABLE>
Contract costs, including indirect expenses, on U.S. government contracts
are subject to audit and adjustment by the Defense Contract Audit Agency (the
"DCAA"). Contract revenues for the period from April 4, 2000 to June 30, 2000
have been recorded in amounts which are expected to be realized upon final
settlement. Contract costs, including indirect expenses, on European Union and
Italian government contracts are audited at the time of reimbursement which is
approximately eight (8) months following submission for payment. In
management's opinion, the results of such audits will not have a material
effect on the Company's financial position, results of operations or cash
flows.
F-13
<PAGE>
Accounts and Unbilled Receivables - Stockholders -- Accounts receivable -
stockholders represent accounts due from AD Little and Norfin related to
services performed in which the Company is the sub-contractor. Unbilled
receivable - stockholders represent accounts due from AD Little and Norfin
related to services performed in which the Company is the sub-contractor that
have not yet been billed by the stockholders which are expected to be billed
and collected within one year.
Unbilled Receivable - Trade -- Unbilled receivable - trade represents
revenues earned on contracts that have not yet been billed which are expected
to be billed and collected within one year.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with remaining maturities of three months or less when purchased to
be cash equivalents.
Inventories -- Inventories consist of unbilled work-in-progress, including
materials, labor, and overhead, which are valued at the lower of cost or market
using the first-in, first-out method.
Property and Equipment, Net -- Property and equipment is stated at cost,
net of accumulated depreciation. Depreciation is provided primarily using the
straight-line method over the estimated useful lives of the related assets. The
Company periodically evaluates the recoverability of its long-lived assets
based on the expected undiscounted cash flows and recognizes impairments, if
any, based on the discounted cash flows.
Intellectual Property -- Intellectual property including patents and
know-how is carried at no value, except for the patents valued in connection
with the merger (Note 2).
Intangible Assets -- Intangible assets are being amortized on a
straight-line basis over the related useful life of the asset (Notes 2 and 6).
Income Taxes -- The operating results of De Nora have been included in the
income tax returns of Norfin through October 1, 1999. The Company was not
reimbursed for the benefits realized by Norfin from utilization of the
Company's tax losses. Therefore, no asset has been recognized for such benefits
in the Company's financial statements. For reporting purposes, the Company has
computed its income tax provision on a separate return basis using the asset
and liability method prescribed by SFAS No. 109, Accounting for Income Taxes.
For periods subsequent to October 1, 1999, income taxes are accounted for
under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are established
when necessary to reduce the deferred tax assets to those amounts expected to
be realized.
Other Long-Term Liabilities -- Other long-term liabilities represent a
severance indemnity accrual for the Company's personnel employed in Italy. The
liability is based upon the employee's salary, years of service and is indexed
annually for inflation. The liability is payable to the individual upon
termination of their employment regardless of the reason for the termination.
Stock-Based Compensation -- The Company accounts for stock-based employee
compensation arrangements using the intrinsic value method in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and complies
with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation".
F-14
<PAGE>
Equity instruments issued to non-employees are accounted for in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF")
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued To Other
Than Employees for Acquiring or in Conjunction with Selling, Goods or
Services". All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, which ever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of the date on
which the counterparty's performance is complete or the date on which it is
probable that performance will occur.
Net Loss Per Common Share -- Basic and diluted net loss per share is
computed using the weighted-average number of shares of common stock
outstanding. As a result of the reverse acquisition the weighted-average number
of shares outstanding, for the purpose of presenting net loss per common share
on a comparative basis, has been retroactively restated to the earliest period
presented based on the exchange ratio in the reverse acquisition. The Company
had no securities or contracts outstanding which were convertible into shares of
common stock during 1997, 1998, 1999 or the six months ended June 30, 1999 and
2000.
The following table illustrates the calculation of net loss per common
share:
<TABLE>
Year Ended Six Months Ended
December 31, June 30,
------------------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net loss......................... $ (1,340) $ (2,285) $ (1,290) $ (677) $ (24,169)
Weighted average number of
common shares................... 500,000 500,000 500,000 500,000 743,094
Net loss per common share........ $ (2.68) $ (4.57) $ (2.58) $ (1.35) $ (32.53)
</TABLE>
Foreign Currency Translation -- The Company translates financial statements
denominated in foreign currency in accordance with SFAS No. 52, "Foreign
Currency Translation". The reporting currency for all period presented is the
U.S. dollar. Balance sheet accounts are translated at the end of period exchange
rate and statement of operations accounts at the average exchange rate for the
period. Because the local currency is the functional currency, translation gains
and losses are recorded in accumulated other comprehensive income (loss) and
transaction gains and losses are reflected in other (income) expense in
determining net loss.
Unaudited Interim Financial Information -- The consolidated balance sheet
as of June 30, 2000, the statements of operations and cash flows for the six
months ended June 30, 1999 and 2000, and the statement of stockholders' equity
(deficit) for the six months ended June 30, 2000 have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission and are
unaudited, but, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation. The results for the interim periods are not
necessarily indicative of the results to be expected for any other interim
periods or the full year.
Concentrations of Credit Risk -- Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of accounts receivable.
The Company's receivables are derived primarily through its stockholders,
from contracts with the U.S. and Italian governments and the European Union.
Amounts included in accounts receivable and unbilled receivables under these
contracts at December 31, 1998, December 31, 1999 and June 30, 2000 were $1,542,
$948, and $1,348, respectively.
Two customers accounted for 85% and 89% of the revenues for the years
ended December 31, 1997 and 1998, respectively. One customer accounted for 82%
of revenues for the six months ended June 30, 1999. Three customers accounted
for 71% and 56% of revenues for the year ended December 31, 1999 and the six
months ended
F-15
<PAGE>
June 30, 1999 and 2000, respectively. Amounts included in accounts receivable
and unbilled receivables from these customers at December 31, 1998, December
31, 1999 and June 30, 2000 were $14, $147 and $154, respectively.
The Company performs ongoing credit evaluations of its customers'
financial condition and does not require collateral from its customers. The
Company maintains reserves for potential credit losses.
Fair Value of Financial Instruments -- The Company's financial
instruments, including cash and cash equivalents, receivables, accounts payable
and notes payable are carried at cost which approximates their fair values
because of the short term nature of these instruments.
Impairment of Long-Lived Assets -- The Company deems an asset to be
impaired if a forecast of undiscounted future operating cash flows directly
related to the asset, including disposal value if any, is less than its carrying
amount. When evaluating and measuring impairment, assets are grouped at the
lowest level for which there are identifiable, largely independent cash flows.
Factors leading to impairment were a combination of historical losses and
anticipated future losses. If an asset is determined to be impaired, the loss is
measured as the amount by which the carrying amount of the asset exceeds its
fair value. Fair value is based on quoted market prices in active markets, if
available. If quoted market prices are not available, an estimate of fair value
is based on the best information available, including prices for similar assets
or the results of valuation techniques.
Recently Issued Accounting Pronouncements -- In June 1998 the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 was amended by SFAS No. 137 which requires adoption of the provisions of
SFAS No. 133 for periods beginning January 1, 2001. The Company does not expect
that SFAS No. 133, as amended, will have a material effect on its consolidated
financial position or results of operations. The Company will adopt this
accounting standard on January 1, 2001, as required.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition. The Company
believes that its revenue recognition practices for sales are substantially
consistent with SAB No. 101. The Company's revenue practices for government and
other contracts fall within and are in compliance with AICPA Audit and
Accounting Guide, "Audits of Federal Government Contractors", and AICPA
Statement of Position ("SOP") No. 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." SAB No.101 did not
modify the principles of the Audit and Accounting Guide or SOP No. 81-1. The
Company does not expect that SAB No. 101 will have a material effect on its
consolidated financial position or results of operations.
