<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 2000
REGISTRATION NO. 333-32972
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FUELCELL ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 06-0853042
<S> <C>
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
------------------------
3 GREAT PASTURE ROAD
DANBURY, CONNECTICUT 06813
(203) 825-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JERRY D. LEITMAN
PRESIDENT
3 GREAT PASTURE ROAD
DANBURY, CONNECTICUT 06813
(203) 825-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
<TABLE>
<S> <C>
WITH COPIES TO:
RICHARD A. KRANTZ, ESQ. DAVID P. FALCK, ESQ.
ROBINSON & COLE LLP WINTHROP, STIMSON, PUTNAM & ROBERTS
FINANCIAL CENTRE ONE BATTERY PARK PLAZA
P.O. BOX 10305 NEW YORK, NY 10004-1490
STAMFORD, CT 06904-2305 (212) 858-1000
(203) 462-7500
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
possible after the effective date of this registration statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.0001 per
share................................... 1,495,000 $65.4688 $97,875,856 $25,840
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 195,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933 based on the
average of the high and low sale prices of the Common Stock of the
Registrant reported on the American Stock Exchange on March 16, 2000.
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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 MARCH 31, 2000
PROSPECTUS
1,300,000 SHARES
[FUELCELL ENERGYLOGO]
COMMON STOCK
----------------------
We are offering 1,300,000 shares of our common stock as described in this
prospectus.
The common stock trades on the American Stock Exchange under the symbol
"FCL." On March 30, 2000, the last sale price of the common stock as reported on
the American Stock Exchange was $73 3/4 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to FuelCell Energy, Inc. ........ $ $
</TABLE>
The underwriters may also purchase up to an additional 195,000 shares from
us at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus to cover over-allotments.
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 of common stock will be ready for delivery on or about
, 2000.
----------------------
MERRILL LYNCH & CO.
CIBC WORLD MARKETS
FAC/EQUITIES
LAZARD FRERES & CO. LLC
----------------------
The date of this prospectus is , 2000.
<PAGE> 3
OUR PRODUCTS
[PICTURES OF OUR 300 kW, 1.5 MW AND 3 MW COMMERCIAL PRODUCTS]
We have designed our commercial products in three configurations: 300 kW, 1.5 MW
and 3 MW, targeting the distributed generation market for applications up to
10 MW. The single fuel cell stack powering our sub-megawatt class product is
also the building block for our 1.5 MW and 3 MW products. All three of our
products will offer the capability for cogeneration where the heat by-product is
suitable for high pressure steam, district heating and air conditioning.
Our sub-megawatt class product (300 kW) is a skid-mounted, compact power plant
that could be used to power a light industrial or commercial facility, a 100
home subdivision or other similar sized applications. Additional units could
subsequently be added to meet incremental demand growth.
Customers with larger power requirements will look to our megawatt class power
plants (1.5 MW and 3 MW) that combine several fuel cell stacks to provide
increased power output. The megawatt class products are designed to meet the
power requirements of customers such as industrial facilities, data centers,
shopping centers, wastewater treatment plants, office buildings, hotels and
hospitals.
[PICTURE OF THE MERCEDES-BENZ VISITOR CENTER IN TUSCALOOSA, AL]
Mercedes-Benz Visitor Center, Tuscaloosa, AL
Part of the facility where we will conduct a field trial of
our sub-megawatt class Direct Fuelcell(TM) power plant
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 11
Forward-Looking Statements.................................. 20
Use of Proceeds............................................. 21
Capitalization.............................................. 21
Price Range of Common Stock................................. 22
Dividend Policy............................................. 22
Business.................................................... 23
Management.................................................. 35
Description of Capital Stock................................ 37
Underwriting................................................ 39
Legal Matters............................................... 41
Experts..................................................... 41
Where You Can Find More Information......................... 41
Index to Consolidated Financial Statements.................. F-1
</TABLE>
You should rely only on the information contained or incorporated by
reference 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 or incorporated
by reference in this prospectus is accurate only as of the date of those
documents. Our business, financial condition, results of operations and
prospects may have changed since those dates.
------------------------
STATEMENT ABOUT INDUSTRY AND MARKET DATA;
CERTAIN TERMINOLOGY USED IN THIS PROSPECTUS
Information contained in this prospectus concerning the electric power
supply industry and the distributed generation market, our general expectations
concerning this industry and this market and our position within this industry
are based on market research, industry publications and other publicly available
information and on assumptions made by us, based on this information and our
knowledge of this industry and this market, which we believe to be reasonable.
Although we believe that the market research, industry publications and other
publicly available information are reliable, including the sources that we cite
in this prospectus, they have not been independently verified by us and,
accordingly, we cannot assure you that such information is accurate in all
material respects. Our estimates, particularly as they relate to our general
expectations concerning the electric power supply industry and the distributed
generation market, involve risks and uncertainties and are subject to change
based on various factors, including those discussed under "Risk Factors."
As used in this prospectus, all degrees refer to degrees Fahrenheit (
degreesF) and kilowatt and megawatt numbers designate nominal or rated capacity
of the referenced power plant. As used in this prospectus, "efficiency" or
"electrical efficiency" means the ratio of the electrical energy generated in
the conversion of a fuel to the total energy contained in the fuel; "overall
energy efficiency" refers to efficiency based on the electrical output plus
useful heat output of the power plant; "kilowatt" (kW) means 1,000 watts;
"megawatt" (MW) means 1,000,000 watts; "megawatt hour" (MWh) is equal to 1 MW of
power supplied to or taken from an electric circuit steadily for one hour; and
"kilowatt hour" (kWh) is equal to 1 kW of power supplied to or taken from an
electric circuit steadily for one hour.
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights material information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including "Risk
Factors" and the documents incorporated by reference, before making an
investment decision. Unless indicated otherwise, the information in this
prospectus assumes that the underwriters' over-allotment option is not
exercised. Direct FuelCell(TM) is a trademark of FuelCell Energy, Inc. Unless
the context otherwise requires, references in this prospectus to "we," "us" and
"our" refer to FuelCell Energy, Inc.
FUELCELL ENERGY, INC.
We are a leading developer of carbonate fuel cell technology for stationary
power generation. We have designed and are planning to commercialize fuel cell
power plants that offer significant advantages compared to existing power
generation technology. These advantages include higher fuel efficiency,
significantly lower emissions, quieter operation, lower vibration, relaxed
siting and permitting requirements, scalability and potentially lower operating,
maintenance and generation costs. We have conducted successful field trials of
250 kW and 2 MW units. Our initial market entry commercial products will be
rated at 250 kW, 1 MW and 2 MW in capacity and are targeted for utility,
commercial and industrial customers in the growing distributed generation
market. We expect to enter the commercial market with our sub-megawatt class
product in late 2001 and with our megawatt class products in 2002.
OUR DIRECT FUELCELL(TM) TECHNOLOGY
We have been developing fuel cell technology since our founding in 1969 and
carbonate fuel cells since the mid-1970s. Fuel cell systems represent an
environmentally friendly alternative power generation source when compared to
traditional combustion technologies, such as gas turbines or internal combustion
engines, that can potentially yield a lower cost of electricity primarily
because of lower fuel and maintenance costs. A fuel cell converts a fossil fuel,
such as natural gas, into electricity without combustion of the fuel. The only
by-products of the fuel cell are heat and water and limited emissions of carbon
dioxide.
Our carbonate fuel cell, known as the Direct FuelCell(TM), operates at
approximately 1200(o)F, which is a higher temperature than most other fuel
cells. This is an optimal temperature that avoids the use of precious metal
electrodes required by lower temperature fuel cells, such as proton exchange
membrane (PEM) and phosphoric acid, and the more expensive metals and ceramic
materials required by higher temperature fuel cells, such as solid oxide. As a
result, less expensive electrocatalysts and readily available metals are used in
our design, and high quality by-product heat energy is available for
cogeneration.
Our Direct FuelCell(TM) is so named because of its ability to generate
electricity directly from a hydrocarbon fuel, such as natural gas, by reforming
the fuel inside the fuel cell itself to produce hydrogen. We believe that this
"one-step" reforming process results in a simpler, more efficient and
cost-effective energy conversion system compared with external reforming fuel
cells. External reforming fuel cells, such as PEM and phosphoric acid, generally
use complex, external fuel processing equipment to convert the fuel into
hydrogen. PEM fuel cells are reported to have an electrical efficiency of
between 35% and 40% when using hydrocarbon fuels and phosphoric acid fuel cells
typically achieve an electrical efficiency of between 35% and 40%. Solid oxide
fuel cells, which can be designed to internally reform the fuel, are projected
to achieve an electrical efficiency of between 45% and 50%.
Our Direct FuelCell(TM) has been demonstrated using a variety of
hydrocarbon fuels, including natural gas, methanol, ethanol, biogas and coal
gas. Our commercial Direct FuelCell(TM) power plant products are expected to
achieve an electrical efficiency of between 50% and 55%. Depending on location,
application and load size, we expect that a cogeneration configuration will
reach an overall energy efficiency of
1
<PAGE> 6
between 70% and 80%. The following diagram shows the difference between a
typical low temperature, external reforming fuel cell and our Direct
FuelCell(TM) in the conversion of fuel into electricity:
[DIAGRAM SHOWING THE DIFFERENCE BETWEEN A TYPICAL LOW TEMPERATURE,
EXTERNAL REFORMING FUEL CELL AND OUR DIRECT FUELCELL(TM)
IN THE CONVERSION OF FUEL INTO ELECTRICITY]
OUR PRODUCTS AND TARGET MARKETS
We have designed our commercial products in three configurations: 300 kW,
1.5 MW and 3 MW. We are targeting the distributed generation market for
applications up to 10 MW. Our designs use the basic single fuel cell stack
incorporated in our sub-megawatt class product as the building block for our 1.5
MW and 3 MW products. All three of our products will offer the capability for
cogeneration where the heat by-product is suitable for high pressure steam,
district heating and air conditioning.
Our sub-megawatt class product is a skid-mounted, compact power plant that
could be used to power a light industrial or commercial facility, 100 home
subdivision or other similar sized applications. Additional units could
subsequently be added to meet incremental demand growth. We expect to bring our
sub-megawatt class product to market in late 2001.
Customers with larger power requirements will look to our megawatt class
power plants that combine several fuel cell stacks to provide increased power
output. The megawatt class products are designed to meet the power requirements
of customers such as industrial facilities, data centers, shopping centers,
wastewater treatment plants, office buildings, hospitals and hotels. We expect
to bring our megawatt class products to market in 2002.
We expect that the initial capital cost of our Direct FuelCell(TM) power
plant products will be higher on a per kW basis than that of alternative power
generation sources, such as gas turbines. We expect, however, that once our
products have achieved full and sustained commercial production, as discussed
below, the higher projected efficiency of our products (and the resulting lower
fuel costs) will make the cost of generating electricity using our Direct
FuelCell(TM) power plants competitive with the cost of generating electricity
using other distributed generation technologies.
We are targeting our initial commercialization effort for the following
stationary power applications:
- customers with a requirement for premium power quality or 24 hour a day,
7 day a week reliability;
- industrial and commercial customers who can make use of the high quality
heat by-product for cogeneration;
- customers with opportunity fuels such as landfill gas or waste gases from
industrial processes;
- customers in regions where air pollution requirements are particularly
strict;
- those seeking to address electric grid distribution or transmission
shortages or congestion;
2
<PAGE> 7
- utility and non-utility power producers who want to improve their
knowledge of fuel cell technology; and
- customers who combine several of the above characteristics.
Our commercialization efforts after these initial applications will largely
depend on how the distributed generation market develops as well as on our
ability to lower the cost of our products. We believe our efforts will continue
to focus on commercial and industrial end markets where self-generation is a
viable option. We will focus on energy service providers, value added
distributors and original equipment manufacturers (OEMs) as potential buyers and
distributors of our products. Utilities are also potential customers as they
will need to add generating capacity to meet increasing demand.
In connection with the Vision 21 program of the Department of Energy (DOE),
we plan to design a 40 MW ultra-high efficiency power system that will combine
our Direct FuelCell(TM) and a gas turbine that we expect will compete for
applications between 10 and 50 MW in the distributed generation market. In
addition, because of the ability to operate on a variety of hydrocarbon fuels,
we are currently developing in conjunction with the U.S. Navy, a Direct
FuelCell(TM) power plant to provide power to ships using diesel fuel. A
diesel-powered fuel cell could also be used by many island communities that have
limited natural gas or similar resources and rely on the use of diesel fuel for
the generation of electricity.
THE ELECTRIC POWER SUPPLY INDUSTRY AND DISTRIBUTED GENERATION
According to the DOE's report Energy Information Administration Energy
Outlook 1999, a projected 363,000 MW 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. This represents
approximately $300 to $500 billion of facilities and equipment for new
generating capacity. Reliance upon the existing infrastructure has been and
continues to be problematic due to capacity constraints, environmental concerns
and other issues. In addition, utility deregulation is creating new challenges
and opportunities in the electric power supply industry. This evolving
competitive industry environment, coupled with the consumer demand for more
reliable, accessible and competitively priced sources of electric power, is
driving traditional energy providers to develop new strategies and seek new
technologies for electricity generation, transmission and distribution.
One solution to meet the growing worldwide demand for electricity is
distributed generation.
The Distributed Power Coalition of America defines distributed generation
as "any small scale power generation technology that provides electric power at
a site closer to customers than central station generation." Currently in the
United States, according to the DOE, there are 805,000 MW of installed power
generation capacity. We believe that distributed generation currently accounts
for approximately 10% of this capacity. In addition, we believe that the
combined United States and European distributed generation market will reach
approximately 5,400 MW per year by 2001, and approximately 7,600 MW per year by
2004, and that fuel cells will be one of the leading technologies in meeting
these market demands.
Distributed generation should play a growing role in electricity generation
in the United States and around the world due to three related global trends.
These are electricity deregulation, the rapid improvement of electricity
generation technology and the associated cost improvements, and an increasing
worldwide awareness of environmental issues, especially air pollution.
In its 1999 report Small-Scale Power Generation, Business Communications
Co., Inc. states that fuel cells have emerged as one of the most promising
technologies for meeting the growing worldwide energy needs. This report
projects that during the period between 1998 and 2003, distributed generation
will grow at an average annual rate of 14.9% in the United States and 28.4%
worldwide, and that the total annual market in 2003 for fuel cells 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
3
<PAGE> 8
by Allied Business Intelligence, Inc., total global stationary fuel cell
generating capacity is expected to grow to 13,669 MW in 2010.
In March 2000, the DOE released a report of the findings and
recommendations of its Power Outage Study Team. This panel of DOE, 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 removing barriers to distributed
generation and adopting energy efficient technologies.