4. INVENTORIES
Inventories consist of the following:
December 31, June 30,
1999 2000
------------ --------
Finished products........... $ 46 $241
Raw materials 582 674
---- ----
Inventories.............. $628 $915
==== ====
There were no inventories as of December 31, 1998.
F-16
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
--------------- June 30,
Description Useful Life 1998 1999 2000
----------- ----------- ----- ---- --------
Laboratory equipment.......... 4 to 5 years $ 347 $382 $ 806
Furniture and fixtures........ 5 to 8 years 31 48 320
Producer goods in lease....... 4 to 5 years 650 559 546
Computer equipment............ 2 years -- -- 203
------ ---- -------
Total...................... 1,028 989 1,875
Less accumulated depreciation. (753) (749) (1,162)
------ ---- -------
Property and equipment, net $ 275 $240 $ 713
====== ==== =======
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
Estimated ---------------- June 30,
Description Useful Life 1998 1999 2000
----------- ------ ------ --------
Assembled workforce........... 4 years $ -- $ -- $ 1,100
Developed technology.......... 6 years -- -- 9,100
Patents..................... 5 years
-- -- 5,400
Goodwill...................... 7 years -- -- 40,925
------ ------ -------
Total...................... -- -- 56,525
Less accumulated depreciation. -- -- (2,180)
------ ------ -------
Intangible assets, net..... $ -- $ -- $54,345
====== ====== =======
7. FINANCING (INCLUDING RELATED PARTY FINANCING)
On March 21, 2000, the Company entered into a financing agreement with an
Italian bank to provide up to $987 (equivalent to 2 billion lira) under a line
of credit. The line of credit bears interest at a variable rate (5% per annum at
June 30, 2000), has no stated maturity date and is guaranteed by Norfin. In
March 2000, the Company borrowed approximately $759 under the line of credit.
The borrowings under the line of credit were repaid in June 2000 using a portion
of the proceeds received as capital contributions from AD Little and Norfin. The
full amount of the line of credit was available as of June 30, 2000.
At December 31, 1999, the Company had promissory notes outstanding to
Norfin totaling $545. The promissory notes, which carried interest at a rate
equal to 90 day LIBOR plus .5% (3.9137% effective rate at December 31, 1999),
were repaid in March 2000 using proceeds received from borrowings under the
bank line of credit. No promissory notes were outstanding as of June 30, 2000.
Interest expense of $2 and $7 was recorded in 1999 and 2000, respectively.
8. RELATED PARTY TRANSACTIONS
The accompanying consolidated financial statements include allocations of
general corporate overhead expenses related to the corporate headquarters and
common support activities of Norfin, including information technology,
financial, treasury, legal, insurance and other corporate functions as well as
certain costs of operations including office rent and facility charges. These
costs have been allocated to De Nora using methodologies primarily based on
headcount
F-17
<PAGE>
and usage. The total costs allocated to the Company were $465, $465 and $403
for the three years ended December 31, 1999. Although management believes the
allocations are reasonable, the costs of these services to De Nora may not be
indicative of the costs that would have been incurred if De Nora had been a
stand-alone entity.
In connection with the establishment of De Nora as a separate subsidiary
of Norfin in October 1999, De Nora and Norfin entered into several agreements
whereby Norfin would continue to perform certain services for De Nora. The
services included assistance and cooperation in financial, accounting,
organizational, commercial, intellectual property, research and development,
import-export, tax and legal matters. The total costs incurred by the Company
under these agreements were $222 and $421 during the year ended December 31,
1999 and the six months ended June 30, 2000, respectively.
In addition, De Nora and Finisola S.p.A., a subsidiary of Norfin, entered
into two lease agreements for laboratory and office space in October 1999. The
lease agreements required payments of $26 per year for six years. The total
costs incurred by the Company under the leases were $8 and $13 for the year
ended December 31, 1999 and the six months ended June 30, 2000, respectively. In
connection with the need to lease additional space, the two lease agreements
were superceded by two new agreements with Finisola S.p.A in July 2000 (Note
12).
In May 2000, the Company entered into a services agreement with De Nora
Elettrodi S.p.A., a subsidiary of Norfin, to provide to the Company personnel
for packaging, transportation and mechanical tasks for an hourly fee of
approximately $52, and daily fees of approximately $304, per business trip and
assistance in import-export and other administrative matters for a fee of
approximately $80 per task. The agreement terminates December 31, 2000 and is
automatically renewed for successive one-year terms unless either party notifies
the other party that it wishes to terminate the agreement at least 30 days prior
to December 31 of each year. No costs were incurred by the Company under this
agreement for the six months ended June 30, 2000.
On April 4, 2000, the date of the merger, the Company and AD Little
entered into a license and services agreement, pursuant to which AD Little had
granted to the Company a license to occupy and use office and laboratory space
in AD Little's headquarters, and AD Little had agreed to provide to the Company
certain general and administrative services. The license and service fee under
the agreement is $2,460 per employee of the Company at the Cambridge facility
per month. The total charges during the six months ended June 30, 2000 under
this agreement were $404. The license and services agreement terminates on
December 31, 2000, subject to six- month renewals by mutual consent of the
parties.
In addition, from the date of the merger, certain services have been
subcontracted to AD Little by the Company under the Company's contractual
agreements and are reflected as costs of revenue and research and development
expenses in the financial statements. The rate charged between the two
companies for subcontract services equals 85% of the rate a third-party would
be charged by AD Little for similar services. Management believes this
subcontract rate is reasonable for the services performed. The costs of certain
services, including costs relating to best-efforts research and development
activities, subcontracted to AD Little by the Company under the Company's
contractual agreements was $118 during the six months ended June 30, 2000.
Under the terms of the Investment Agreement, AD Little and Norfin each
agreed to provide up to $11,000 in cash to fund the Company's operations
through December 31, 2000. In April 2000, AD Little and Norfin each contributed
to capital $3,000 under this commitment. On November 3, 2000, AD Little, Norfin
and Hess entered into a $30,000 capital contribution agreement (Note 1).
F-18
<PAGE>
A summary of the transactions with Norfin and AD Little are as follows:
<TABLE>
Year Ended December 31, Six Months Six Months Cumulative
-------------------------- Ended Ended Since
1997 1998 1999 June 30, 1999 June 30, 2000 Inception
------ ------ ------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Due to stockholders at beginning of period... $1,473 $2,257 $5,248 $5,248 $ -- $ --
Net expenditures (including collections on
accounts rceivables) paid (received) by
stockholder on behalf of the Company...... 874 2,526 1,881 987 (1,524) 4,259
Payment to stockholders for agreements....... -- -- -- -- (2,160) (2,160)
Due to stockholders converted into capital
contributions............................. (848) -- (7,058) -- -- (7,906)
Expenses allocated from stockholder
including costs under certain related
party agreements.......................... 465 465 403 231 2,745 5,440
Foreign exchange effect.................... 293 -- (474) -- -- (572)
------ ------ ------ ------ ------- --------
Due to (from) stockholders at end of period.. $2,257 $5,248 $ -- $6,466 $ (939) $ (939)
====== ====== ====== ====== ======= ========
</TABLE>
9. INCOME TAXES
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
F-19
<PAGE>
December 31,
------------------ June 30,
1998 1999 2000
------- ------- --------
Deferred tax assets:
Net operating loss carryforwards.............. $ -- $ 54 $ 1,430
Research and development carryforwards........ -- -- 412
Loss on uncompleted projects.................. -- -- 331
Depreciation.................................. -- -- 78
Deferred compensation......................... -- -- 18
Advance payments from customers............... -- -- 23
Other......................................... -- -- 57
Deferred tax liabilities:
Intangibles................................... -- -- (5,952)
------- ------- -------
Deferred tax assets (liabilities).............. -- 54 (3,603)
Less: valuation allowance for net deferred
tax assets................................... -- (54) (348)
------- ------- -------
Net deferred taxes............................. $ -- $ -- $(3,951)
======= ======= =======
The Company has established a valuation allowance because of uncertainties
regarding its ability to generate sufficient taxable income in the applicable
tax jurisdiction during the carryforward period to utilize the net operating
loss carryforwards.
Reconciliations of the effective tax rate at the applicable statutory rate
to the effective rate are as follows:
Year Ended
December 31,
--------------------------
1997 1998 1999
---- ---- ----
Applicable statutory rate...................... 37% 37% 37%
Permanent items and other...................... -- -- (1)%
Less: Provision for valuation allowance
on deferred tax assets....................... -- -- (36)
Parent utilization of net operating losses..... (37) (37) --
-- -- --
Effective tax rate............................ -- -- --
== == ==
The effective tax rate for the six months ended June 30, 2000 is based on
the expected tax rate for the full year.
At December 31, 1999, the Company had a foreign tax net operating loss
carryforward available for future periods from De Nora of $54 expiring
indefinitely. The Company also has available research and development credits
for federal and state tax purposes of approximately $311 and $101,
respectively. The federal research and development credits expire as follows:
$61 in 2018, $142 in 2019 and $108 in 2020. The state research and development
credits expire as follows: $20 in 2013, $46 in 2014 and $35 in 2015.
10. RETIREMENT SAVINGS PLAN
The Company has a non-contributory 401(k) Retirement Plan for eligible
full-time and part-time employees. Employees eligible to participate in the
Plan must be at least 21 years of age. Under the Plan, employees may generally
contribute up to 15% of their compensation, however, not in excess of IRS
limitations. The Company does not make matching contributions at this time.
Employees are 100% vested in their own contributions plus earnings at all
times.
11. GEOGRAPHIC SALES INFORMATION
The Company operates in a single segment. Information with respect to the
Company's revenues (Note 1) for the years ended December 31, 1997, 1998 and
1999, the six months ended June 30, 1999, and other data for the six months
ended June 30, 2000 by geographic area are as follows (revenues are attributed
to geographical areas based on the location of the customer):
F-20
<PAGE>
<TABLE>
North Europe and
America Middle East Asia Total
------- ----------- ---- -----
<S> <C> <C> <C> <C>
Revenues
Year ended December 31, 1997........... $ 34 $ 316 $ - $ 350
Year ended December 31, 1998........... 22 262 - 284
Year ended December 31, 1999........... 121 548 - 669
Six months ended June 30, 1999......... 21 346 - 367
Six Months Ended June 30, 2000
Revenues.............................. 318 361 224 903
Less: intercompany sales............... - (61) - (61)
-------- ------ ---- --------
Total revenues....................... $ 318 $ 300 $224 $ 842
======== ====== ==== ========
Loss from operations................... $(24,541) $ (854) - $(25,395)
Identifiable assets.................... 59,106 3,294 - 62,400
</TABLE>
12. SUBSEQUENT EVENTS
Transactions with Fineurop International Limited
On August 1, 2000, the Company entered into a consulting agreement with
Fineurop Soditic S.p.A., an affiliate of Fineurop International Limited, to
provide financial advisory services to the Company in connection with its
initial public offering. The agreement included a retainer fee of $90 which will
be offset against the planned success fee equal to 0.7% of the net proceeds
received from the initial public offering. On August 2, 2000, Fineurop
International Limited purchased from Norfin International S.A. for $1,600, 1.6%
of the common stock of De Nora New Energy Investments B.V., a subsidiary of
Norfin, which was exchangeable for 8,539 shares of the Company's common stock
held by De Nora New Energy Investments B.V. Fineurop International exercised the
exchange right in October 2000 and subsequently transferred 2,625 of its shares
of the Company's common stock to its affiliate Fineureka S.A.
Transactions with Finisola S.p.A.
In July 2000, the Company entered into leases with Finisola S.p.A. for
office and laboratory space and production facilities. The leases expire on June
30, 2006, and each lease is automatically renewed for an additional six-year
term unless either party notifies the other party that it wishes to terminate
the relevant lease six months prior to its expiration. The minimum lease
commitments are $44 in 2000 and $87 in 2001, 2002, 2003, 2004 and 2005.
Common Stock Transactions
On July 31, 2000, Hess purchased 67,416 shares of newly issued common
stock of the Company for an aggregate price of $15,000. The proceeds from the
sale will be used for research and development, marketing and general working
capital purposes or such other purposes as the Company may determine from time
to time in its discretion.
On October 10, 2000, the Company granted 17,500 fully-vested shares of the
Company's common stock contributed to the Company by AD Little to certain
long-term employees of the Company, including some of the executive officers of
the Company, in recognition of their past service to the Company. The Company
will record stock-based compensation expense in October 2000 relating to this
grant. The Company provided forgivable loans to these employees in an aggregate
amount of approximately $1,800 to enable them to pay the income taxes related
to the grants. The loans will carry interest at a rate of 8.5% and the
principal of and interest on these loans will be forgiven from repayment by the
employee over a period of two years if the employee remains an employee of the
F-21
<PAGE>
Company. The Company will record additional compensation expense as these loans
are forgiven in an amount equal to the principal and accrued interest forgiven.
In connection with these transactions, AD Little will make an additional capital
contribution of approximately $2.2 million to the Company.
In addition, the portion of the stock grants collateralizing the employee
loans will be accounted for under variable plan accounting. Therefore,
additional stock-based compensation will be recorded in the future on the
collateralized grants based on the difference between the value of the common
stock at date of grant and the fair value of the common stock at each reporting
date.
Adoption of 2000 Stock Incentive Plan
On September 14, 2000, the Company's stockholders approved the 2000 stock
incentive plan, pursuant to which employees, directors and consultants of
the Company are eligible to receive stock options, restricted stock and other
stock-based awards, including stock appreciation rights and rights to dividends
and dividend equivalents. The maximum number of shares of common stock that may
be issued under this plan is 176,124. No options have been granted under the
plan.
Tax Indemnification Agreement
Under a tax indemnification agreement dated October 26, 2000, AD Little
has agreed to indemnify the Company and its subsidiaries for any income tax
liabilities that may be imposed on the Company arising solely from the Company
or any of its subsidiaries having been a member of AD Little's consolidated,
combined or unitary group.
*****
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
EPYX Corporation
Cambridge, Massachusetts
We have audited the accompanying balance sheets of Epyx Corporation (a
development stage company) (the "Company") as of December 31, 1999 and 1998,
and the related statements of operations, stockholder's deficit, and cash flows
for each of the three years in the period ended December 31, 1999. 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 audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999 and
1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America.
The Company is in the development stage as of December 31, 1999. As
discussed in Note 1 to the financial statements, successful completion of the
Company's development program and, ultimately, the attainment of profitable
operations is dependent upon future events, including maintaining adequate
financing to fulfill its development activities, and achieving a level of sales
adequate to support the Company's cost structure.