We believe that the growth of the distributed generation market combined
with the continuing deregulation of the utility industry, and the increasing
demands for higher efficiency, higher quality, more environmentally friendly and
lower cost power generation capacity, provide market opportunities for our
Direct FuelCell(TM) products.
OUR STRENGTHS
We believe our competitive strengths include the following:
LEADING TECHNOLOGY. We believe our Direct FuelCell(TM) technology is best
suited for stationary power generation and many applications within the
distributed generation market. Advantages of our Direct FuelCell(TM) technology
include the following:
- High Efficiency. The high efficiency, internal fuel reforming system
incorporated within our Direct FuelCell(TM) leads to a simpler, more
cost-effective power plant with superior operating characteristics that
offer a variety of benefits to energy providers and end users. The
elimination of external reforming contributes to higher operating
efficiency, lower fuel use and, therefore, lower operating costs compared
to competing fuel cell technologies.
- Optimal Operating Temperature. Our Direct FuelCell(TM) operates at a
temperature of approximately 1200(o)F. This temperature generates high
quality by-product heat that provides superior energy efficiencies and
allows the use of multiple fuels. However, this operating temperature is
low enough to avoid the production of pollutants and allows the fuel cell
to be built with less expensive and commonly available materials.
- Atmospheric Pressure. Our Direct FuelCell(TM) operates at atmospheric
pressure. This enables it to be constructed at a lower cost than other
fuel cell systems, such as PEM and solid oxide, that operate in a
pressurized environment. This also allows our Direct FuelCell(TM) to
operate unattended.
- Multiple Fuel Capability. Because of the internal fuel reforming system
and the high operating temperature, our Direct FuelCell(TM) can operate
using multiple fuel sources, including natural gas, oil, gasoline,
diesel, propane, methanol, ethanol, biogas and coal gas. We think that
this provides a distinct competitive advantage in that it enables our
Direct FuelCell(TM) to be used in a variety of applications where the
supply or delivery of natural gas is limited.
- Scalability. Our power plant design is modular, allowing several units
to be combined to provide incremental power capabilities. This allows our
Direct FuelCell(TM) to be utilized by a wide range of customers with
different power needs.
SUCCESSFUL FIELD TRIALS AND DEMONSTRATION PROJECTS. We have extensive
experience in testing our products in a variety of conditions and settings and
on a range of fuels. Some significant demonstrations include the following:
- Santa Clara Demonstration Project. During 1996 and 1997, our
"proof-of-concept" 2 MW fuel cell power plant in Santa Clara, California
achieved a peak power output of 1.93 MW and an electrical efficiency of
44%, both records for a single cycle fossil fuel power plant. Adjusting
for the use of supplemental fuel, the plant achieved a peak electrical
efficiency of 50%. The Santa Clara plant also achieved record low
emissions of sulfur and nitrogen oxides. The demonstration involved
4
<PAGE> 9
the largest carbonate fuel cell power plant in the world and the largest
fuel cell of any type operated in the United States.
- Danbury Project. In February 1999, we began operating a 250 kW Direct
FuelCell(TM) grid-connected power plant at our headquarters in Danbury,
Connecticut. The plant operates on pipeline natural gas and has been
running for approximately 9,000 hours, providing approximately 1,400,000
kWh of electricity. In March 1999, the plant reached maximum power of 263
kW, the highest ever produced by a single carbonate fuel cell stack.
- Bielefeld, Germany Project. In November 1999, our European partner,
MTU-Friedrichshafen GmbH (MTU), a subsidiary of DaimlerChrysler,
commissioned a 250 kW Hot Module power plant at the University of
Bielefeld in Bielefeld, Germany. The Hot Module is a skid-based, sub-
megawatt power plant designed by MTU that incorporates our Direct
FuelCell(TM) as its fuel cell component. The Bielefeld plant has achieved
a peak electrical efficiency of 45%. Employing cogeneration applications
that use the heat by-product to produce process steam for the University
and district heating, the plant has achieved an overall energy efficiency
of 77%.
- Commercial Design Endurance Project. In April 1998, we began operating a
10 kW commercial design fuel cell located at our Danbury, Connecticut
facility, which has now been generating electricity for more than 14,000
hours, an endurance record for this type of fuel cell. The unit operates
on methane and is scheduled to run for a total of 17,000 hours or two
years.
PLANNED FIELD TRIALS AND DEMONSTRATION PROJECTS. In early 2001, we expect
to conduct various field trials and demonstration projects, including the
following:
- Southern Company Services, Inc. -- Alabama Municipal Electric
Authority -- Mercedes-Benz U.S. International, Inc. In conjunction with
Southern Company Services, Inc. (Southern), Alabama Municipal Electric
Authority (AMEA) and Mercedes-Benz U.S. International, Inc. (Mercedes-
Benz), we have agreed to build and install a 250 kW fuel cell power plant
at the Mercedes-Benz facility in Tuscaloosa, Alabama utilizing MTU's Hot
Module design. This field demonstration project is expected to be
operational within a year. Southern and AMEA have each agreed to
contribute $1 million to this project and have options to negotiate
exclusive arrangements with us for the sale, distribution and service of
our Direct FuelCell(TM) power plants in several southern states.
- Los Angeles Department of Water and Power. The Los Angeles Department of
Water and Power (LADWP) recently selected us to install a 250 kW fuel
cell power plant on the site of a yet-to-be selected LADWP customer. The
installation of this power plant will help LADWP gain knowledge and
experience in the installation, maintenance and operation of fuel cell
power plants. We plan to finalize this agreement by May 2000 and commence
construction shortly thereafter. The proposed agreement provides for
LADWP to contribute $2.4 million to this project.
ADVANCED MANUFACTURING PROCESSES AND DESIGN. We have devoted considerable
resources since 1991 to designing our products and developing our manufacturing
processes to enable us to satisfy production requirements in a cost-effective
manner. Our processes have been developed to manufacture one building block
component, the sub-megawatt class fuel cell stack, which can be cost-effectively
combined to produce our megawatt class products. We expect that these second and
third generation processes, and our standardized component design, will result
in reduced cost to produce our products which will, in turn, reduce the cost of
generating electricity. In 1999, at the request of the DOE, we presented our
cost projections to a panel of independent consultants. Our presentation
indicated that our commercial design fuel cell would be capable of being
manufactured, delivered and installed by 2005 at a cost per kW of approximately
$1,200 (assuming full and sustained commercial production of at least 400 MW of
fuel cells per year). Although subject to a number of assumptions and
uncertainties, some of which are beyond our control, including the price of
fuel, we believe that, by 2005, such a cost per kW would result in a cost of
generating electricity of between 5 and 7 cents per kWh.
5
<PAGE> 10
KEY RELATIONSHIPS. We have strategic alliances with the following
partners:
- DOE. From the inception of our carbonate fuel cell development program
in the mid-1970s to date, over $350 million has been invested under DOE
programs to support the development, demonstration and field testing of
our Direct FuelCell(TM) technology. This includes funding we have
received from the DOE of approximately $200 million. We have complemented
the DOE's funding with additional support from a variety of other sources
that have contributed approximately $150 million. Since 1993, we have
been the major carbonate fuel cell developer for the DOE. Our existing
cooperative agreement covers the design, scale-up, construction and
testing of carbonate fuel cells operating on natural gas. Although not
yet formally approved, we have submitted to the DOE a proposal to extend
this agreement for three additional years and to provide us with funding
of $40 million over this period.
In addition, under the Vision 21 program, the DOE recently selected us
for a $2.5 million project to develop a high utilization fuel cell and
key system components, and to perform a sub-scale test of a fuel
cell/turbine system utilizing the 250 kW Direct FuelCell(TM) power plant
currently providing electricity to our Danbury facility. Under the Vision
21 program, we will also design a 40 MW ultra-high efficiency, fuel
cell/turbine power plant based on our existing Direct FuelCell(TM)
technology.
- MTU. We have been working with MTU, a subsidiary of DaimlerChrysler,
since 1989 to develop carbonate fuel cells. In 1992, MTU formed a
European consortium (ARGE) to further invest in the development and
demonstration of our carbonate fuel cell technology. We have granted to
MTU the exclusive right to sell our Direct FuelCell(TM) in Europe and the
Middle East, and the non-exclusive right to sell our Direct FuelCell(TM)
in South America and Africa. MTU has granted to us the exclusive right to
sell MTU's Hot Module (which incorporates our Direct FuelCell(TM) as its
fuel cell component) anywhere in the world except Europe and the Middle
East. MTU currently owns approximately 11% of our outstanding common
stock.
- Marubeni Corporation of Japan. Under an agreement with Marubeni
Corporation of Japan (Marubeni), we have agreed to supply to Marubeni,
and Marubeni has agreed to site and test, based on customer commitment,
Direct FuelCell(TM) power plants in Japan and other select Asian markets.
In connection with this agreement, Marubeni has an option, prior to
October 1, 2001, to negotiate an exclusive arrangement with us for the
sale, distribution and service of Direct FuelCell(TM) power plants in
Japan and other select Asian markets.
- Bath Iron Works. In August 1999, we entered into an agreement with the
Advanced Technology Division of Bath Iron Works, a General Dynamics
company, to develop an advanced Direct FuelCell(TM) power plant for
defense marine applications. We expect this agreement to lead to the
development of the first new power generation technology for surface
ships since nuclear power was adopted, addressing the market for advanced
marine power systems.
- U.S. Navy/U.S. Coast Guard. We have been working on Direct FuelCell(TM)
power plants for marine applications under programs with the U.S. Navy
and the U.S. Coast Guard. These power plants are required to operate on
liquid fuels such as diesel. We have already produced a fuel cell
compatible fuel from marine diesel using a compact fuel processing
system. In 1999, a sub-scale fuel cell stack was tested on this fuel
under conditions simulating marine requirements. Another sub-scale stack
was also successfully tested for shock and vibration tolerance. In
addition, liquid fuel processing has been developed under a U.S.
Department of Defense-sponsored program. Total funding to date under
these programs has been $11 million. We have submitted a proposal to the
U.S. Navy to continue development work under Phase II of this project,
leading to a 500 kW land based demonstration.
- Fluor Daniel, Inc. We have a long-standing relationship with Fluor
Daniel, Inc., a subsidiary of Fluor Corporation (Fluor Daniel), one of
the largest engineering, procurement, construction, and technical
services companies in the world. Fluor Daniel's Oil, Gas & Power unit has
been working
6
<PAGE> 11
with us providing architectural, design, engineering and construction
management services in developing, based on our specifications, the
balance of plant systems required to support our fuel cells in natural
gas and coal fueled power plants. Fluor Daniel is a resource that we
expect will continue to provide us with the technical and management
expertise and experience required for designing and optimizing our fuel
cell power plants.
INTELLECTUAL PROPERTY. We have 46 U.S. and 95 international patents
covering our fuel cell technology. Of the 46 U.S. patents, 33 relate to our
Direct FuelCell(TM) technology. We also have submitted 6 U.S. and 23
international patent applications. We believe that our patents provide us with a
significant competitive advantage in the markets in which we compete. We also
believe that the viability of our business is not dependent on any one single
patent.
STRONG MANAGEMENT TEAM. We believe that we have a strong management team
with the vision, experience and skills necessary to enable us to achieve our
objectives. Our Chief Executive Officer, Jerry Leitman, has considerable
experience in research, development, manufacturing and operations in energy-
related companies. Our Chairman and founder, Dr. Bernard Baker, is an
internationally recognized pioneer in fuel cell technology. In addition to the
experience of our executive officers, our engineering and manufacturing
employees have an average of 12 and 9 years of experience with us, respectively.
OUR STRATEGY
Our business strategy is to be the leading provider of carbonate fuel cell
products for stationary power generation. We plan on being the first to provide
high quality, low cost sub-megawatt and megawatt class fuel cell power plants to
the distributed generation market. We plan to manufacture the proprietary fuel
cell stack components and to purchase balance of plant equipment from suppliers
who will deliver it as modularized packages to the power plant site. We plan on
continuing to be the industry leader in carbonate fuel cell technology focused
on expanding our proprietary technology and developing future applications,
products and markets. To accomplish our strategy, we plan to:
FOCUS ON OUR SUPERIOR TECHNOLOGY FOR STATIONARY MARKETS. We believe that
our Direct FuelCell(TM) is the fuel cell technology most suited to stationary
power generation based on its highly efficient operating characteristics and the
ability to use multiple hydrocarbon fuels such as natural gas, oil, gasoline,
diesel, propane, methanol, ethanol, biogas and coal gas. We plan to continue to
focus on the distributed generation market where we believe that our technology
and our power plant product design afford us a significant competitive
advantage. We also plan to develop new products, based on our existing power
plant design, for applications in the 10 to 50 MW range, and for marine and
stationary applications utilizing diesel fuel.
DEMONSTRATE OUR SUPERIOR TECHNOLOGY. We plan to conduct additional
demonstrations of our Direct FuelCell(TM) in various applications and utilizing
a range of fuels. We are planning demonstrations in early 2001 in the United
States at the Mercedes-Benz facility in Tuscaloosa, Alabama and at a LADWP
customer site. MTU has scheduled a demonstration at the Rhon Clinic, a hospital
in Bavaria, Germany, in late 2000 and at a brewery in Einbeck, Germany in early
2001, both utilizing our Direct FuelCell(TM) components. In connection with our
strategic alliance with Marubeni, additional demonstrations are planned for
Japan and Asia. As these demonstration projects progress, we believe that we
will begin to deliver our sub-megawatt class commercial products to the market
in late 2001.
DEVELOP DISTRIBUTION ALLIANCES AND CUSTOMER RELATIONSHIPS. We anticipate
multiple third-party distribution channels to service our customers. In the
United States, we initially expect our products to be sold to power generation
product suppliers, value added distributors and energy service providers. In
Europe, we plan to manufacture and deliver fuel cell components to our partner
MTU, a subsidiary of DaimlerChrysler, who will package the fuel cell power
plants for distribution. In Asia, we initially expect to sell power plants
through distributors, and then, as volume increases, through the delivery of
fuel cell components to OEMs. We plan to leverage our existing relationships and
the success of our field trials and demonstration projects into long-term
distributor and OEM relationships while continuing to pursue additional
distribution partners.
7
<PAGE> 12
ACHIEVE PROFITABILITY BY REDUCING COSTS. As a result of the simple design
of our Direct FuelCell(TM), we plan to focus our fuel cell component cost
reduction efforts on improving manufacturing processes, reducing purchased
material cost through economies of scale and improving the performance of our
fuel cells. Our strategy for reducing the balance of plant cost is to develop
strategic alliances with equipment suppliers who will recognize the potential
mutual benefit of joint cost reduction programs.
EXPAND MANUFACTURING CAPACITY. Our current manufacturing facilities are
capable of producing 5 MW of fuel cells per year. We plan to expand our current
production capacity to 50 MW per year in early 2001. We expect to increase our
manufacturing capacity in stages to 400 MW in 2004.