As discussed in Note 8 to the Financial Statements, on April 4, 2000, the
Company merged with De Nora Fuel Cells, S.p.A, a wholly-owned subsidiary of De
Nora New Energy Investments B.V., in a transaction accounted for as a reverse
acquisition.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
November 3, 2000
F-23
<PAGE>
EPYX CORPORATION
(A Development Stage Company)
BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
ASSETS December 31,
-------------------
1998 1999 March 31, 2000
------- ------ --------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Accounts receivable - stockholder (net of allowance for doubtful
accounts of $10 in 1998, $23 in 1999 and $25 in 2000)................ 495 886 1,442
Unbilled receivables - stockholder (net of allowance for doubtful
accounts of $10 in 1998, $23 in 1999 and $25 in 2000)................ 297 551 807
Prepaid and other current assets....................................... 129 5 --
------ ------ -------
Total current assets................................................. 921 1,442 2,249
Property and equipment, net............................................ 558 350 441
------ ------ -------
Total assets......................................................... 1,479 1,792 2,690
====== ====== =======
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable - trade............................................... 62 130 12
Advance payments from customers........................................ 30 41 111
Accrued compensation and other expenses................................ 144 230 224
Estimated losses on uncompleted projects............................... 14 813 1,419
Due to stockholder..................................................... 3,786 6,741 9,137
------ ------ -------
Total current liabilities............................................ 4,036 7,955 10,903
Commitments and contingencies (Note 4).................................. - - -
Stockholder's deficit:
Common stock, par value $.01 per share, 500,000 shares
authorized in 1998; 1,000,000 and 2,000,000 shares
authorized in 1999 and 2000, respectively; 500,000 shares
issued and outstanding............................................... 5 5 5
Deficit accumulated during the development stage....................... (2,562) (6,168) (8,218)
------ ------ -------
Total stockholder's deficit.......................................... (2,557) (6,163) (8,213)
------ ------ -------
Total liabilities and stockholder's deficit.......................... 1,479 1,792 2,690
====== ====== =======
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE>
EPYX CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
Cumulative
Year Ended December 31, Three Months Ended From July 5, 1991
--------------------------------- ----------------------- (Inception) to
1997 1998 1999 1999 2000 March 31, 2000
------- ------- ------- ------- ------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Contracts................. $ 1,551 $ 891 $ 458 $ 123 $ 61 $ 4,128
Lease..................... - 146 124 68 - 270
Government................ 265 - - - - 1,125
------- ------- ------- ------- ------- -------
Total revenues.......... 1,816 1,037 582 191 61 5,523
Cost of revenues
Contracts................. 1,185 701 1,101 269 1,237 4,998
Lease..................... - 286 124 68 - 410
Government................ 265 - - - - 1,510
------- ------- ------- ------- ------- -------
Total cost of revenues.. 1,450 987 1,225 337 1,237 6,918
Research and development
expense, net.............. 182 1,375 2,430 720 574 4,868
General and administrative
expense................... 351 684 533 149 300 1,955
------- ------- ------- ------- ------- -------
Net loss.................. $ (167) $(2,009) $(3,606) $(1,015) $(2,050) $(8,218)
======= ======= ======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
F-25
<PAGE>
EPYX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDER'S DEFICIT
(Dollars in thousands)
<TABLE>
Deficit
Common Stock, Accumulated
$.01 Par Value During The Total
------------------- Development Stockholder's
Shares Amount Stage Deficit
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997............................. - $ - $ (386) $ (386)
Conversion of payable to Arthur D. Little, Inc. into
common stock....................................... 500 5 - 5
Net loss............................................. - - (167) (167)
--- ------ -------- -------
Balance, December 31, 1997........................... 500 5 (553) (548)
Net loss............................................. - - (2,009) (2,009)
--- ------ -------- -------
Balance, December 31, 1998........................... 500 5 (2,562) (2,557)
Net loss............................................. - - (3,606) (3,606)
--- ------ -------- -------
Balance, December 31, 1999........................... 500 5 (6,168) (6,163)
Net loss (Unaudited)................................. - - (2,050) (2,050)
--- ------ -------- -------
Balance, March 31, 2000 (Unaudited).................. 500 $ 5 $ (8,218) $(8,213)
=== ==== === ====== ======== =======
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE>
EPYX CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
Three Months Ended Cumulative From
Year Ended December 31, March 31, July 5, 1991
----------------------------- ------------------- (Inception) to
1997 1998 1999 1999 2000 March 31, 2000
------ ------- ------- ------- ------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES--:
Net loss........................................ $(167) $(2,009) $(3,606) $(1,015) $(2,050) $(8,218)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization.................. 21 118 105 74 103 348
(Decrease) increase in cash from:
Accounts receivable - stockholder.............. (354) 239 (391) (320) (556) (1,442)
Unbilled receivables - stockholder............. (202) 135 (254) (12) (256) (807)
Prepaid and other current assets............... - (129) 124 129 5 -
Accounts payable - trade....................... 23 42 68 (29) (118) 12
Advance payments from customers................ 51 (21) 11 (19) 70 111
Accrued compensation and other expenses........ 42 61 86 (72) (6) 224
Estimated losses on uncompleted projects....... (44) (52) 799 201 606 1,419
----- ------- ------- ------- ------- -------
Cash provided by operating activities........... (630) (1,616) (3,058) (1,063) (2,202) (8,353)
----- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES--
Expenditures for property and equipment........ (187) (506) (31) (20) (194) (789)
----- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES--
Due to stockholder............................. 817 2,122 3,089 1,083 2,396 9,142
----- ------- ------- ------- ------- -------
INCREASE IN CASH AND EQUIVALENTS................ - - - - - -
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD....................................... - - - - - -
----- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, END OF
PERIOD......................................... $ - $ - $ - $ - $ - $ -
===== ======= ======= ======= ======= =======
Non cash financing activities:
Conversion of payable to Arthur D. Little,
Inc. into common stock....................... $ 5 $ - $ - - $ - $ 5
Transfer of property and equipment to Arthur D.
Little, Inc.................................... - - 134 - - 134
</TABLE>
See Notes to Financial Statements.
F-27
<PAGE>
EPYX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information For The Three Months Ended March 31, 1999 and 2000, and
Cumulative For The Period From July 5, 1991 (Inception) to
March 31, 2000 is Unaudited)
(Dollars in thousands, except per share amounts)
1. OVERVIEW AND BASIS OF PRESENTATION
Epyx Corporation (a development stage company) (the "Company") designs,
develops, markets and manufactures fuel processors that provide the hydrogen
reformate to power proton-exchange membrane ("PEM") fuel cell systems. It is
engaged in a single operating segment of the fuel cell industry.
The Company's operations began in 1991 when the U.S. Department of Energy
selected Arthur D. Little, Inc. ("AD Little") to conduct a study of
proton-exchange membrane technology. This study and subsequent studies
indicated that proton-exchange fuel cells did not have a ready-made source of
hydrogen reformate, and accordingly, AD Little began development of fuel
processors to reform a variety of hydrocarbon fuels for use in fuel cell
stacks. All fuel cell development was conducted as an integral part of AD
Little's overall operations until December 1997 when Epyx was incorporated as a
wholly owned subsidiary of AD Little.
The Company is in the development stage. The successful completion of the
Company's development program and, ultimately, the attainment of profitable
operations is dependent upon future events, including maintaining adequate
financing to fulfill its development and marketing activities and achieving a
level of sales adequate to support the Company's cost structure.
The financial statements have been prepared on a carve-out basis for the
purpose of presenting the financial position, results of operations and cash
flows of the Company. Included within the financial statements is revenue which
has been reflected by the Company for certain services subcontracted to the
Company by AD Little under AD Little's contractual agreements for non-Company
engagements. In addition, certain services have been subcontracted to AD Little
by the Company under the Company's contractual agreements and are reflected as
costs of revenue and research and development expenses in the financial
statements. The rate charged between the two companies for subcontract services
equals 85% of the rate a third-party would be charged for similar services.
Management believes the subcontract rate is reasonable for the services
performed (Note 4).
The financial statements also include allocations of general corporate
overhead expenses related to the corporate headquarters and common support
activities of AD Little, including information technology, financial, treasury,
legal, insurance and other corporate functions as well as certain costs of
operations including office rent and facility charges. These costs have been
allocated to the Company using methodologies primarily based on headcount and
usage. Although management believes the allocations are reasonable, the costs
of these services to the Company may not be indicative of the costs that would
have been incurred if the Company had been a stand-alone entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the 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.