BENEFIT FROM STRATEGIC RELATIONSHIPS AND ALLIANCES. We plan to continue to
develop and benefit from strategic alliances with leading developers, suppliers,
manufacturers and distributors of electrical power and electric power systems
and components. We expect these alliances will develop into mutually beneficial
relationships where the ability of each party to lower costs of their respective
components of the Direct FuelCell(TM) power plant will make competitive pricing
more achievable.
CREATE BRAND AWARENESS. We are working to develop in our target markets
the association of our Direct FuelCell(TM) name with the highest quality
stationary fuel cell products. We are also working to have the design of our
Direct FuelCell(TM) accepted as the industry standard for stationary fuel cell
systems, OEMs and other customers.
AGGRESSIVELY PROTECT INTELLECTUAL PROPERTY. We plan to aggressively
protect our intellectual property, through the use of patents, trademarks, trade
secret protection, confidentiality procedures and confidentiality agreements. We
believe that our intellectual property affords us a distinct competitive
advantage, and that protecting our intellectual property is an essential part of
preserving this advantage.
DEVELOP PRODUCTS FOR THE 10 TO 50 MW DISTRIBUTED GENERATION MARKET. We
plan to accelerate our research and development, leveraging our existing
technology, to develop additional commercial applications for the 10 to 50 MW
distributed generation market. For example, in connection with the DOE's Vision
21 program, we plan to design a 40 MW ultra-high efficiency system that will
combine our Direct FuelCell(TM) and a gas turbine. We estimate that this system
could reach an electrical efficiency of between 75% and 80%.
DEVELOP DIESEL FUELED APPLICATIONS. We plan to accelerate our research and
development related to diesel fueled applications for our technology. In
conjunction with the U.S. Navy and the U.S. Coast Guard, we are developing a
fuel processing system to convert diesel fuel into a fuel compatible with our
existing fuel cell technology. This product would also have significant
opportunities for stationary applications on islands that are dependent on
diesel as their primary fuel source.
DEVELOP NEXT GENERATION PRODUCTS. We are currently developing and plan to
continue to develop next generation fuel cell power plant technologies that have
the potential to significantly reduce the cost per kWh by increasing the power
output and cell life of our power plant products.
8
<PAGE> 13
THE OFFERING
Common stock offered.......... 1,300,000 shares
Common stock to be outstanding
after this offering........... 7,678,757 shares(1)
Use of proceeds............... For expansion of our manufacturing capacity and
for general corporate purposes, including
research and development, field trial support
and working capital. See "Use of Proceeds."
Risk factors.................. See "Risk Factors" and other information in
this prospectus for a discussion of factors you
should carefully consider before deciding to
invest in shares of our common stock.
Dividend policy............... We have never paid a cash dividend and do not
anticipate paying any cash dividends in the
foreseeable future.
American Stock Exchange
symbol........................ FCL
Nasdaq National Market
application................... We have applied to have our common stock quoted
on the Nasdaq National Market under the symbol
"FCEL." We expect that this application will be
approved shortly after the consummation of this
offering.
- ---------------
(1) The outstanding share information is based upon the shares of common stock
outstanding as of January 31, 2000. In addition, this information excludes
options to purchase 694,662 shares of common stock outstanding as of January
31, 2000 under our stock option plans.
------------------------
Our principal executive offices are located at 3 Great Pasture Road,
Danbury, Connecticut 06813. Our telephone number at that location is (203)
825-6000 and our Internet address is www.fuelcellenergy.com. The information
contained on our web site is not incorporated by reference in this prospectus.
9
<PAGE> 14
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth certain summary consolidated financial
information derived from our audited consolidated financial statements for the
fiscal years ended October 31, 1999, 1998 and 1997 and from our unaudited
interim consolidated financial statements for the three months ended January 31,
2000 and 1999. The unaudited interim financial statements include, in the
opinion of our management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our financial position,
results of operations and cash flows as of the dates and for the periods covered
by such statements. Interim results are not necessarily indicative of the
results that may be expected for any other interim period or for a full year.
You should read this summary consolidated financial information together with
our consolidated financial statements and the notes thereto included elsewhere
in this prospectus and the documents that we incorporate by reference in this
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------------- ------------------
1999 1998 1997 2000 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................................. $19,965 $24,318 $24,830 $ 3,600 $ 6,284
Gross profit............................. 7,543 9,728 9,188 1,635 1,929
Operating Expenses:
Administrative and selling............. 6,615 6,986 6,081 670 1,361
Depreciation........................... 1,362 1,529 1,768 385 330
Research and development............... 1,813 2,258 1,270 671 823
------- ------- ------- ------- -------
Income (loss) from operations............ (2,247) (1,045) 69 (91) (585)
Interest and other income, net........... 195 267 307 72 65
Interest expense......................... (169) (269) (354) (37) (53)
License fee income (expense), net........ 1,527 678 650 63 (16)
------- ------- ------- ------- -------
Income (loss) before provision for income
taxes.................................. (694) (369) 672 7 (589)
Provision for (benefit from) income
taxes.................................. 291 13 247 2 (241)
------- ------- ------- ------- -------
Net income (loss)........................ $ (985) $ (382) $ 425 $ 5 $ (348)
======= ======= ======= ======= =======
Basic earnings (loss) per share.......... $ (0.16) $ (0.06) $ 0.07 $ 0.00 $ (0.06)
Basic shares outstanding................. 6,227 6,122 5,932 6,333 6,247
Diluted earnings (loss) per share........ $ (0.16) $ (0.06) $ 0.07 $ 0.00 $ (0.06)
Diluted shares outstanding............... 6,227 6,122 6,288 6,746 6,247
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF JANUARY 31,
----------------------------- ------------------
1999 1998 1997 2000 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 6,163 $10,304 $ 6,802 $ 6,478 $10,337
Working capital.......................... 7,204 10,234 6,366 7,664 9,815
Total assets............................. 19,831 26,843 21,433 20,111 28,609
Long-term debt........................... 1,625 1,944 2,699 1,588 1,785
Total shareholders' equity............... 14,815 15,870 14,769 14,914 15,612
</TABLE>
10
<PAGE> 15
RISK FACTORS
You should consider the following factors carefully before purchasing
shares of our common stock. If any of the following risks occur, our business,
prospects, results of operations and financial condition could be harmed. In
that case, the trading price of our common stock could decline, and you could
lose all or part of your investment.
WE HAVE RECENTLY INCURRED LOSSES AND ANTICIPATE CONTINUED LOSSES
We are currently transitioning from a research and development company that
has been primarily dependent on government contracts to a company focusing on
commercial products. As such, we have not achieved profitability since our
fiscal year ended October 31, 1997 and expect to continue to incur net losses
until we can produce sufficient revenues to cover our costs. We incurred a net
loss of $985,000 for the fiscal year ended October 31, 1999. Even if we achieve
our objective of bringing our first commercial product to market in late 2001,
we anticipate that we will continue to incur losses until we can cost-
effectively produce and sell our Direct FuelCell(TM) products, which we do not
expect to occur for several years. Even if we do achieve profitability, we may
be unable to sustain or increase our profitability in the future. For the
reasons discussed in more detail below, there are substantial uncertainties
associated with our achieving and sustaining profitability.
OUR COST REDUCTION STRATEGY MAY NOT SUCCEED OR MAY BE SIGNIFICANTLY DELAYED
Our cost reduction strategy is based on the assumption that a significant
increase in production will result in the realization of economies of scale. In
addition, certain aspects of our cost reduction strategy rely on advancements in
our manufacturing process and engineering design that, to a large degree, are
currently not ascertainable. 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 commercialization
plans and, therefore, our business, prospects, results of operations and
financial condition.
We recognize that successfully implementing our strategy and obtaining a
significant share of the distributed generation market will require that we
offer our Direct FuelCell(TM) products at competitive prices, which can only be
accomplished when production costs are cut substantially from current levels. If
we are unable to produce Direct FuelCell(TM) products at competitive prices
relative to alternative technologies and products, our target market customers
will be unlikely to buy our Direct FuelCell(TM) products.
Our Direct FuelCell(TM) products produce electricity from a variety of
hydrocarbon fuels, such as natural gas and methanol. If these fuels are not
readily available or if their prices are such that electricity produced by our
products costs more than electricity provided through other generation sources,
our products would be less economically attractive to potential energy users. In
addition, we have no control over the prices of several types of competitive
energy sources such as oil, gas or coal. Significant decreases in the price of
these inputs could also have a material adverse effect on our business because
other generation sources could be more economically attractive to consumers than
our Direct FuelCell(TM) products.
COMMERCIALIZATION OF OUR PRODUCTS IS DEPENDENT ON CONDUCTING SUCCESSFUL FIELD
TRIALS
One key aspect of our strategy is to leverage the success of our field
trials and demonstration projects into long-term distributor-type relationships
that will result in these distributors marketing our Direct FuelCell(TM)
products directly to energy customers. We are currently field testing a 250 kW
Direct FuelCell(TM) power plant at our headquarters in Danbury, Connecticut. In
addition, MTU is currently field testing a 250 kW Hot Module power plant in
Bielefeld, Germany that incorporates our Direct FuelCell(TM) as its fuel cell
component. We believe that our fuel cell commercialization program is dependent
upon us conducting one or more additional commercial field trials of our power
plants and completing substantial additional research and development. We have
planned field trials and demonstration projects in 2001 for our sub-
11
<PAGE> 16
megawatt stationary fuel cell power plants but have not yet conducted any field
trials of our proposed commercial design megawatt class products nor do we
currently have any agreements providing for field trials of these products.
Field trials and demonstration projects may encounter problems and delays
for a number of reasons, including the failure of our technology, the failure of
the technology of others, the failure to combine these technologies properly and
the failure to maintain and service the test prototypes properly. Many of these
potential problems and delays are beyond our control.
A failure by us to conduct field trials and demonstration projects of our
megawatt class products or a failure to site the scheduled sub-megawatt power
plants and complete these commercial field trials and research and development
as currently planned could delay the timetable by which we believe we can begin
to commercially sell our Direct FuelCell(TM) products. The failure of planned
commercial field trials to perform as well as we anticipate could also have a
material adverse effect on our commercialization plans, including the ability to
enter into long-term distributor-type relationships for our Direct FuelCell(TM)
products. Any delay, performance failure or perceived problem with our field
trials could hurt our reputation in the distributed generation market and,
therefore, could have a material adverse effect on our business, prospects,
results of operations and financial condition.
WE CURRENTLY FACE AND WILL CONTINUE TO FACE SIGNIFICANT COMPETITION
Our Direct FuelCell(TM) products currently face and will continue to face
significant competition. Technological advances in alternative energy products,
improvements in the electric grid or other fuel cell technologies may negatively
affect the development or sale of some or all of our products or make our
products uncompetitive or obsolete prior to commercialization or afterwards.
Other companies, some of which have substantially greater resources than us, are
currently engaged in the development of products and technologies that are
similar to, or may be competitive with, certain of our products and
technologies.
As our Direct FuelCell(TM) products have the potential to replace existing
power sources, competition with our products will come from current power
technologies, from improvements to current power technologies and from new
alternative power technologies, including other types of fuel cells. The
distributed generation market, our target market, is currently serviced by
several manufacturers with existing customers and suppliers. These manufacturers
use proven and widely accepted technologies such as internal combustion engines
and turbines as well as coal, oil and nuclear powered generators.
We believe that we are the only domestic company exclusively engaged in the
development and production of carbonate fuel cells. In Japan, at least six
manufacturers have demonstrated interest in developing and marketing carbonate
fuel cells. One of these manufacturers has demonstrated extended operation of a
200 kW carbonate fuel cell. Two of these manufacturers have jointly demonstrated
extended operation of a 100 kW carbonate fuel cell and recently tested a 1 MW
plant. In Europe, there are several companies engaged in carbonate fuel cell
development that are potential competitors. Our licensee, MTU, and its partners
have conducted the most significant activity in Europe.
Additionally, there are competitors working on developing technologies
other than carbonate fuel cells in our target market. Emerging technologies in
our target distributed generation market include small gas turbines, PEM fuel
cells, phosphoric acid fuel cells and solid oxide fuel cells. Major competitors
using or developing these technologies include Capstone Turbine Corporation,
Elliot Energy Systems and Honeywell International Inc. in the case of gas
turbines, Ballard Power Systems Inc. in the case of PEM fuel cells, ONSI
Corporation in the case of phosphoric acid fuel cells, and SiemensWestinghouse
Electric Company and Mitsubishi Heavy Industries, Ltd. in the case of solid
oxide fuel cells. Each of these competitors has the potential to capture market
share in our target market, which could have a material adverse effect on our
position in the industry.
12
<PAGE> 17
WE MAY NOT MEET OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION MILESTONES
We have established product development and commercialization milestones
that we use to assess our progress toward developing commercially viable Direct
FuelCell(TM) products. These milestones relate to technology and design
improvements as well as to dates for achieving development goals. To gauge our
progress, we operate, test and evaluate our Direct FuelCell(TM) products under
actual conditions. If our systems exhibit technical defects or are unable to
meet cost or performance goals, including power output, useful life and
reliability, our commercialization schedule could be delayed and potential
purchasers of our initial commercial Direct FuelCell(TM) products may decline to
purchase them or choose to purchase alternative technologies. We cannot be sure
that we will successfully achieve our milestones in the future or that any
failure to achieve these milestones will not result in potential competitors
gaining advantages in our target market.
OUR COMMERCIALIZATION PLANS ARE DEPENDENT ON MARKET ACCEPTANCE OF OUR DIRECT
FUELCELL(TM) PRODUCTS
Our commercialization plans, which include bringing our sub-megawatt class
product to market in late 2001, are dependent upon market acceptance of, as well
as enhancements to, our Direct FuelCell(TM) products. Fuel cell systems
represent an emerging market, and we cannot be sure that potential customers
will accept fuel cells as a replacement for traditional power sources. As is
typical in a rapidly evolving industry, demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty and risk. Since the distributed generation market is new and
evolving, it is difficult to predict with certainty the size of the market and
its growth rate. The development of a market for our Direct FuelCell(TM)
products may be affected by many factors that are out of our control, including:
- the cost competitiveness of our Direct FuelCell(TM) products;
- the future costs of natural gas and other fuels used by our Direct
FuelCell(TM) products;
- consumer reluctance to try a new product;
- consumer perceptions of the safety of our Direct FuelCell(TM) products;
- the pace of utility deregulation nationwide, which could affect the
market for distributed generation;
- local permitting and environmental requirements; and
- the emergence of newer, more competitive technologies and products.