F-28
<PAGE>
Revenue Recognition -- Revenues on long-term contracts are recognized
using the percentage-of-completion method based on the costs incurred to date
as compared to the estimated total costs for each contract. Lease revenues are
recognized ratably over the lease period. Revenues from consulting contracts
are recognized as services are performed. Losses on long-term contracts are
charged to operations when the total estimated cost to complete a contract
exceeds the contract value.
Revenue recognized on contracts in excess of related billings is reflected
as unbilled receivables. Cost reimbursable contracts are billed one month in
arrears, coincident with the preparation of the required billing detail.
Research and Development -- Research and development expenses consist
primarily of the net costs incurred under contracts that qualify as
best-efforts arrangements and expenditures for research conducted by the
Company and include expenditures for research conducted by the company. All
research and development costs are expensed as incurred.
Revenue related to contracts which qualify as best-efforts arrangements is
recorded as an offset to the Company's research and development expenses and
the Company is generally required to absorb 12% to 50% of the total costs
incurred on best-efforts arrangements. Development costs generally include an
allocable share of allowable indirect costs such as overhead and general and
administrative expenses.
Contracts are deemed to be best-efforts arrangements when all of the
following elements are met: (a) the sole or principal customer is the U.S.
government; (b) the activities performed qualify as research and development
under SFAS No. 2, "Accounting for Research and Development Costs"; (c) the
Company retains a right to the data and results of the research and
development; (d) the total costs at the inception of the contract are expected
to exceed the amount of the grant; and (e) the Company is obligated to perform
only on a best-efforts basis to achieve the agreed- upon objectives. The total
costs incurred under these arrangements and the total revenue netted against
research and development during the years ended December 31, 1997, 1998 and
1999, for the three months ended March 31, 1999 and 2000, and cumulative from
July 5, 1991 (inception) to March 31, 2000 was as follows:
<TABLE>
Three Cumulative
Months Ended From July 5,
Year Ended December 31, March 31, 1991
----------------------------- ------------------ (Inception) To
1997 1998 1999 1999 2000 March 31, 2000
------ ------- ------ ------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Research and development costs incurred... $769 $4,767 $7,086 $1,573 $1,703 $16,840
Government funding offset against costs... 587 3,392 4,656 853 1,129 11,972
---- ------ ------ ---- ---- -------
Research and development costs, net....... $182 $1,375 $2,430 $720 $574 $ 4,868
==== ====== ====== ==== ==== =======
</TABLE>
Contract costs, including indirect expenses, are subject to audit and
adjustment by the Defense Contract Audit Agency (the "DCAA"). Contract costs
through 1996 have been finalized with the DCAA, and contract revenues for the
current and prior years have been recorded in amounts which are expected to be
realized upon final settlement. In management's opinion, the results of such
audits will not have a material effect on the Company's financial position,
results of operations or cash flows.
Under non-government arrangements in which a third party funds a portion
of the research and development costs on a specific project, the direct
materials and labor costs of that project are recorded as a cost of revenue,
and the overhead and general and administrative expenses allowable for
inclusion in the cost reimbursement calculation are recorded as general and
administrative expenses.
Accounts and Unbilled Receivable -- The Company's contracts have
historically been executed between AD Little and the customer. Accounts
receivable represent outstanding amounts owed to AD Little, in accordance with
the contracts, as the Company's efforts are being performed on a subcontract
basis with AD Little. Unbilled receivables represent revenues earned, through
subcontract agreements with AD Little, on contracts that have not yet been
billed. Accordingly, accounts and unbilled receivables are reflected as
receivable from stockholder.
F-29
<PAGE>
Fair Value of Financial Instruments -- The Company's financial
instruments, including, receivables and accounts payable are carried at cost
which approximates their fair values because of the short term nature of these
instruments.
Concentrations of Credit Risk -- Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of accounts receivable.
The Company's receivables, through AD Little, are derived primarily from
contracts with various U.S. government agencies. Total accounts receivable and
unbilled receivables on U.S. government contracts at December 31, 1998 and 1999
and March 31, 2000 were $980, $1,449 and $2,243, respectively.
AD Little, on the Company's behalf, performs ongoing credit evaluations of
its customers' financial condition and requires no collateral from its
customers. The Company maintains reserves for potential credit losses.
Property and Equipment, Net -- Property and equipment is stated at cost,
net of accumulated depreciation. Depreciation is provided primarily using the
straight-line method over the estimated useful lives of the related assets.
Impairment of Long-Lived Assets -- The Company deems an asset to be
impaired if a forecast of undiscounted future operating cash flows directly
related to the asset, including disposal value if any, is less than its
carrying amount. When evaluating and measuring impairment, assets are grouped
at the lowest level for which there are identifiable, largely independent cash
flows. Factors leading to impairment were a combination of historical losses
and anticipated future losses. If an asset is determined to be impaired, the
loss is measured as the amount by which the carrying amount of the asset
exceeds its fair value. Fair value is based on quoted market prices in active
markets, if available. If quoted market prices are not available, an estimate
of fair value is based on the best information available, including prices for
similar assets or the results of valuation techniques.
Income Taxes -- The operating results of the Company for all periods has
been or will be included in the consolidated income tax returns of AD Little.
The Company is not reimbursed for the benefits realized by AD Little from
utilization of the Company's tax losses. Therefore, no asset is recognized for
such benefits in the Company's financial statements. For reporting purposes,
the Company computes its income tax provision on a separate return basis using
the asset and liability method prescribed by SFAS No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Valuation
allowances are established when necessary to reduce the deferred tax assets to
those amounts expected to be realized.
Comprehensive Loss -- Comprehensive loss for all periods presented equals
net loss.
Unaudited Interim Financial Information -- The accompanying consolidated
balance sheet as of March 31, 2000, the statements of operations and cash flows
for the three months ended March 31, 1999 and 2000, and the statement of
stockholders' deficit for the three months ended March 31, 2000 are unaudited,
but include all adjustments, consisting only of normal recurring adjustments,
which the Company considers necessary for a fair presentation. The results for
the interim periods are not necessarily indicative of the results to be
expected for the full year.
Recently Issued Accounting Pronouncements -- In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No.133 was amended by SFAS No. 137, which requires adoption of the provisions
of SFAS No. 133 for periods beginning January 1, 2001. The Company does not
expect that SFAS No. 133, as amended, will have a material effect on its
consolidated financial position or results of operations. The Company will
adopt this accounting standard on January 1, 2001, as required.
F-30
<PAGE>
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition. The Company
believes that its revenue recognition practices for contracts are substantially
consistent with SAB No. 101. The Company's revenue practices for government
contracts fall within and are in compliance with AICPA Audit and Accounting
Guide, "Audits of Federal Government Contractors", and AICPA Statement of
Position ("SOP") No. 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." SAB No.101 did not modify the principles of
the Audit and Accounting Guide or SOP No. 81-1. The Company does not expect
that SAB No. 101 will have a material effect on its consolidated financial
position or results of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
December 31,
Estimated ----------------- March 31,
Description Useful Life 1998 1999 2000
----------- ----------- ---- ---- ---------
<S> <C> <C> <C> <C>
Furniture and fixtures................... 5 years $173 $174 $167
Laboratory and related equipment......... 5 years 245 255 415
Leasehold improvements................... 10 years 138 4 4
Computer equipment....................... 2 years 142 162 203
---- ---- ----
Total property and equipment ........... 698 595 789
Less accumulated depreciation............ (140) (245) (348)
---- ---- ----
Property and equipment, net ............ $558 $350 $441
==== ==== ====
</TABLE>
4. RELATED PARTY TRANSACTIONS
Since inception, the Company's operations have been funded through
advances from AD Little. A summary of the transactions with AD Little is as
follows:
<TABLE>
Three Cumulative
Months Ended From July 5,
Year Ended December 31, March 31, 1991
----------------------------- ----------------- (Inception) to
1997 1998 1999 1999 2000 March 31, 2000
------ ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Due to stockholder - beginning balance.. $ 847 $1,664 $3,786 $3,786 $6,741 $ -
Expenses allocated from AD Little....... 169 592 906 137 306 2,147
Net expenditures (including collections on
accounts receivables) paid (received) by AD
Little on behalf
of the Company........................ 653 1,530 2,183 946 2,090 7,129
Transfer of property and equipment
to AD Little.......................... - - (134) - - (134)
Conversion of payable to AD Little into
common stock............................. (5) - - - - (5)
------ ------ ------ ------ ------ ------
Due to stockholder - ending balance...... $1,664 $3,786 $6,741 $4,869 $9,137 $9,137
====== ====== ====== ====== ====== ======
</TABLE>
The Company's costs and expenses include allocations from AD Little for
certain general and administrative services including information technology,
financial, treasury, legal, insurance and other corporate functions as well as
certain costs of operations including office rent and facility charges. These
allocations have been estimated on bases that AD Little and the Company
consider to be a reasonable reflection of the utilization of services provided
to the Company. The allocation of expenses from AD Little was calculated using
a ratio of total compensation costs for the Company's employees to total
compensation costs for AD Little employees applied against the pool of expenses
incurred by AD Little.