If a sufficient market fails to develop or develops more slowly than we
anticipate, we may be unable to recover the losses we will have incurred in the
development of our Direct FuelCell(TM) products and may never achieve
profitability.
OUR GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACTS ARE CRITICAL TO THE
IMPLEMENTATION OF OUR COMMERCIALIZATION PLANS
Since 1995, our revenues have been principally derived from a long-term
cooperative agreement with the DOE. This agreement covers the design, scale-up,
construction and testing of direct carbonate fuel cells operating on natural
gas. Excluding cost share funding, the present estimated value of this agreement
with the DOE, which expires in December 2000, is $95 million. Although not yet
formally approved, we have submitted to the DOE a proposal to extend this
agreement for three additional years and to provide us with funding of $40
million over this period (excluding cost share funding). This agreement is
critical to the continued development and commercialization of our technology
and our products.
Generally, our U.S. government research and development contracts,
including the DOE cooperative agreement, 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
annual congressional 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
annually by Congress as a result of the appropriations process. Accordingly, we
13
<PAGE> 18
cannot be sure that the three-year extension of the DOE cooperative agreement
will be finalized or, even if finalized, whether or not we will receive the full
amount allocated by the DOE under this agreement or the full amounts allocated
under our other government 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 three-year extension of
the DOE cooperative agreement or the full amounts allocated under any of our
government research and development contracts could materially adversely affect
our commercialization plans and, therefore, our business, prospects, results of
operations and financial condition.
THE UNITED STATES GOVERNMENT HAS CERTAIN RIGHTS RELATING TO OUR INTELLECTUAL
PROPERTY
Many of our United States patents are the result of government-funded
research and development programs, including the DOE cooperative agreement. Our
patents that were the result of government-funded research prior to January 1988
(the date that we qualified as a "small business") are owned by the United
States government and have been licensed to us. This license is revocable only
in the limited circumstances where it has been demonstrated that we are not
making an effort to commercialize the invention. Our patents that were the
result of government-funded research after January 1988 automatically belong to
us because of our "small business" status. We expect to continue to qualify as a
"small business" at the time that the three-year extension of the DOE
cooperative agreement is formally approved.
However, all of our United States patents that have resulted from
government-funded research are subject to the risk of 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.
The failure to continue to qualify as a "small business" under applicable
government regulations, and the related inability to own our patents developed
with government funds if we do not so qualify, or the exercise of "march-in"
rights by the government could materially adversely affect our business,
prospects, results of operations and financial condition.
OUR FUTURE SUCCESS AND GROWTH IS DEPENDENT ON OUR DISTRIBUTION STRATEGY
We do not plan to establish a direct distribution infrastructure for our
Direct FuelCell(TM) products. A key aspect of our strategy is to use multiple
third-party distribution channels to ultimately service our diverse customer
base. Depending on the needs of the customer, our Direct FuelCell(TM) products
could be distributed through a value added distributor who could provide a
package of our products and various other components such as flywheels and
battery storage devices; through an energy services company who could arrange
various ancillary services for the customer; or through power generation
equipment suppliers. In addition, we anticipate that our Direct FuelCell(TM)
components will be distributed through OEMs, such as MTU, who will then
integrate our Direct FuelCell(TM) components into power plant products.
We cannot assure you that we will enter into distributor relationships that
are consistent with our commercialization plans or our growth strategy or that
these relationships will be on terms favorable to us. Many of these distributor
arrangements have or will require that we grant exclusive distribution rights to
companies in defined territories. We cannot be sure that MTU will continue to,
or OEMs will, manufacture or package products using our Direct FuelCell(TM)
components. Any integration, design, manufacturing or marketing problems
encountered by MTU or OEMs could adversely affect the market for our Direct
FuelCell(TM) products and, therefore, our business, prospects, results of
operations and financial condition.
14
<PAGE> 19
WE HAVE NO EXPERIENCE MANUFACTURING OUR DIRECT FUELCELL(TM) PRODUCTS ON A
COMMERCIAL BASIS
To date, we have focused primarily on research and development, and we have
no experience manufacturing our Direct FuelCell(TM) products on a commercial
basis. We plan to expand our product capacity from our current capacity of 5 MW
per year to 50 MW per year in early 2001. We expect that we will increase our
manufacturing capacity in stages to 400 MW in 2004. We cannot be sure that we
will be able to achieve our planned increases in production capacity.
Even if we are successful in achieving our planned increases in production
capacity, we cannot be sure that we will do so in time to meet our product
commercialization schedule or to satisfy the requirements of our customers.
Given our dependence on government research and development contracts and the
necessity of providing government entities with substantial amounts of
information, our sales process has historically been long and time-consuming. We
will need to shorten the time from initial contact to final product delivery if
we hope to expand production, reach a wider customer base and forecast revenues
with any degree of certainty. Additionally, we cannot be sure that we will be
able to develop efficient, low-cost manufacturing capabilities and processes
that will enable us to meet our cost goals and profitability projections. Our
failure to shorten the sales cycle for our Direct FuelCell(TM) products or to
develop these advanced manufacturing capabilities and processes, or meet our
cost goals, could have a material adverse effect on our business, prospects,
results of operations and financial condition.
WE DEPEND ON OUR INTELLECTUAL PROPERTY, AND OUR FAILURE TO PROTECT THAT
INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR FUTURE GROWTH AND SUCCESS
Failure to protect our existing intellectual property rights may result in
the loss of our exclusivity or the right to use our technologies. If we do not
adequately ensure our freedom to use certain technology, we may have to pay
others for rights to use their intellectual property, pay damages for
infringement or misappropriation or be enjoined from using such intellectual
property. We rely on patent, trade secret, trademark and copyright law to
protect our intellectual property. The patents that we have obtained will expire
between 2000 and 2016 and the average remaining life of our patents is
approximately 8 years. 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 design. In addition, some of our intellectual property includes
technologies and processes that may be similar to the patented technologies and
processes of third parties. If we are found to be infringing third-party
patents, we do not know whether we will able to obtain licenses to use such
patents on acceptable terms, if at all. Our patent position is subject to
complex factual and legal issues that may give rise to uncertainty as to the
validity, scope and enforceability of a particular patent. Accordingly, we
cannot assure you that:
- any of the U.S. patents or foreign patents owned by us or other patents
that third parties license to us will not be invalidated, circumvented,
challenged, rendered unenforceable or licensed to others; or
- any of our pending or future patent applications will be issued with the
breadth of claim coverage sought by us, if issued at all.
In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited or not applied for in certain foreign
countries.
We also seek to protect our proprietary intellectual property, including
intellectual property that may not be patented or patentable, in part by
confidentiality agreements and, if applicable, inventors' rights agreements with
our strategic partners and employees. We cannot assure you that these agreements
will not be breached, that we will have adequate remedies for any breach or that
such persons or institutions will not assert rights to intellectual property
arising out of these relationships. Certain of our intellectual property has
been licensed to us on a non-exclusive basis from third parties who may also
license such intellectual property to others, including our competitors. If our
licensors are found to be infringing third-
15
<PAGE> 20
party patents, we do not know whether we will be able to obtain licenses to use
the intellectual property licensed to us on acceptable terms, if at all.
If necessary or desirable, we may seek extensions of existing licenses or
further licenses under the patents or other intellectual property rights of
others. However, we can give no assurances that we will obtain such extensions
or further licenses or that the terms of any offered licenses will be acceptable
to us. The failure to obtain a license from a third party for intellectual
property that we use at present could cause us to incur substantial liabilities,
and to suspend the manufacture or shipment of products or our use of processes
requiring the use of such intellectual property.
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
intellectual property and diverting the efforts of our technical and management
personnel, whether or not such litigation is resolved in our favor.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED
MANAGEMENT AND TECHNICAL PERSONNEL
Our future success is substantially dependent on the continued services and
on the performance of our executive officers and other key management,
engineering, scientific, manufacturing and operating personnel, particularly
Jerry Leitman, our President and Chief Executive Officer, and Dr. Hansraj Maru
and Christopher Bentley, our Executive Vice Presidents. The loss of the services
of any executive officer, including Mr. Leitman, Dr. Maru and Mr. Bentley, or
other key management, engineering, scientific, manufacturing and operating
personnel could materially adversely affect our business. Our ability to achieve
our development and commercialization plans will also depend on our ability to
attract and retain additional qualified management and technical personnel.
Recruiting personnel for the fuel cell industry is highly competitive. We do not
know whether we will be able to attract or retain additional qualified
management and technical personnel. Our inability to attract and retain
additional qualified management and technical personnel, or the departure of key
employees, could materially adversely affect our development and
commercialization plans and, therefore, our business, prospects, results of
operations and financial condition.
OUR MANAGEMENT MAY BE UNABLE TO MANAGE RAPID GROWTH EFFECTIVELY
We expect that the availability of additional capital will permit us to
expand our manufacturing capabilities, accelerate the commercialization of our
products and enter a period of rapid growth which will place a significant
strain on our senior management team and our financial and other resources. The
proposed expansion will expose us to increased competition, greater overhead,
marketing and support costs and other risks associated with the
commercialization of a new product. Our ability to manage our rapid growth
effectively will require us to continue to improve our operations, to improve
our financial and management information systems and to train, motivate and
manage our employees. Difficulties in effectively managing the budgeting,
forecasting and other process control issues presented by such a rapid expansion
could harm our business, prospects, results of operations and financial
condition.
WE HAVE CONTINGENT OBLIGATIONS RELATING TO EVERCEL
In connection with our spin-off on February 22, 1999 of our former battery
group, now owned by Evercel, Inc. (Evercel), we entered into several agreements,
including a license assistance agreement, with Evercel. Under the license
assistance agreement, Evercel has agreed to fulfill our obligations under a
joint venture contract relating to battery operations in China until we obtain
certain required third-party and governmental consents. We do not believe that
we have any remaining material exposure with respect to this joint venture in
light of the license assistance agreement. We cannot assure you, however, that,
if Evercel does not continue to perform under the license assistance agreement,
fulfilling our contingent
16
<PAGE> 21
obligations under the joint venture contract will not have a material adverse
effect on our business, prospects, results of operations and financial
condition.
WE MAY BE AFFECTED BY ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION
Although our products are not currently subject to direct regulation by any
governmental agency, it is possible that industry specific laws and regulations
will be adopted covering issues such as environmental standards, transmission
scheduling, distribution and characteristics and quality of our products and
services. Such regulation could limit the growth in the use of carbonate fuel
cells, decrease the acceptance of fuel cells as a commercial product and
increase our costs and, therefore, the price of our Direct FuelCell(TM)
products. Any such new legislation or regulation, the application of existing
laws and regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the energy
industry could have a material adverse effect on our business, prospects,
results of operations and financial condition.
UTILITY COMPANIES COULD CHARGE FEES TO OUR CUSTOMERS THAT COULD MAKE OUR
PRODUCTS LESS DESIRABLE
Utility companies commonly charge fees to larger customers for
disconnecting from the electric grid or for having the capacity to use power
from the electric grid for back up purposes. These fees could increase the cost
to our customers of using our Direct FuelCell(TM) products and could make our
products less desirable, thereby harming our business, prospects, results of
operations and financial condition.
CHANGES IN GOVERNMENT REGULATIONS AND ELECTRIC UTILITY INDUSTRY RESTRUCTURING
MAY AFFECT DEMAND FOR OUR DIRECT FUELCELL(TM) PRODUCTS
The market for electricity generation products is heavily influenced by
federal and state governmental regulations and policies. Changes in regulatory
standards or policies could reduce the level of investment in the research and
development of alternative energy sources, including fuel cells, and could
result in a reduction in the potential demand for our Direct FuelCell(TM)
products. Our target market, the distributed generation market, is driven by
deregulation and restructuring of the electric utility industry in the United
States and elsewhere and by the requirements of utilities, independent power
producers and end users. Deregulation of the electric utility industry is
subject to government policies that will determine the pace and extent of
deregulation. Changes in government and public policy over time could affect
deregulation and adversely affect our prospects for commercializing our Direct
FuelCell(TM) products and our financial results. We cannot predict how the
deregulation and restructuring of the electric utility industry will ultimately
affect the market for our Direct FuelCell(TM) products.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL TO COMPLETE OUR PRODUCT DEVELOPMENT
AND COMMERCIALIZATION PLANS
Our product development and commercialization schedule could be delayed if
we are unable to fund our research and development activities, our field trials
and demonstration projects or the development of our manufacturing capabilities.
Future capital requirements are dependent upon many factors, including, but not
limited to, the rate at which we expand production volume capabilities, the
amount used to fund demonstration projects and field trials, the level of
government funding provided to us and our investment in new technology. In
addition to the proceeds from this offering and expected government funding, we
believe it is likely that we will need additional funding to expand our
manufacturing capabilities to the level where volume efficiencies can be
achieved consistent with our plans to fully commercialize our products. Some of
our potential strategic business partners have indicated interest in investing
in us. However, additional financing may not be available and, if available, it
may not be available on terms favorable to us or our stockholders. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our then current stockholders will be reduced. If adequate funds
are not available to satisfy either short or long-term capital requirements, we
may be required to limit operations in a manner inconsistent with our
commercialization plans.
17
<PAGE> 22
WE HAVE LARGE AND INFLUENTIAL STOCKHOLDERS
MTU will own approximately 8.9% of our outstanding common stock upon
completion of this offering (based upon the shares of common stock outstanding
as of January 31, 2000). Loeb Investors Co. LXXV and Warren Bagatelle (a
managing director of an affiliate of Loeb Investors Co. LXXV) will collectively
own approximately 8.6% of our outstanding common stock upon completion of this
offering (based upon the shares of common stock outstanding as of January 31,
2000). These ownership levels could make it difficult for a third party to
acquire our common stock or have input into the decisions made by our board of
directors, which include Michael Bode of MTU, Warren Bagatelle and Thomas L.
Kempner (Chairman and Chief Executive Officer of an affiliate of Loeb Investors
Co. LXXV). MTU is also a licensee of our technology and a purchaser of our
Direct FuelCell(TM) products. Therefore, it may be in MTU's interest to possess
substantial influence over matters concerning our overall strategy and
technological and commercial development. In addition, MTU's ownership interest
could raise a conflict of interest if MTU is experimenting with competing
technologies for its own products.
OUR STOCK PRICE HAS BEEN AND COULD REMAIN VOLATILE
The market price for our common stock has been and may continue to be
volatile and subject to extreme price and volume fluctuations in response to
market and other factors, including the following, some of which are beyond our
control:
- failure to meet our product development and commercialization milestones;
- due to our stage of development, variations in our quarterly operating
results from the expectations of securities analysts or investors;
- downward revisions in securities analysts' estimates or changes in
general market conditions;
- announcements of technological innovations or new products or services by
us or our competitors;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- investor perception of our industry or our prospects;
- demand for our common stock; and
- general technological or economic trends.
In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class action
litigation. If we became involved in a securities class action litigation in the
future, it could result in substantial costs and diversion of management's
attention and resources and could harm our stock price, business, prospects,
results of operations and financial condition.
PROVISIONS OF DELAWARE AND CONNECTICUT LAW AND OF OUR CHARTER AND BY-LAWS MAY
MAKE A TAKEOVER MORE DIFFICULT
Provisions in our certificate of incorporation and by-laws and in Delaware
and Connecticut corporate law may make it difficult and expensive for a third
party to pursue a tender offer, change in control or takeover attempt that 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. These anti-takeover provisions could substantially impede the ability of
public stockholders to benefit from a change in control or change our management
and board of directors. See "Description of Capital Stock."
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
18
<PAGE> 23
additional equity capital in the future. After this offering, we will have
7,678,757 shares of common stock outstanding (based upon the shares of common
stock outstanding as of January 31, 2000). Of these shares, 5,906,475 shares
will be freely tradable and 1,772,282 shares are subject to 180-day lock-up
agreements. All of our shares may be available for sale in the public market 180
days after the date of this prospectus (subject, in some cases, to the volume
and manner of sale limitations under Rule 144 under the Securities Act).
In addition, as of January 31, 2000, we have 1,161,970 shares of common
stock reserved for issuance under our stock option plans. As of January 31,
2000, options to purchase 694,662 shares of common stock were issued and
outstanding under our stock option plans, of which options to purchase 430,038
shares 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.
YOUR INVESTMENT WILL BE IMMEDIATELY DILUTED
Assuming a public offering price of $73 3/4 per share, your investment will
suffer immediate and substantial dilution of approximately $60.04 per share in
the net tangible book value of the shares purchased.
WE WILL HAVE BROAD DISCRETION AS TO THE USE OF THE NET PROCEEDS FROM THIS
OFFERING
Our board of directors and our management will have broad discretion over
the use of the net proceeds of this offering. Investors will be relying on the
judgment of our board of directors and our management regarding the application
of the net proceeds of this offering. See "Use of Proceeds."
19
<PAGE> 24
FORWARD-LOOKING STATEMENTS
This prospectus includes and incorporates by reference forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Words such as "expects,"
"anticipates," "approximates," "believes," "estimates," "intends," and "hopes"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. We intend such forward-looking statements, all
of which are qualified by this statement, to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 and are including this statement for purposes of
complying with these safe harbor provisions. We have based these statements on
our current expectations and projections about future events. These
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected in these statements. These risks and
uncertainties include those set forth under "Risk Factors." The forward-looking
statements contained or incorporated by reference in this prospectus include,
among others, statements about:
- the development and commercialization schedule for our fuel cell
technology and products;
- future funding under government research and development contracts;
- the expected cost competitiveness of our fuel cell technology and
products;
- our intellectual property;
- the timing and availability of our products;
- the electric power supply industry and the distributed generation market;
- our business strategy; and
- general economic conditions in the electric power supply industry and our
target markets.
Except for our ongoing obligations to disclose material information under
the federal securities laws, we are not obligated to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed or incorporated by reference in this prospectus
might not occur.
20
<PAGE> 25
USE OF PROCEEDS
The net proceeds from this offering, after deducting the estimated
underwriting discounts and offering expenses payable by us, are estimated to be
approximately $90.3 million, or $104.0 million if the underwriters'
over-allotment option is exercised in full, assuming a public offering price of
$73 3/4 per share, the last reported sale price of our common stock on the
American Stock Exchange on March 30, 2000.
We intend to use the net proceeds from this offering as follows:
- for manufacturing equipment, manufacturing facilities and other capital
expenditures to support our commercialization activities; and
- for general corporate purposes, including research and development, field
trial support and working capital.
We have not yet determined the amount of net proceeds to be used for each
of the purposes indicated. Accordingly, our board of directors and our
management will have broad discretion over the use of the net proceeds of the
offering. Pending these uses, the net proceeds will be invested in short-term,
investment grade securities, certificates of deposit or direct or guaranteed
obligations of the United States.
CAPITALIZATION
The following table shows our capitalization on an actual (unaudited) basis
as of January 31, 2000 and on an as adjusted basis to reflect the sale of
1,300,000 shares of common stock in the offering at an assumed public offering
price of $73 3/4 per share, after deducting the estimated underwriting discounts
and offering expenses payable by us. You should read this table together with
our consolidated financial statements and the notes thereto included elsewhere
in this prospectus and the documents that we incorporate by reference in this
prospectus.
<TABLE>
<CAPTION>
AS OF JANUARY 31, 2000
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 198 198
======= =======
Long-term debt.............................................. $ 1,588 1,588
Minority interest........................................... 200 200
Common shareholders' equity:
Common stock, $.0001 par value per share, 20,000,000
shares authorized, actual and as adjusted; 6,378,757
shares issued and outstanding, actual; 7,678,757 shares
issued and outstanding, as adjusted.................... -- 1
Additional paid-in capital................................ 14,236 104,577
Retained earnings......................................... 678 678
------- -------
Total common shareholders' equity...................... 14,914 105,256
------- -------
Total capitalization................................. $16,702 107,044
======= =======
</TABLE>
21
<PAGE> 26
PRICE RANGE OF COMMON STOCK
Our common stock has been publicly traded since June 25, 1992. From
September 21, 1994 through February 25, 1997, it was traded on the Nasdaq
National Market, and since February 26, 1997 it has been traded on the American
Stock Exchange under the symbol "FCL." We have applied to have the common stock
quoted on the Nasdaq National Market under the symbol "FCEL." We expect that
this application will be approved shortly after the consummation of this
offering.
The following table sets forth the range of high and low sales prices of
our common stock as reported on the American Stock Exchange for fiscal years
1998, 1999 and 2000 to date:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED OCTOBER 31, 1998
First Quarter............................................. $12.00 $ 8.50
Second Quarter............................................ 19.33 9.92
Third Quarter............................................. 16.33 11.50
Fourth Quarter............................................ 12.17 6.33
YEAR ENDED OCTOBER 31, 1999
First Quarter............................................. $10.25 $ 7.75
Second Quarter............................................ 9.67 5.38
Third Quarter............................................. 12.92 7.00
Fourth Quarter............................................ 21.17 10.75
YEAR ENDED OCTOBER 31, 2000
First Quarter............................................. $63.00 $16.83
Second Quarter (through March 30, 2000)................... 95.50 36.75
</TABLE>
On March 30, 2000, the last sale price of the common stock as reported on
the American Stock Exchange was $73 3/4 per share. As of January 31, 2000, there
were 6,378,757 shares of our common stock outstanding held by approximately 250
holders of record.
DIVIDEND POLICY
We have never paid a cash dividend on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. As a result of
not collecting a dividend, there is a risk that stockholders will not experience
a return on their investment unless they sell their shares of common stock.
On November 16, 1999, we paid a stock dividend of one additional share of
common stock for every two shares of our common stock held on November 1, 1999,
the record date. All per share data and number of shares of common stock data in
this prospectus have been adjusted retroactively to give effect to the stock
dividend.
22
<PAGE> 27
BUSINESS
OUR DIRECT FUELCELL(TM) TECHNOLOGY
We have been developing fuel cell technology since our founding in 1969 and
carbonate fuel cells since the mid-1970s. Fuel cell systems represent an
environmentally friendly alternative power generation source when compared to
traditional combustion technologies, such as gas turbines or internal combustion
engines, that can potentially yield a lower cost of electricity primarily
because of lower fuel and maintenance costs. A fuel cell converts a fossil fuel,
such as natural gas, into electricity without combustion of the fuel. The only
by-products of the fuel cell are heat and water and limited emissions of carbon
dioxide.
A fuel cell power plant can be thought of as having two basic segments: the
fuel cell stack module, the part that actually produces the electricity, and the
"balance of plant," which includes various fuel handling and processing
equipment, including pipes and blowers, computer controls, inverters to convert
the DC output of the fuel cell to AC and other related equipment.
Our carbonate fuel cell, known as the Direct FuelCell(TM), operates at
approximately 1200 degreesF, which is a higher temperature than most other fuel
cells. This is an optimal temperature that avoids the use of precious metal
electrodes required by lower temperature fuel cells, such as PEM and phosphoric
acid, and the more expensive metals and ceramic materials required by higher
temperature fuel cells, such as solid oxide. As a result, less expensive
electrocatalysts and readily available metals are used in our design and high
quality by-product heat energy is available for cogeneration.
The following table shows our estimates of the electrical efficiency,
operating temperature, proposed capacity range and certain other operating
characteristics of single cycle PEM, phosphoric acid, carbonate (Direct
FuelCell(TM)) and solid oxide fuel cells:
<TABLE>
<CAPTION>
ELECTRICAL OPERATING PROPOSED
EFFICIENCY TEMPERATURE CAPACITY BY-PRODUCT HEAT
FUEL CELL TYPE ELECTROLYTE % (LOGO)F RANGE USE
- -------------- ------------------- ---------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
PEM Polymer 35-40 180 25kW to Warm Water
Membrane 250kW
Phosphoric Acid Phosphoric 35-40 400 50kW to Hot Water
Acid 200kW
CARBONATE POTASSIUM/LITHIUM 50-55 1200 250KW TO HIGH PRESSURE
(DIRECT CARBONATE 3MW STEAM
FUELCELL(TM))
Solid Oxide Zirconium dioxide 45-50 1800 25kW to High Pressure
ceramic 3MW Steam
</TABLE>
Our Direct FuelCell(TM) is so named because of its ability to generate
electricity directly from a hydrocarbon fuel, such as natural gas, by reforming
the fuel inside the fuel cell itself to produce hydrogen. We believe that this
"one-step" reforming process results in a simpler, more efficient and
cost-effective energy conversion system compared with external reforming fuel
cells. External reforming fuel cells, such as PEM and phosphoric acid, generally
use complex, external fuel processing equipment to convert the fuel into
hydrogen.
Our Direct FuelCell(TM) has been demonstrated using a variety of
hydrocarbon fuels, including natural gas, methanol, ethanol, biogas and coal
gas. Our commercial Direct FuelCell(TM) power plant products are expected to
achieve an electrical efficiency of between 50% and 55%. Depending on location,
application and load size, we expect that a cogeneration configuration will
reach an overall energy efficiency of between 70% and 80%.
Conventional non-nuclear power plants burn a hydrocarbon, such as coal, oil
or natural gas, to create heat. The heat boils water, converting it to steam,
which rotates a turbine, which produces the electricity. Some large power plants
use a combined cycle approach where the gas is fired in the turbines and the
exhaust heat produces steam, which generates additional power in steam turbines.
Each step in these
23
<PAGE> 28
processes consumes some of the potential energy in the fuel, and the combustion
process typically creates emissions of sulfur and nitrogen oxides, carbon
monoxide, soot and other air pollutants.
Because of the non-combustion, non-mechanical power generation process, our
Direct FuelCell(TM) is more efficient than conventional power plants. Emissions
of sulfur and nitrogen oxides from our Direct FuelCell(TM) are nearly zero, and
other pollutants are minimal or non-existent. With the only moving parts being
the air blower, in contrast to large rotating turbines, fuel cells are quieter
than these turbines. In addition, fuel cells typically achieve high efficiency
at extremely small sizes, allowing fuel cells to satisfy the needs of the
distributed generation market, such as providing electrical power to a hospital
or a retail store. Also, since they are quieter than other power generation
sources, fuel cells can be located near the customer and provide both electrical
and thermal energy.
THE ELECTRIC POWER SUPPLY INDUSTRY AND DISTRIBUTED GENERATION
The United States electric utility industry has been changing for several
years triggered in part by the Energy Policy Act of 1992, which called for open
access for consumers. In 1994, a major upheaval in the industry began as a
result of significant moves toward direct access and deregulation of the
electric utility industry in various states. As a result, a heightened
atmosphere of competition, as well as uncertainty, exists in the industry.
Furthermore, some electric utilities have already decided to exit the power
generation aspect of the business, leaving this aspect of the business to
independent power producers and non-utility generators. Other electric utilities
have merged with either other electric utilities or gas distribution companies.
According to the DOE's report Energy Information Administration Energy
Outlook 1999, a projected 363,000 MW 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. This represents
approximately $300 to $500 billion of facilities and equipment for new
generating capacity. Reliance upon the existing infrastructure has been and
continues to be problematic due to capacity constraints, environmental concerns
and other issues. In addition, utility deregulation is creating new challenges
and opportunities in the electric power supply industry. This evolving
competitive industry environment, coupled with the consumer demand for more
reliable, accessible and competitively priced sources of electric power, is
driving traditional energy providers to develop new strategies and seek new
technologies for electricity generation, transmission and distribution.
One solution to meet the growing worldwide demand for electricity is
distributed generation.
The Distributed Power Coalition of America defines distributed generation
as "any small scale power generation technology that provides electric power at
a site closer to customers than central station generation." Distributed
generation should play a growing role in electricity generation in the United
States and around the world due to three related global trends.
The first and most important trend is electricity deregulation. In
deregulation, the traditional electric utilities will no longer be integrated
providers of electricity to a captive geographic area. Most deregulation
policies focus on separating the utility's three business lines (generation,
transmission/distribution and marketing). Most legislation intends 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. Thus, deregulation will allow new
entrants into the electricity generation business, as customers will be free to
choose power producers and marketers.
The second trend accelerating distributed generation is the rapid
improvement of electricity generation technology, especially small gas turbines
and fuel cells. These improvements have resulted in dramatically lower costs for
smaller operating units and increased operating efficiency, allowing these
technologies to begin to become cost competitive with traditional grid-based
electrical generation. More importantly, these technologies have proven to be
more reliable than the existing grid-based system when it comes to providing
reliable service.
24
<PAGE> 29
The final trend is an increasing worldwide awareness of environmental
issues, especially air pollution. One step to reducing air pollution is cutting
down on the amount of electricity generated by oil and coal-fired power plants.
Most distributed generation technologies use natural gas, biogas or liquid
fuels. These three trends are converging rapidly in the United States.
Currently in the United States, according to the DOE, there are
approximately 805,000 MW of installed power generation capacity. We believe that
distributed generation currently accounts for approximately 10% of this
capacity. In addition, we believe that the combined available United States and
European market for distributed generation will reach approximately 5,400 MW per
year by 2001, and approximately 7,600 MW per year by 2004, and that fuel cells
will be one of the leading technologies in meeting these market demands.
In its 1999 report on Small-Scale Power Generation, Business Communications
Co., Inc. states that fuel cells have emerged as one of the most promising
technologies for meeting the growing worldwide energy needs. They project that
during the period between 1998 and 2003, distributed generation will grow at an
average annual rate of 14.9% in the United States and 28.4% worldwide, and that
the total annual market in 2003 for fuel cells 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 MW in 2010.