The allocations of costs and expenses are not necessarily indicative of
the costs and expenses that would have been or will be incurred by the Company
on a stand-alone basis.
F-31
<PAGE>
Included in the financial statements is revenue which has been reflected
for certain services subcontracted to the Company by AD Little under AD
Little's contractual agreements for non-Company engagements. Revenue applicable
to these contracts was $234, $233, $250, $114 and $0 in 1997,1998, 1999 and the
three months ended March 31, 1999 and 2000, respectively. The costs of certain
services, including costs relating to best efforts research and development
activities, subcontracted to AD Little by the Company under the Company's
contractual agreements were $1,071, $901, $691, $197, and $223 in 1997, 1998,
1999 and the three months ended March 31, 1999 and 2000, respectively.
5. INCOME TAXES
Significant components of the Company's deferred tax assets are as
follows:
<TABLE>
Year Ended December 31, Three Months
----------------------- Ended
1998 1999 March 31, 2000
------- ------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Research and development credit carryforwards......... $ 80 $ 269 $ 327
Depreciation on property and equipment................ 35 40 70
Loss on uncompleted projects.......................... 5 308 538
Other................................................. 10 31 23
----- ------ --------
Total deferred tax assets:......................... 130 648 958
Less: Valuation allowance for deferred tax assets:.... (130) (648) (958)
----- ------ --------
Net deferred tax assets............................ $ - $ - $ -
===== ====== ========
</TABLE>
The Company has established a full valuation allowance because of
uncertainties regarding its ability to generate sufficient taxable income to
utilize these deferred tax assets.
A reconciliation of the expected tax rate at the U.S. statutory rate to
the effective rate for each of the years ended December 31, 1997, 1998 and 1999
is as follows:
Federal statutory rate.................................... (34)%
State tax, net of federal impact.......................... (6)
Provision for valuation allowance on deferred
tax assets.............................................. 40
--
Effective tax rate........................................ -%
==
The tax rate for the three months ended March 31, 2000 is based on
the expected tax rate for the full year.
At December 31, 1999, the company has available research and development
credits. The Company has research and development credits for federal and state
tax purposes of approximately $61 and 19, respectively, in 1998, which expire in
2018 and 2013, respectively. The Company also has research and development
credits for federal and state tax purposes of approximately $142 and 47,
respectively, in 1999, which expire in 2019 and 2014, respectively.
F-32
<PAGE>
6. RETIREMENT SAVINGS PLAN
The Company has a non-contributory 401(k) Retirement Plan for eligible
full-time and part-time employees. Employees eligible to participate in the
Plan must be at least 21 years of age. Under the Plan, employees may generally
contribute up to 15% of their compensation, however, not in excess of IRS
limitations. The Company does not make matching contributions at this time.
Employees are 100% vested in their own contributions plus earnings at all
times.
7. GEOGRAPHIC SALES INFORMATION
The Company operates in a single segment. Information with respect to the
Company's revenues through subcontracting arrangements with AD Little, by
geographical area are as follows (revenues are attributed to geographical areas
based on the location of the customer):
<TABLE>
Three Months Ended
Year Ended December 31, March 31,
--------------------------------- -------------------
1997 1998 1999 1999 2000
------- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues
North America........... $1,667 $ 917 $392 $191 $ 6
Asia.................... - 120 190 - 49
Europe and the Middle
East.................... 149 - - - 6
------ ------ ---- ---- ---
Total................... $1,816 $1,037 $582 $191 $61
====== ====== ==== ==== ===
</TABLE>
8. SUBSEQUENT EVENT
Merger with De Nora Fuel Cells S.p.A.
On April 4, 2000, the Company completed a merger with De Nora Fuel Cells
S.p.A. ("De Nora"), a wholly owned subsidiary of Norfin S.p.A and subsidiaries
("Norfin") pursuant to an Investment and Exchange Agreement dated April 4, 2000
(the "Investment Agreement"). Under the terms of the Investment Agreement,
Norfin received 500,000 newly issued shares of Company common stock, or 50% of
the Company's then outstanding shares, in exchange for 100% ownership interest
of De Nora. Simultaneously with the merger, Amerada Hess Corporation ("Hess")
purchased 50,000 shares of the Company's common stock from AD Little. Upon
consummation of the merger, Epyx Corporation, which is the legal acquirer and
surviving legal entity, changed its name to Nuvera Fuel Cells, Inc.
Immediately after the merger, Norfin owned 50% of the Company's common
stock and held control over four of the eight seats on the Board of Directors,
enabling them to retain voting and operating control of the Company. AD Little
owned 45% of the Company's common stock and control over three of the Board
seats. Hess owned 5% of the Company's common stock and control over one of the
Board seats. The merger transaction will be accounted for under the purchase
method of accounting and treated as a reverse acquisition as Norfin received
the controlling interest in the combined enterprise. Therefore, for accounting
purposes, De Nora is deemed to have acquired the Company.
* * * * *
F-33
<PAGE>
===============================================================================
Through and including , 2001, 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 underwriters and with respect
to their unsold allotments or subscriptions.
Shares
Nuvera Fuel Cells, Inc.
Common Stock
-----------------------
PROSPECTUS
-----------------------
Merrill Lynch & Co.
Lehman Brothers
ABN AMRO Rothschild LLC
Bear, Stearns & Co. Inc.
, 2001
===============================================================================
<PAGE>
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
Subject to Completion
Preliminary Prospectus dated November 7, 2000
PROSPECTUS
----------
Shares
Nuvera Fuel Cells, Inc.
Common Stock
-----------------------
This is Nuvera Fuel Cells, Inc.'s initial public offering. Nuvera is
offering shares. The international managers are offering shares
outside the U.S. and Canada and the U.S. underwriters are offering shares
in the U.S. and Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National
Market under the symbol "NVRA."
Investing in our common stock involves risks that are described in the
"Risk Factors" section beginning on page 7 of this prospectus.
-----------------------
Per Share Total
--------- -----
Public offering price................................. $ $
Underwriting discount................................. $ $
Proceeds, before expenses, to Nuvera Fuel Cells, Inc.. $ $
The international managers may also purchase up to an additional ____
shares from Nuvera, at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover
over-allotments. The U.S. underwriters may similarly purchase up to an
additional shares from Nuvera.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about , 2001.
-----------------------
Merrill Lynch International
Lehman Brothers
ABN AMRO Rothschild
Bear, Stearns International Limited
The date of this prospectus is , 2001.