In March 2000, the DOE released a report of the findings and
recommendations of its Power Outage Study Team. This panel of DOE, 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 removing barriers to distributed
generation and adopting energy efficient technologies.
We believe that the growth of the distributed generation market combined
with the continuing deregulation of the utility industry, and the increasing
demands for higher efficiency, higher quality, more environmentally friendly and
lower cost power generation capacity, provide market opportunities for our
Direct FuelCell(TM) products.
OUR FUEL CELL DEVELOPMENT PROGRAM
Successful Field Trials and Demonstration Projects. We have extensive
experience in testing our products in a variety of conditions and settings and
on a range of fuels. Some significant demonstrations include the following:
- Santa Clara Demonstration Project. During 1996 and 1997, we operated our
"proof-of-concept" 2 MW fuel cell plant in Santa Clara, California. The
Santa Clara plant achieved a peak power output of 1.93 MW and an
electrical efficiency of 44%, both records for a single cycle fossil fuel
power plant. Adjusting for the use of supplemental fuel, the plant
achieved a peak electrical efficiency of 50%. The Santa Clara plant also
achieved record low emissions of sulfur and nitrogen oxides. The
demonstration involved the largest carbonate fuel cell power plant in the
world and the largest fuel cell of any type operated in the United
States.
The Santa Clara plant operated at various electrical outputs for almost
one year and was connected to the utility grid for half of that time.
Despite encountering equipment problems unrelated to the basic fuel cell
technology, the Santa Clara plant achieved most of the goals that we set
for the project and established new milestones. After operation of the
Santa Clara plant ended in March 1997, all of the fuel cell stacks were
returned to us for comprehensive analysis. We used the results of this
analysis, along with the results of ongoing research and development
activities, to develop a commercial fuel cell design significantly more
compact, reliable and cost-effective than
25
<PAGE> 30
the Santa Clara plant design. Based on data and analysis from the Santa
Clara plant and continued progress by our researchers, we continue to
advance the Direct FuelCell(TM) design. A new fuel cell stack design has
been developed with cells that are 50% larger in area, 40% lighter per
unit area, and 30% thinner than the Santa Clara plant design. These
improvements have doubled the power output from a fuel cell stack. Our
current fuel cell power plant design will be capable of producing the
same output as the Santa Clara plant with a footprint one-ninth as large.
We believe that this reduction in size and increase in power per fuel
cell stack will result in significant manufacturing cost savings.
- Danbury Project. In February 1999, we began operating a 250 kW Direct
FuelCell(TM) grid-connected power plant at our headquarters in Danbury,
Connecticut. The plant operates on pipeline natural gas and has been
running for approximately 9,000 hours, providing approximately 1,400,000
kWh of electricity to our facility. In March 1999, the plant reached
maximum power of 263 kW, the highest ever produced by a single carbonate
fuel cell stack. Ruggedness of this product design was demonstrated in
planned stress tests, such as rapid ramp-up and thermal cycle tests.
Another test simulated emergency fuel loss verifying that the Direct
FuelCell(TM) could be cost-effectively maintained in the field despite
fuel supply and power failures, without decreasing performance.
- Bielefeld, Germany Project. In November 1999, our European partner, MTU,
a subsidiary of DaimlerChrysler, commissioned a 250 kW Hot Module power
plant at the University of Bielefeld in Bielefeld, Germany. The Hot
Module is a skid-based, sub-megawatt power plant designed by MTU that
incorporates our Direct FuelCell(TM) as its fuel cell component. The
Bielefeld plant has achieved a peak electrical efficiency of 45%.
Employing cogeneration applications that use the heat by-product to
produce process steam for the University and district heating, the plant
has achieved an overall energy efficiency of 77%.
- Commercial Design Endurance Project. In April 1998, we began operating a
10 kW commercial design fuel cell located at our Danbury, Connecticut
facility, which has now been generating electricity for more than 14,000
hours, an endurance record for this type of fuel cell. The unit operates
on methane and is scheduled to run for a total of 17,000 hours or two
years.
Planned Field Trials and Demonstration Projects. We expect to conduct
various field trials and demonstration projects, including the following:
- Southern Company Services, Inc. -- Alabama Municipal Electric
Authority -- Mercedes-Benz U.S. International, Inc. In conjunction with
Southern, AMEA and Mercedes-Benz, we have agreed to build and install a
250 kW fuel cell power plant at the Mercedes-Benz facility in Tuscaloosa,
Alabama utilizing MTU's Hot Module design. This field demonstration
project is expected to be operational within a year. Southern and AMEA
have each agreed to contribute $1 million to this project and have
options to negotiate exclusive arrangements with us for the sale,
distribution and service of our Direct FuelCell(TM) power plants in
several southern states.
This agreement will continue through December 31, 2001. Southern may
terminate this agreement, at any time, upon 60 days' written notice to
us, and AMEA may terminate this agreement, at any time, upon 30 days'
written notice to us. Upon termination, Southern or AMEA, as the case may
be, will pay us for any costs, noncancellable commitments incurred prior
to termination and fair closeout costs to support our work under this
agreement.
- Los Angeles Department of Water and Power. LADWP recently selected us to
install a 250 kW fuel cell power plant on the site of a yet-to-be
selected LADWP customer. The installation of this power plant will help
LADWP gain knowledge and experience in the installation, maintenance and
operation of fuel cell power plants. We plan to finalize this agreement
by May 2000 and commence construction shortly thereafter. The proposed
agreement provides for LADWP to contribute $2.4 million to this project.
We will agree to install the 250 kW power plant upon the later of nine
months from the date of this agreement or five months from the date LADWP
identifies the site.
26
<PAGE> 31
The proposed agreement will include a penalty for late power plant
delivery up to a maximum of $60,000, and an electric power production
penalty up to a maximum of $75,000. Under the proposed agreement with
LADWP, we will be required to pay LADWP annual royalties of 2% of net
sales revenues, beginning when sales of fuel cells reach 50 MW per year,
and continuing until the earlier of termination of the agreement or the
payment to LADWP of $5 million in royalties.
- Global Energy Clean Coal Project. In late 1999, the DOE transferred a
long standing clean coal project to a wholly-owned subsidiary of Global
Energy, Inc., a Cincinnati based independent power producer. This project
is one of the largest power plant projects in the federal clean coal
technology program, and is the first clean coal technology plant to
employ a fuel cell. The objective of this project is to demonstrate an
innovative coal gasification technology along with a carbonate fuel cell
power plant. The clean, low-cost fuel generated in this process will be
used to fire gas turbines and to demonstrate the operation of a 2 MW fuel
cell power plant. The 2 MW fuel cell power plant is part of a $432
million 400 MW project funded in part by the DOE. We are named in the
project contract as the supplier of the fuel cell technology, and have
recently entered into a sub-contract for the design, construction and
operation of the 2 MW fuel cell power plant. We expect this fuel cell
power plant to be operational in 2003. Up to $17 million in DOE funding
will be available to us under this project, subject to the annual
congressional appropriations process. We plan to obtain non-government
financing for the remaining cost of the power plant, which is expected to
be $17 million.
In addition to our planned demonstrations, MTU expects to conduct various
field trials and demonstration projects, including the following:
- Rhon Clinic Project. The State of Bavaria, the Rhonklinikum AG Bad
Neustadt/S, a public company operating approximately 40 German hospitals,
the local gas supplier, Ferngas Nordbayern GmbH, and MTU have agreed to
build and operate a 250 kW Hot Module power plant. The purpose of this
project is to demonstrate the viability of a fuel cell power plant in a
hospital environment. The power plant is expected to be commissioned in
the second half of 2000 and is planned to start operation in late 2000.
The electrical power will be fed into the local clinic grid and the hot
exhaust air will be used to produce process steam for clinic use.
- Brewery Project. The European Community, MTU and a brewery located in
Einbeck, Germany intend to run a joint program to demonstrate the use of
a fuel cell power plant in the environment of a brewery. The 250 kW Hot
Module power plant is expected to be commissioned in late 2000 and is
planned to start-up operation in the first quarter of 2001.
PRINCIPAL GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACTS
Our revenues have been principally derived from U.S. government and
industry research and development contracts. Government funding, principally
from the DOE, provided approximately 87%, 97%, and 92% of our revenue for the
fiscal years ended 1999, 1998, and 1997, respectively. From the inception of our
carbonate fuel cell development program in the mid-1970s to date, over $350
million has been invested under DOE programs to support the development,
demonstration and field testing of our Direct FuelCell(TM) technology. This
includes funding we have received from the DOE of approximately $200 million. We
have complemented the DOE's funding with additional support from a variety of
other sources that have contributed approximately $150 million.
We perform our services under government-funded contracts or agreements
that usually require performance over a period of one to five years. However,
congressional budget limits could prolong the contracts. Generally, our U.S.
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 annual congressional 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
annually by Congress as a result of the appropriations process.
27
<PAGE> 32
We currently receive our government funding primarily from a cooperative
agreement with the DOE. This agreement covers the design, scale up, construction
and testing of carbonate fuel cells operating on natural gas. Major development
emphasis under this agreement focuses on fuel cell and total power plant cost
reduction and improved endurance.
The original cooperative agreement, which covered a 5-year project that
commenced in the first fiscal quarter of 1995, had an estimated value of $78
million, excluding cost share funding by us and other private sector sources.
The DOE has funded $95 million under this agreement which expires in December
2000. Although not yet formally approved, we have submitted to the DOE a
proposal to extend this agreement for three additional years and to provide us
with funding of $40 million over this period (assuming receipt of cost share
funds). As a condition to receiving any amounts allocated under this agreement,
we have provided significant cost share funding along with our partners and
expect to provide approximately $27 million in connection with the proposed
extension. Cost share funding may include amounts spent by our customers on
development, field tests and demonstration projects, as well as in kind
contributions of equipment and other assets.
The U.S. government and the DOE have certain rights relating to our
intellectual property as described under "Proprietary Rights." Lastly, under
this cooperative agreement, we must pay the DOE 10% of all license and royalty
income received from MTU, up to $500,000.
In 1995, the DOE granted us a Small Business Innovation Research award to
research and develop internal electrolyte replenishment for long fuel cell life.
The present estimated value of the award is $825,000, excluding cost share
funding. The award expires on October 30, 2000. In 1997, the DOE granted us a
Small Business Innovation Research award to research and develop novel coatings
as barriers for carbonate fuel cell components. The present estimated value of
the award is $825,000, excluding cost share funding. The award expires on June
15, 2000. In 1999, we received an award from the DOE to develop a high
temperature membrane to overcome some of the shortcomings of present generation
polymer electrolyte membrane fuel cells. The present estimated value of the
award is $756,000, excluding cost share funding. The award expires on February
15, 2001.
The DOE, under the Vision 21 Program, recently selected us for a $2.5
million project to develop a high utilization fuel cell and key system
components, and to perform a sub-scale test of a fuel cell/turbine system
utilizing the 250 kW Direct FuelCell(TM) power plant currently providing
electricity to our Danbury facility. Under the Vision 21 Program, we will also
design a 40 MW ultra-high efficiency, fuel cell/turbine power plant based on our
existing Direct FuelCell(TM) technology. This selection is subject to the
completion of the formal DOE contract process.
We have also been working on the development of our Direct FuelCell(TM)
technology since 1976 with various government agencies in addition to the DOE,
including the Department of Defense, the Defense Advanced Research Projects
Agency and the National Aeronautics and Space Administration.
In addition to the activities listed above, we have been active in
soliciting other business from government organizations. We have been working on
Direct FuelCell(TM) power plants for marine applications under programs with the
U.S. Navy and the U.S. Coast Guard. These power plants are required to operate
on liquid fuels such as diesel. We have already produced a fuel cell compatible
fuel from marine diesel using a compact fuel processing system. In 1999, a
sub-scale fuel cell stack was tested on this fuel under conditions simulating
marine requirements. Another sub-scale stack was successfully tested for shock
and vibration tolerance. We have submitted a proposal to the U.S. Navy to
continue development work under Phase II of this project, leading to a 500 kW
land based demonstration.
STRATEGIC ALLIANCES AND LICENSE AGREEMENTS
We have entered into international licensing agreements with major
corporations. Generally, we have reserved the exclusive rights to manufacture
and sell our carbonate fuel cells in North America. The licensees pay annual
license fees and royalties on equipment sales to us.
28
<PAGE> 33
We have benefited from our licenses and have received valuable technical
and manufacturing information from our licensees. By coordinating our own
development program with the extensive effort of our partners, we have leveraged
our own efforts substantially.
MTU. In 1989, we entered into a license agreement with DASA, a German
aerospace and aircraft equipment manufacturer and a subsidiary of Daimler Benz
Corporation, one of the largest industrial companies in Europe. In 1993, that
agreement was transferred to a subsidiary of DASA, MTU, now a DaimlerChrysler
subsidiary.
In December 1999, the 1989 license agreement was replaced by a revised MTU
license agreement, in which we have granted MTU an exclusive license to use our
Direct FuelCell(TM) patent rights and know-how in Europe and the Middle East,
and a non-exclusive license in South America and Africa, subject to certain
rights of us and others, in each case for a royalty. Under this agreement, MTU
has granted us an exclusive, royalty-free license to use any improvements to our
Direct FuelCell(TM) made by MTU anywhere in the world except Europe and the
Middle East. In addition, MTU has agreed to negotiate a license grant of any
separate fuel cell know-how it develops once it is ready for commercialization.
Under this agreement, we have also agreed to sell our Direct FuelCell(TM)
components and stacks to MTU at cost, plus a modest fee. The new MTU agreement
continues through December 2004 and may be extended, at the option of MTU, by
written notice at least 180 days prior to expiration. Upon termination, MTU will
retain a non-exclusive license to use our Direct FuelCell(TM) patent rights and
know-how for a royalty.
In 1992, MTU formed a European consortium (ARGE) with RWE Energie, the
largest electric utility in Germany; Ruhrgas, the largest natural gas supplier
in Germany; Elkraft, a large Danish utility; and Haldor Topsoe A/S, a Danish
industrial company. The activities of this group complement our efforts to
design and manufacture natural gas and coal gas fueled carbonate fuel cell
systems based on our designs.
During 1998, MTU designed and built a 250 kW cogeneration fuel cell unit
labeled the Hot Module, which incorporates our fuel cell assemblies and uses an
innovative integration of a portion of the balance of plant into the fuel cell
stack module itself, with the expectation of reducing costs to the power plant
as a whole. The design is compact and especially suitable for cogeneration
applications.