<PAGE>
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
We intend to offer the shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S.
underwriters. Merrill Lynch International, Lehman Brothers International
(Europe), ABN AMRO Rothschild and Bear, Stearns International Limited are
acting as lead managers for the international managers named below. Subject to
the terms and conditions described in an international purchase agreement among
us and the international managers, and concurrently with the sale of __ shares
to the U.S. underwriters, we have agreed to sell to the international managers,
and the international managers severally have agreed to purchase from us, the
number of shares listed opposite their names below.
Number
International Managers of Shares
---------------------------------------------------- -----------
Merrill Lynch International.........................
Lehman Brothers International (Europe)..............
ABN AMRO Rothschild.................................
Bear, Stearns International Limited.................
-----------
Total............................................
===========
We have also entered into a U.S. purchase agreement with the U.S.
underwriters for sale of the shares in the U.S. and Canada for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc., ABN
AMRO Rothschild LLC and Bear, Stearns, & Co. Inc. are acting as U.S.
representatives. Subject to the terms and conditions in the U.S. purchase
agreement, and concurrently with the sale of shares to the
international managers pursuant to the international purchase agreement,
we have agreed to sell to the U.S. underwriters, and the U.S. underwriters
severally have agreed to purchase, shares from us. The initial public
offering price per share and the total underwriting discount per share are
identical under the international purchase agreement and the U.S. purchase
agreement.
The international managers and the U.S. underwriters have agreed to
purchase all of the shares sold under the international and U.S. purchase
agreements if any of these shares are purchased. If an underwriter defaults,
the international and U.S. purchase agreements provide that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreements may be terminated. The closings for the sale of shares to be
purchased by the international managers and the U.S. underwriters are
conditioned on one another.
We have agreed to indemnify the international managers and the U.S.
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the international managers and
U.S. underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters
of officers' certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.
Commissions and Discounts
The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering
price on the cover page of this prospectus and to dealers at that price less a
concession not in excess of $____ per share. The international managers may
allow, and the dealers may reallow, a discount not in excess of $___ per share
to other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to Nuvera. The information assumes either no
exercise or full exercise by the international managers and the U.S.
underwriters of their over-allotment options.
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[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
Without
Per Share Option With Option
--------- -------- -----------
Public offering price.................... $ $ $
Underwriting discount.................... $ $ $
Proceeds, before expenses, to Nuvera..... $ $ $
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by Nuvera.
Over-allotment Options
We have granted options to the international managers to purchase up to __
additional shares at the public offering price less the underwriting discount.
The international managers may exercise these options for 30 days from the date
of this prospectus solely to cover any over-allotments. If the international
managers exercise these options, each will be obligated, subject to conditions
contained in the purchase agreements, to purchase a number of additional shares
proportionate to that international manager's initial amount reflected in the
above table.
We have also granted options to the U.S. underwriters, exercisable for 30
days from the date of this prospectus, to purchase up to __ additional shares to
cover any over-allotments on terms similar to those granted to the
international managers.
Intersyndicate Agreement
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the intersyndicate agreement, the international managers and
the U.S. underwriters may sell shares to each other for purposes of resale at
the public offering price, less an amount not greater than the selling
concession. Under the intersyndicate agreement, the international managers and
any dealer to whom they sell shares will not offer to sell or sell shares to
U.S. or Canadian persons or to persons they believe intend to resell to persons
who are U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement. Similarly, the U.S. underwriters and any dealer to
whom they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian or to persons they believe intend to resell to persons
who are non-U.S. or non-Canadian persons, except in the case of transactions
under the terms of the intersyndicate agreement.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to __ shares offered by this prospectus for sale to
some of our directors, officers, employees, distributors, dealers, business
associates and related persons. If these persons purchase reserved shares, this
will reduce the number of shares available for sale to the general public. Any
reserved shares that are not orally confirmed for purchase within one day of
the pricing of this offering will be offered by the underwriters to the general
public on the same terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We, our executive officers and directors and all existing stockholders
have agreed, with exceptions, not to sell or transfer any common stock for 180
days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch. Specifically, we and these other individuals have
agreed not to directly or indirectly:
o offer, pledge, sell, or contract to sell any common stock,
o sell any option or contract to purchase any common stock,
o purchase any option or contract to sell any common stock,
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<PAGE>
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
o grant any option, right or warrant for the sale of any common stock,
other than in connection with the conversion of our preferred stock
and non-voting common stock into common stock and pursuant to our
employee benefit plan or non-employee director stock plan,
o lend or otherwise dispose of or transfer any common stock,
o request or demand that we file a registration statement related to
the common stock other than in connection with our employee benefit
plan or non-employee director stock plan, or
o enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition. The lock-up agreements described above
may be released at any time as to all or any portion of the shares subject to
such agreements at the sole discretion of Merrill Lynch. There are, however,
currently no agreements between Merrill Lynch and any of our executive
officers, directors or stockholders releasing them from these lock-up
agreements prior to the expiration of the 180-day period.
Quotation on the Nasdaq National Market
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "NVRA."
Offering Price Determination
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations among us and the U.S. representatives and lead managers. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are:
o the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
o our financial information,
o the history of, and the prospects for, our company and the industry
in which we compete,
o an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues,
o the present state of our development, and
o the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
U-3
<PAGE>
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit the
underwriters and selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
In connection with the offering, the underwriters may make short sales of
the common stock and may purchase shares in the open market to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of shares than they are required to purchase in the offering.
"Covered" short sales are made in an amount not greater than the over-allotment
option described above. The underwriters may close out any covered short
position by either exercising the over-allotment option or purchasing shares in
the open market. In determining the source of shares to close out the covered
short position, the underwriters will consider, among other things, the price
of shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. "Naked" short
sales are sales in excess of the over-allotment option. The underwriters must
close out any naked short position by purchasing shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who purchase in
the offering. Purchases of the common stock to stabilize its price or to reduce
a short position may cause the price of the common stock to be higher than it
might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
UK Selling Restrictions
Each international manager has agreed that:
o it has not offered or sold and will not offer or sell any shares of
common stock to persons in the United Kingdom, except to persons
whose ordinary activities involve them in acquiring, holding
managing, or disposing of investments (as principal or agent) for the
purposes of their business or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995;
o it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the
United Kingdom; and
o it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
issuance of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 as amended by the Financial
Services Act of 1986 (Investment Advertisements) (Exemptions) Order
1997 or is a person to whom such document may otherwise lawfully be
issued or passed on.
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[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
No Public Offering Outside the United States
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation, or distribution of this prospectus or
any other material relating to our company or shares of our common stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of our common stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering materials or advertisements in
connection with the shares of our common stock may be distributed or published,
in or from any country or jurisdiction except in compliance with any applicable
rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered by this prospectus may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price on the cover page of this
prospectus.
U-5
<PAGE>
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
===============================================================================
Through and including , 2001, 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 underwriters and with respect
to their unsold allotments or subscriptions.
Shares
Nuvera Fuel Cells, Inc.
Common Stock
-----------------------
PROSPECTUS
-----------------------
Merrill Lynch International
Lehman Brothers
ABN AMRO Rothschild
Bear, Stearns International Limited
, 2001
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated costs and expenses, other
than underwriting discounts and commissions, payable by Nuvera in connection
with the issuance and sale of the common stock being registered hereby.
Amount
To Be Paid
----------
SEC registration fee................................... $30,360
NASD filing fee........................................ 12,000
Nasdaq National Market listing fees.................... *
Transfer agent's fees.................................. *
Printing and engraving expenses........................ *
Legal fees and expenses................................ *
Accounting fees and expenses........................... *
Financial advisory -- Fineurop Soditic S.p.A........... *
Blue Sky fees and expenses............................. 5,000
Miscellaneous.......................................... *
-------
Total................................................ $
=======
---------
* To be supplied by amendment.
Each of the amounts set forth above, other than the SEC registration fee
and the NASD filing fee, is an estimate.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) in which such person was
or is or is threatened to be made a party by reason of such person being or
having been a director, officer, employee or agent of the corporation; provided
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful. The Delaware General Corporation
Law provides that Section 145 is not exclusive of other rights to which those
seeking indemnification may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. The Registrant's Amended
and Restated Certificate of Incorporation provides for indemnification by the
Registrant of its directors, officers and employees to the fullest extent
permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. The Registrant's Amended and Restated Certificate of
Incorporation provides for such limitation of liability.
The Registrant maintains standard policies of insurance under which
coverage is provided (a) to its directors and officers against loss arising
from claims made by reason of breach of duty or other wrongful act, and (b) to
the Registrant with respect to payments which may be made by the Registrant to
such officers and directors pursuant to the above indemnification provision or
otherwise as a matter of law.
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<PAGE>
The proposed forms of Underwriting Agreement filed as Exhibit 1 to this
Registration Statement provide for indemnification of directors and officers of
the Registrant by the underwriters against certain liabilities.
Item 15. Recent Sales of Unregistered Securities.
On December 18, 1997, the Registrant issued and sold 1,000 shares of its
common stock, par value $.01 per share, to Arthur D. Little, Inc. in exchange
for aggregate consideration of $1,000. The transaction was exempt from
registration under Section 4(2) of the Securities Act because no public
offering was involved.
On April 4, 2000, the Registrant issued and sold 500,000 shares of its
common stock, par value $.01 per share, to De Nora New Energy Investments B.V.,
a Netherlands corporation, in exchange for 400,000 ordinary shares of De Nora
Fuel Cells S.p.A., a corporation organized under the laws of the Republic of
Italy. The transaction was exempt from registration under Section 4(2) of the
Securities Act because no public offering was involved.
On July 27, 2000, the Registrant issued and sold 67,416 shares of its
common stock, par value $.01 per share, to Amerada Hess Corporation, a Delaware
corporation, in exchange for aggregate consideration of $15,000,000. The
transaction was exempt from registration under Section 4(2) of the Securities
Act because no public offering was involved.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions. All recipients either received adequate information about the
Registrant or had access to such adequate information.
On October 10, 2000, the Registrant granted 17,500 shares of its common
stock, contributed to it by AD Little, par value $.01 per share, to 31
employees. The transactions were deemed to be exempt from registration under
the Securities Act in reliance on Rule 701 under the Securities Act as
transactions pursuant to contracts relating to compensation.
Item 16. Exhibits and Financial Statement Schedules.
(a) See Exhibit Index following Signature pages.
(b) None.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this registration statement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
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<PAGE>
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cambridge, State of
Massachusetts, on the 6th day of November, 2000.
NUVERA FUEL CELLS, INC.
By /s/ Jeffrey M. Bentley
-----------------------------------
Name: Jeffrey M. Bentley
Title: Senior Vice President
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<PAGE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey Bentley, Michele Tettamanti, William
Mitchell and Anne O'Brien Troutman, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any and all additional
registration statements pursuant to Rule 462(b) of the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agents full power and authority to
do and perform each and every act in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or either of them or their or his or
her substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Mark A. Brodsky President and Director November 7, 2000
------------------------- (Principal Executive Officer)
Mark A. Brodsky
/s/ Lou Persico Treasurer November 7, 2000
------------------------- (Principal Financial Officer and
Lou Persico Principal Accounting Officer)
/s/ J. Barclay Collins Director November 7, 2000
-------------------------
J. Barclay Collins
/s/ Federico De Nora Director November 7, 2000
-------------------------
Federico De Nora
/s/ John A. Gartman Director November 7, 2000
-------------------------
John A. Gartman
/s/ Franco Ladavas Director November 7, 2000
-------------------------
Franco Ladavas
/s/ Lorenzo C. Lamadrid Director November 7, 2000
-------------------------
Lorenzo C. Lamadrid
/s/ John Lavin Director November 7, 2000
-------------------------
John Lavin
/s/ Eugenio Morpurgo Director November 7, 2000
-------------------------
Eugenio Morpurgo
/s/ Mauro Saponelli Director November 7, 2000
-------------------------
Mauro Saponelli
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
1.1* Form of U.S. Purchase Agreement
1.2* Form of International Purchase Agreement
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1* Form of Common Stock Certificate
5.1* Opinion of Davis Polk & Wardwell
10.1 Investment and Exchange Agreement, dated as of April 4, 2000, by and
among De Nora Fuel Cells S.p.A., De Nora New Energy Investments B.V.,
Arthur D. Little, Inc. and Epyx Corporation
10.2 Stockholders' Agreement, dated as of April 4, 2000, by and among De
Nora New Energy Investments B.V., Arthur D. Little, Inc., Amerada Hess
Corporation and Epyx Corporation
10.3 Technology, Trade Identity, Contracts & Equipment Assignment, between
Arthur D. Little, Inc. and Epyx Corporation
10.4 License Agreement, dated as of March 31, 2000, by and between Epyx
corporation and Arthur D. Little, Inc.
10.5 Investment Agreement, dated as of March 30, 2000, by among Amerada
Hess Corporation, Arthur D. Little, Inc. and Epyx Corporation
10.6 Subscription and Share Purchase Agreement, dated as of August 2, 2000,
among Fineurop International Limited, Norfin International S.A. and
De Nora New Energy Investments B.V.
10.7 Service Agreement, dated January 10, 2000, between Norfin S.p.A. and
De Nora Fuel Cells S.p.A.
10.8 Service Agreement, dated January 18, 2000, between De Nora S.p.A. and
De Nora Fuel Cells S.p.A.
10.9 Service Agreement, dated May 20, 2000, between De Nora Elettrodi
S.p.A. and De Nora Fuel Cells S.p.A.
10.10 Loan Agreement, dated October 2, 1999, between Norfin S.p.A. and
De Nora Fuel Cells S.p.A.
10.11 Letter Agreement, dated August 1, 2000, from Fineurop Soditic S.p.A.
to Nuvera Fuel Cells, Inc.
10.12 License and Services Agreement, dated as of April 4, 2000, by and
between Arthur D. Little, Inc. and Epyx Corporation
10.13 Tax Indemnification Agreement, dated as of October 26, 2000, between
Arthur D. Little, Inc. and Nuvera Fuel Cells, Inc.
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<PAGE>
Exhibit
Number Description
------- -----------
10.14 Lease, dated October 1, 1999, between Finisola S.p.A. and
De Nora Fuel Cells S.p.A.
10.15 Lease, dated January 1, 2000, between Finisola S.p.A. and
De Nora Fuel Cells S.p.A.
10.16 Lease, dated July 1, 2000, between Finisola S.p.A. and Nuvera
Fuel Cells Europe S.r.l.
10.17 Lease, dated July 1, 2000, between Finisola S.p.A. and Nuvera Fuel
Cells Europe S.r.l.
10.18 Nuvera Fuel Cells, Inc. 2000 Stock Incentive Plan
10.19 Form of Stock Award Letter, dated October 10, 2000
10.20 Form of Promissory Note and Pledge, dated October 10, 2000
10.21 Form of Director and Officer Indemnification Agreement
10.22 Capital Contribution Agreement, dated as of November 3, 2000, by and
among Nuvera Fuel Cells, Inc., Arthur D. Little, Inc., Norfin
International S.A., Nuvera Fuel Cells Europe S.r.l., De Nora New
Energy Investments B.V. and Amerada Hess Corporation.
10.23 Credit Agreement, dated March 21, 2000, between Banca Popolare di
Bergamo -- Credito Varesino and De Nora Fuel Cells S.p.A.
21 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Consent
23.3* Consent of Davis Polk & Wardwell (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
---------
* To be filed by amendment.
II-8