In July 1998, we entered into a cross-licensing and cross-selling agreement
with MTU pursuant to which we have granted MTU a non-exclusive license to use
our balance of plant know-how (excluding fuel cell technology included in the
1999 license agreement) in Europe, the Middle East, South America and Africa,
and MTU has granted us a worldwide, non-exclusive license to use MTU's balance
of plant know-how (excluding fuel cell technology included in the 1999 license
agreement), in all territories except Europe and the Middle East. We and MTU are
required to pay to the other a royalty for each kW of rating which uses the
licensed balance of plant know-how of the other. MTU is not required to pay us
royalties under this agreement if MTU is obligated to pay us royalties under the
1999 license agreement. This agreement continues through 2003 and may be
extended by written notice at least 180 days prior to expiration.
Marubeni Corporation of Japan. Under an agreement with Marubeni, we have
agreed to supply to Marubeni, and Marubeni has agreed to site and test, based on
customer commitment, our Direct FuelCell(TM) power plants in Japan and other
select Asian markets. Marubeni will provide field trial marketing, management
and distribution services under this agreement. Pursuant to this agreement,
Marubeni will order a minimum of five sub-megawatt class Direct FuelCell(TM)
power plants or, alternatively, one megawatt class Direct FuelCell(TM) power
plant and one sub-megawatt class Direct FuelCell(TM) power plant. In connection
with this agreement, Marubeni has an option, prior to October 1, 2001, to
negotiate an exclusive arrangement with us for the sale, distribution and
service of our Direct FuelCell(TM) power plants in Japan and other select Asian
markets. Marubeni will receive a distributor discount on our fuel cell products
that will be negotiated.
29
<PAGE> 34
This agreement will continue through December 31, 2001. Marubeni may
terminate this agreement, at any time, upon 30 days' written notice to us. Upon
termination, Marubeni will pay us for any costs and noncancellable commitments
incurred prior to termination to support our work under this agreement.
Bath Iron Works. In August 1999, we entered into an agreement with the
Advanced Technology Division of Bath Iron Works, a General Dynamics company, to
develop an advanced Direct FuelCell(TM) plant for defense marine applications.
We expect this agreement to lead to the development of the first new power
generation technology for surface ships since nuclear power was adopted for
aircraft carriers, addressing the market for advanced marine power systems. This
agreement continues through 2004, and may be terminated by either Bath Iron
Works or us, upon 30 days' written notice.
Fluor Daniel, Inc. We have a long-standing relationship with Fluor Daniel,
Inc., a subsidiary of Fluor Corporation (Fluor Daniel), one of the largest
engineering, procurement, construction, and technical services companies in the
world. Fluor Daniel's Oil, Gas & Power unit has been working with us providing
architectural, design, engineering and construction management services in
developing, based on our specifications, the balance of plant systems required
to support our fuel cells in natural gas and coal fueled power plants. Fluor
Daniel is a resource that we expect will continue to provide us with the
technical and management expertise and experience required for designing and
optimizing our fuel cell power plants.
Santa Clara. In 1993, we obtained an exclusive license, with sublicense
rights, to use the balance of plant design for the Santa Clara plant. Under this
agreement, our license to use the balance of plant design in connection with all
fuel cell plants outside North America, and fuel cell plants of 100 kW or less
inside North America is subject to the quarterly payment by us of license fees
equal to the lesser of (a) 2% of the proportional gross revenues from the sale
of that portion of each fuel cell plant that uses the balance of plant design or
(b) 1% of the total gross revenue from the sale of each fuel cell plant that
uses the balance of plant design. We must also pay Santa Clara 25% of all fees
we receive for sublicensing the balance of plant design. In addition, beginning
three years after commencement of production of fuel cells at a commercial scale
manufacturing plant, we are required to make royalty payments of $15 per
kilowatt (subject to consumer price index and other upward adjustments) on sales
of fuel cell power plant stacks of capacities of 100 kW or more. The license
becomes non-exclusive after 2005 or earlier, at the option of Santa Clara, if we
do not meet certain commercialization milestones.
Electric Power Research Institute. In 1988, we entered into a license
agreement with the Electric Power Research Institute, Inc. (EPRI), granting us
an unreserved, non-exclusive, worldwide license to use carbonate fuel cell
proprietary data developed under certain EPRI contracts with us. We have agreed
to pay EPRI a one-time license fee of approximately $50,000 within six months of
our first commercial sale of a carbonate fuel cell stack greater than one
megawatt in size, and a royalty of 0.5% to 1% of net sales upon commercial sales
of carbonate fuel cell stacks. The license and our obligation to make royalty
payments continue until the later of the expiration of all patents licensed to
us by EPRI, or fifteen years from our first commercial sale of a carbonate fuel
cell stack.
COST REDUCTION PROGRESS
We regularly review and revise our cost reduction plans. The DOE has on
several occasions assigned an independent outside auditor to examine our present
and projected cost figures to determine if the DOE's continued support of us
through development contracts will achieve its intent of creating commercially
viable fuel cell power generation technology in the United States. In 1999, at
the request of the DOE, we presented our cost projections to a panel of
independent consultants. Our presentation indicated that our commercial design
fuel cell would be capable of being manufactured, delivered and installed by
2005 at a cost per kW of approximately $1,200 (assuming full and sustained
commercial production of at least 400 MW of fuel cells per year). Although
subject to a number of assumptions and uncertainties, some of which are beyond
our control, including the price of fuel, we believe that, by 2005, such a cost
per kW would result in a cost of generating electricity of between 5 and 7 cents
per kWh.
If this cost reduction is achieved, from a cost per kWh standpoint, our
Direct FuelCell(TM) will be an economically attractive source of energy in many
places in the United States. According to the DOE,
30
<PAGE> 35
electricity prices currently vary substantially depending on the region of the
country. Prices in the highest cost region (New York, with an average price of
over 10 cents per kWh in 1998) are almost 2.3 times as expensive as in the
lowest cost region (the northwest United States). The DOE predicts that, even in
a competitive environment, electricity prices in New York will be 8.88 cents per
kWh in 2005 and 8.84 cents per kWh in 2012. We believe that our Direct
FuelCell(TM) will be a viable alternative as transmission and distribution
costs, as well as losses in efficiency due to transmission and distribution,
will be substantially lessened or eliminated.
We plan to achieve our cost goals through a combination of factors,
including manufacturing process improvements, economies of scale, completion or
elimination of first time or one of a kind costs, and through technology
maturation that increases power output without additional product cost. These
factors are as described below:
Manufacturing cost reduction: Manufacturing costs are being reduced
by multi-faceted efforts including supplier management, material and labor
utilization, vertical integration and engineering for manufacturing
efficiencies.
Economies of scale: Volume directly affects purchased material cost
and reduces fixed cost allocation. Volume also has a secondary effect on
direct labor by providing justification to invest in capital projects for
improved productivity.
First time costs: The elimination of first time development and
engineering costs is a large and straightforward element of our cost
reduction plan. At commercial volumes, power plant installations are
expected to be virtually identical. Furthermore, indirect costs associated
with developing the initial field trial projects will not exist.
Improved performance: Power plant performance is a critical factor.
Power output has a direct impact on capital cost as measured in cost per
kW, and efficiency, decay rate and availability all affect the cost of
electricity which is the best measure of the value of our products. Our
research and development activities have made and are expected to continue
to make substantial progress in these areas.
COMPETITION
We are competing primarily on the basis of fuel efficiency, environmental
considerations and cost. We believe that the carbonate fuel cell enjoys
competitive advantages over other fuel cells. These benefits include higher fuel
efficiency, significantly lower emissions, scalability and potentially lower
operating, maintenance and generation costs. We believe that we are more
advanced in the development of carbonate fuel cells than other manufacturers.
Several companies in the United States are involved in fuel cell
development, although we believe that we are the only domestic company
exclusively engaged in the development and production of carbonate fuel cells.
Emerging technologies in our target distributed generation market include small
gas turbines, PEM fuel cells, phosphoric acid fuel cells and solid oxide fuel
cells. Major competitors using or developing these technologies include Capstone
Turbine Corporation, Elliot Energy Systems and Honeywell International Inc. in
the case of gas turbines, Ballard Power Systems Inc. in the case of PEM fuel
cells, ONSI Corporation in the case of phosphoric acid fuel cells, and
SiemensWestinghouse Electric Company and Mitsubishi Heavy Industries, Ltd. in
the case of solid oxide fuel cells. Each of these competitors has the potential
to capture market share in our target market. Plug Power Inc. has also announced
plans to test models of its 5-10 kW PEM fuel cells for residential applications.
We believe that PEM fuel cells are less efficient than our Direct FuelCell(TM)
and, therefore, have higher fuel costs. We believe that existing PEM developers
are focused primarily on transportation fuel cells and small residential units.
In Japan, at least six manufacturers have demonstrated interest in
developing and marketing carbonate fuel cells. Some have larger marketing and
sales departments than we do and have a history of producing and selling
electric generation equipment. One of these manufacturers has demonstrated
31
<PAGE> 36
extended operation of a 200 kW carbonate fuel cell. Two of these manufacturers
have jointly demonstrated extended operation of a 100 kW carbonate fuel cell and
recently tested a 1 MW plant. One of these companies is expected to concentrate
on 700-800 kW sized modules for distributed generation. We believe that most of
these companies use the more complex and less efficient approach of using
external fuel processing equipment to produce hydrogen fuel.
In Europe, companies in Germany, Spain and Italy are actively engaged in
carbonate fuel cell development and are potential competitors. Our licensee,
MTU, and its partners have conducted the most significant activity in Europe.
We must also compete with companies manufacturing more established
combustion equipment, including various engines and turbines, which are
currently in use and have established operating and cost features. Significant
competition comes from the gas turbine industry which has recently made progress
in improving fuel efficiency and reducing pollution in large size combined cycle
natural gas fueled generators. Efforts are underway to extend these advantages
to small size machines. We believe that in small size units, under 5 MW, gas
turbines will not be able to match our fuel cell efficiency or environmental
characteristics.
MANUFACTURING
We manufacture fuel cells at our facility located in Torrington,
Connecticut. At present, the capacity of the plant is approximately 5 MW per
year on a single shift basis. We are planning to increase the capacity of this
plant by purchasing equipment to replace certain elements of the manufacturing
process that currently restrict the overall output of the facility. The first
stage in this process is to raise the output capability to 50 MW per year in
early 2001. We estimate that the cost of this expansion will be approximately
$16 million.
We believe that virtually all of the raw materials used in our products are
readily available from a variety of vendors in the United States and Canada.
However, certain manufacturing processes that are necessary to transform the raw
materials into component parts for fuel cells are presently available only
through a small number of foreign manufacturers. We believe that these
manufactured products eventually will be obtainable from United States suppliers
as demand for these items increases.
EVERCEL SPIN-OFF
On February 22, 1999, we effected a spin-off to our stockholders of our
former battery group, now owned by Evercel. In connection with this transaction,
we transferred to Evercel the principal assets, liabilities and intellectual
property related to our battery operations. Following the transfer, we
distributed to our stockholders, in a tax-free distribution, one share of
Evercel common stock for every three shares of our common stock held on the
record date of February 19, 1999. In connection with this transfer, our board of
directors re-priced certain stock options held on February 22, 1999 by certain
of our officers and directors under our stock option plans to reflect the
reduction in value of our common stock as a result of the spin-off. In addition,
our board of directors granted to Dr. Hansraj C. Maru and Christopher R. Bentley
4,599 and 12,474 stock options, respectively, under our stock option plans at an
average price of $5.99 and $3.12, respectively.
Under a services agreement entered into with Evercel in contemplation of
the spin-off, we have provided and continue to provide certain administrative
and management services to Evercel, as well as the use of certain office,
research and development and manufacturing and support facilities and services.
As Evercel continues its development as a stand-alone company, we will continue
to reduce the support that we have provided to Evercel under this services
agreement.
In accordance with a license assistance agreement entered into with Evercel
in contemplation of the spin-off, Evercel has agreed to provide all services and
assistance necessary for Evercel to effectively fulfill, on our behalf, all of
our obligations under a joint venture contract for Xiamen Three Circles-ERC
Battery Corp., Ltd. and a related license agreement until we obtain the approval
from our Chinese partner and the
32
<PAGE> 37
appropriate Chinese governmental authority for the assignment of these
agreements to Evercel. In return for this assistance, we will pay to Evercel all
remuneration paid and other benefits accruing to us pursuant to the joint
venture contract and related license agreement.
During 1998, we formed a joint venture with Xiamen Hi-Tech Innovation
Centre called Xiamen ERC Technology Corp. Ltd. This joint venture has been
formed to fund other entities, such as Xiamen University, to conduct research in
advanced electrochemical technologies, which will benefit us and Xiamen Hi-Tech
Innovation Centre. We have invested $400,000 of capital into this joint venture
to date, which is currently two-thirds owned by us. After we obtain the
requisite third-party approvals, as contemplated by the distribution agreement
we have entered into with Evercel in contemplation of the spin-off, we will
transfer a one-third ownership interest in this joint venture to Evercel for no
consideration.
RESEARCH AND DEVELOPMENT
A significant portion of our research and development has been funded by
government contracts and, therefore, a substantial amount of our total research
and development expense has been classified as a cost of revenues in our
consolidated financial statements. In addition, we have incurred discretionary
research and development expense under our government contracts for fuel cell
and battery development that has been included in research and development
expense although it, too, has been reimbursed fully under these government
contracts. For the fiscal years ended 1999, 1998 and 1997, total research and
development expense, including amounts received from the DOE, other government
agencies and our customers, and amounts that have been self-funded, was $14.2
million, $16.8 million and $16.9 million, respectively.
PROPRIETARY RIGHTS
We rely primarily on a combination of copyright and trademark laws, trade
secrets, patents, confidentiality procedures (including, in some instances, the
encryption of certain technical information) and confidentiality agreements and
inventors' rights agreements with our strategic partners and employees to
protect our proprietary rights. We have obtained patents and will continue to
make efforts to obtain patents, when available, in connection with our
technologies. We have 46 U.S. and 95 international patents covering our fuel
cell technology. Of the 46 U.S. patents, 33 relate to our Direct FuelCell(TM)
technology. We also have submitted 6 U.S. and 23 international patent
applications. The patents that we have obtained will expire between 2000 and
2016, and the average remaining life of our patents is approximately 8 years.
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 design. In addition, some of our intellectual property includes
technologies and processes that may be similar to the patented technologies and
processes of third parties. Certain of our intellectual property has been
licensed to us on a non-exclusive basis from third parties who may also license
such intellectual property to others, including our competitors.
Many of our United States patents are the result of government-funded
research and development programs, including the DOE cooperative agreement. Our
patents that were the result of government-funded research prior to January 1988
(the date that we qualified as a "small business") are owned by the United
States government and have been licensed to us. This license is revocable only
in the limited circumstances where it has been demonstrated that we are not
making an effort to commercialize the invention. Our patents that were the
result of government-funded research after January 1988 automatically belong to
us because of our "small business" status. We expect to continue to qualify as a
"small business" at the time that the three-year extension of the DOE
cooperative agreement is formally approved.
However, all of our United States patents that have resulted from
government-funded research are subject to the risk of 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
33
<PAGE> 38
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. We
believe, however, that the likelihood of the United States government exercising
these rights is remote and would only occur if we ceased our commercialization
efforts.
GOVERNMENT REGULATION
We presently are, and our fuel cell power plants will be, subject to
various 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. To date, we believe that we have obtained all necessary government
permits and have been in substantial compliance with all of these applicable
laws and regulations.
Pursuant to the National Environmental Protection Act, since 1991, each
local DOE procurement office must file and have approved by the DOE in
Washington, D.C., appropriate documentation for environmental, safety and health
impacts with respect to procurement contracts entered into by that local office.
The costs associated with compliance with environmental regulations are
generally recoverable under our cost reimbursable contracts. In certain cases,
contract work may be delayed until the approval is received.
LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings that, either
individually or taken as a whole, could materially harm our business, prospects,
results of operations and financial condition.
EMPLOYEES
As of December 31, 1999, we had 114 full-time employees, of which
approximately 30 were engineers, scientists and other degreed professionals and
84 were professional, technical, administrative and manufacturing support
personnel. We consider relations with our employees to be satisfactory.
PROPERTIES
We currently own and occupy approximately 72,000 square feet in two
interconnected single story buildings on 10.8 acres, of which approximately 5.4
acres are currently used, in Danbury, Connecticut. Additionally, we currently
lease a 63,000 square foot facility in Torrington, Connecticut for our
manufacturing operations. This lease expires February 1, 2001 and the annual
lease cost is approximately $325,000.
We have recently entered into a ten year lease agreement for a new 65,000
square foot facility in Torrington, Connecticut for our manufacturing
operations, effective November 1, 2000. This facility is currently under
construction and will replace our current facility in Torrington. The annual
lease cost is $430,000 in the first five years, and $494,000 for the last five
years, in addition to taxes, utilities and operating expenses. We have an option
to extend the lease for an additional five years with an annual lease cost of
$569,000. We have been approved for a $4 million loan from the Connecticut
Development Authority to be used for the purchase of equipment at this facility.
34
<PAGE> 39
MANAGEMENT
The following table provides certain information regarding our executive
officers and directors as of March 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Dr. Bernard S. Baker................. 63 Chairman of the Board
Jerry D. Leitman..................... 57 President, Chief Executive Officer and Director
Dr. Hansraj C. Maru.................. 55 Executive Vice President and Director
Christopher R. Bentley............... 57 Executive Vice President and Director
Joseph G. Mahler..................... 47 Vice President, Chief Financial Officer, Treasurer and
Corporate Secretary
Warren D. Bagatelle.................. 61 Director
Michael Bode......................... 54 Director
Thomas R. Casten..................... 57 Director
James D. Gerson...................... 56 Director
Thomas L. Kempner.................... 72 Director
William A. Lawson.................... 66 Director
John A. Rolls........................ 58 Director
</TABLE>
DR. BERNARD S. BAKER. Dr. Baker joined us in 1970 and was President from
1973 to August 1997 when he became Chairman of the Board. He was Chief Executive
Officer from March 1992 to August 1997. He was also a part-time employee from
August 1997 to May 1998. From May 1998 to December 1998, he provided consulting
services to us. He received a Ph.D. from the Illinois Institute of Technology in
1969, and was a Fulbright Fellow at the Laboratory for Electrochemistry at the
University of Amsterdam subsequent to receiving his Master of Science in
Chemical Engineering from the University of Pennsylvania in 1959. In 1999, Dr.
Baker received the Grove Medal in the United Kingdom for his contributions to
fuel cell technology.
JERRY D. LEITMAN. Mr. Leitman has been President, Chief Executive Officer
and a director since August 1997. Mr. Leitman was previously President of ABB
Asea Brown Boveri's global air pollution control businesses from 1992 to 1995.
Prior to joining ABB, Mr. Leitman was Group Executive Vice President of FLAKT
AB, a Swedish multinational company, responsible for FLAKT's worldwide
industrial businesses from 1989 to 1992. Mr. Leitman is also a director and a
member of the Compensation Committee of Esterline Technologies Inc. Mr. Leitman
obtained both a BS and MS in Mechanical Engineering from the Georgia Institute
of Technology in 1965 and 1967, respectively. Mr. Leitman also serves as
Chairman of the Board of Evercel.
DR. HANSRAJ C. MARU. Dr. Maru has been Executive Vice President and a
director since December 1992. Dr. Maru was Chief Operating Officer from December
1992 to December 1997. Prior to that he was Senior Vice President -- Research
and Development. Prior to joining us in 1977, Dr. Maru was involved in fuel cell
development at the Institute of Gas Technology. Dr. Maru received a Ph.D. in
Chemical Engineering from the Illinois Institute of Technology in 1975.
CHRISTOPHER R. BENTLEY. Mr. Bentley has been a director since June 1993
and Executive Vice President since September 1990. Mr. Bentley was President of
Fuel Cell Manufacturing Corporation, our former subsidiary, from September 1990
to December 1997. From 1985 through 1989, he was Director of Manufacturing
(1985), Vice President and General Manager (1985-1988) and President (1988-1989)
of the Turbine Airfoils Division of Chromalloy Gas Turbine Corporation, a major
manufacturer of gas turbine hardware. Mr. Bentley received a BSME from Tufts
University in 1966.
JOSEPH G. MAHLER. Mr. Mahler joined us in October 1998 as Vice President,
Chief Financial Officer, Corporate Secretary and Treasurer. From 1993 to 1998,
Mr. Mahler was Vice President -- Chief Financial Officer at Earthgro, Inc. Prior
to that, he was a partner at Ernst & Young. Mr. Mahler received a BS in
Accounting from Boston College in 1974.
35
<PAGE> 40
WARREN D. BAGATELLE. Mr. Bagatelle has been a director since 1988. Mr.
Bagatelle has been a Managing Director of Loeb Partners Corporation since 1988
and a general partner of Loeb Investors Co. LXXV, an investment partnership and
an affiliate of Loeb Partners Corporation. Mr. Bagatelle is also a director of
Evercel.
MICHAEL BODE. Mr. Bode has been a director since 1993. Mr. Bode joined
Messerschmitt-Bolkow-Blohm GmbH in 1974, where he has held a variety of
positions. He became Vice President and Director of the New Technology group of
the Space Transportation and Propulsion Systems division of Deutsche Aerospace
AG, a subsidiary of Daimler-Benz Corp., in 1990. Since July 1993, Mr. Bode has
been Vice President and Director of the New Technology group of MTU.
THOMAS R. CASTEN. Mr. Casten has been a director since late March 2000.
From 1989 to 1999, Mr. Casten was Chief Executive Officer of Trigen Energy
Corporation, a company involved in alternative energy generation. From 1980 to
1986, Mr. Casten was Chief Executive Officer of Trigen's predecessor company,
Cogeneration Development Corporation. From 1969 to 1980, Mr. Casten was employed
by Cummins Engine Company where he established a business unit to combine
generation of heat and power using diesel engines.
JAMES D. GERSON. Mr. Gerson has been a director since 1992. Since March
1993, Mr. Gerson has been Vice President of Fahnestock & Co., Inc. and was
Portfolio Manager of the Hudson Capital Appreciation Fund, a mutual fund until
September 1999. Mr. Gerson also serves as a director of Ag Services of America,
Inc. and American Power Conversion Corp. and is a director of Evercel.
THOMAS L. KEMPNER. Mr. Kempner has been a director since 1988 and was
Chairman of the Board from March 1992 to August 1997. He has been Chairman and
Chief Executive Officer of Loeb Partners Corporation since 1979 and a general
partner of Loeb Investors Co. LXXV, an investment partnership and an affiliate
of Loeb Partners Corporation. Mr. Kempner is also a director of Alcide
Corporation, IGENE Biotechnology, Inc., Intermagnetics General Corporation, CCC
Information Services Group, Inc., Insight Communications Company, Inc., Evercel
and Roper Starch Worldwide, Inc. and director emeritus of Northwest Airlines,
Inc.
WILLIAM A. LAWSON. Mr. Lawson has been a director since 1988. Mr. Lawson
has been President of W.A. Lawson Associates, an industrial and financial
consulting firm, since 1987. Mr. Lawson has been Chairman of the board of
directors of Newcor, Inc. since March 1991 and Chairman and Chief Executive
Officer of Bernal International Inc. (formerly Atlantic Eagle Inc.) since March
1997. Mr. Lawson also is a director of Evercel.
JOHN A. ROLLS. Mr. Rolls became a director in February 2000. Mr. Rolls is
President, Chief Executive Officer and a principal investor in Thermion Systems
International. He is a director and principal investor in VivaScan Corporation
and is a director and Chairman of the Finance Committee of both Bowater
Incorporated and MBIA Corporation. In 1992, he became President and Chief
Executive Officer of Deutsche Bank North America. From 1986 through 1992, Mr.
Rolls was Executive Vice President and Chief Financial Officer for United
Technologies Corp. Previously, Mr. Rolls was Vice President and Treasurer of RCA
Corporation since 1982 and became Senior Vice President and Chief Financial
Officer in 1985.
36
<PAGE> 41
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
As of January 31, 2000, there were 6,378,757 shares of common stock, par
value $.0001 per share, issued and outstanding. Our authorized capital stock
consists of 20,000,000 shares of common stock, of which 7,678,757 will be issued
and outstanding following the offering (based upon the shares of common stock
outstanding as of January 31, 2000), and 250,000 shares of undesignated
preferred stock issuable in one or more series designated by the board of
directors, of which no shares will be issued and outstanding following the
offering. In addition, as of January 31, 2000, there were outstanding stock
options to purchase 694,662 shares of common stock. At January 31, 2000, there
were 250 holders of record of our common stock.
COMMON STOCK
Voting Rights. The holders of our common stock have one vote per share.
Holders of our common stock are not entitled to vote cumulatively for the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority, or, in the case of the election of directors, by
a plurality, of the votes entitled to be cast at a meeting at which a quorum is
present by all shares of common stock present in person or represented by proxy,
voting together as a single class, subject to any voting rights granted to
holders of any then outstanding preferred stock.
Dividends. Holders of common stock will share ratably in any dividends
declared by the board of directors, subject to the preferential rights of any
preferred stock then outstanding. Dividends consisting of shares of common stock
may be paid to holders of shares of common stock.
Other Rights. In the event of liquidation, dissolution or winding up,
after payment of liabilities and liquidation preferences on any shares of
preferred stock then outstanding, the holders of common stock are entitled to
share ratably in all assets available for distribution. Holders of common stock
have no preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock.
PREFERRED STOCK
Our certificate of incorporation provides that shares of preferred stock
may be issued, from time to time, in one or more series. The board of directors
is authorized to fix the voting rights, if any, designations, powers,
preferences, qualifications, limitations and restrictions applicable to the
shares of each series. The board of directors may, without stockholder approval,
issue preferred stock with voting and other rights that could adversely affect
the voting power and other rights of the holders of common stock and could have
anti-takeover effects. We have no present plans to issue any shares of preferred
stock. The ability of our board of directors to issue preferred stock without
stockholder approval could have the effect of delaying, deferring or preventing
a change of control or the removal of existing management.
ANTI-TAKEOVER PROVISIONS
Certain Provisions of our Certificate of Incorporation and By-Laws may have
Anti-Takeover Effects. A number of provisions of our certificate of
incorporation and by-laws concern matters of corporate governance and the rights
of stockholders. Some of these provisions, including, but not limited to, the
inability of stockholders to take action by unanimous written consent,
supermajority voting provisions with respect to any amendment of voting rights
provisions, the filling of vacancies on the board of directors by the
affirmative vote of a majority of the remaining directors, and the ability of
the board of directors to issue shares of preferred stock and to set the voting
rights, preferences and other terms thereof, without further stockholder action,
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 the board of directors to issue
preferred stock without further
37
<PAGE> 42
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 inhibit a merger, tender offer or proxy contest, even if favorable
to the interests of stockholders, and could depress the market price of our
common stock. The board of directors believes these provisions are appropriate
to protect our interests and the interests of our stockholders. The board of
directors has no present plans to adopt any further measures or devices which
may be deemed to have an "anti-takeover effect."
Delaware Anti-Takeover Provisions. Following the offering, we will be
subject to Section 203 of the Delaware General Corporation Law, which prohibits
a publicly-held Delaware corporation from engaging in a "business combination,"
except under certain circumstances, with an "interested stockholder" for a
period of three years following the date such person became an "interested
stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved either the business combination or
the transaction that resulted in the interested stockholder becoming an
interested stockholder;
- upon the consummation of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
- at or following the time such person became an interested stockholder,
the business combination is approved by the board of directors of the
corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of 66 2/3% of the outstanding voting
stock of the corporation which is not owned by the interested
stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the three years prior
to the determination of interested stockholder status, owned, 15% or more of a
corporation's outstanding voting stock. The term "business combination" includes
mergers, asset or stock sales and other similar transactions resulting in a
financial benefit to an interested stockholder. Section 203 makes it more
difficult for an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. The existence of this
provision would be expected to have an anti-takeover effect with respect to
transactions not approved in advance by the board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by stockholders. A Delaware corporation may "opt
out" of Section 203 with an express provision in its original certificate of
incorporation or any amendment thereto. Our certificate of incorporation does
not contain any such exclusion.
Connecticut Anti-Takeover Provisions. The laws of the State of
Connecticut, where our principal executive offices are located, impose
restrictions on certain transactions between certain foreign corporations and
significant stockholders. Section 33-840 of the Connecticut Business Corporation
Act prohibits certain publicly-held foreign corporations that are based in
Connecticut from engaging in a "business combination" (including the issuance of
equity securities which have an aggregate market value of 5% or more of the
total market value of the outstanding shares of the company) with an "interested
shareholder" as defined in the Connecticut Business Corporation Act for a period
of five years from the date of the shareholder's purchase of stock, unless
approved in a prescribed manner. The application of this statute could prevent a
change of control. Generally, approval is required by the board of directors, by
a majority of our non-employee directors and by 80% of the outstanding voting
shares and two-thirds of the voting power of the outstanding shares of the
voting stock other than shares held by the interested shareholder. We can give
no assurance that these provisions would not prevent us from entering into a
business combination that otherwise would be beneficial to us or to our
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, New York, New York.
38
<PAGE> 43
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, CIBC World Markets
Corp., FAC/Equities, a division of First Albany Corporation, and Lazard Freres &
Co. LLC are acting as representatives of each of the underwriters named below.
Subject to the terms and conditions set forth in a purchase agreement between
the underwriters and us, we have agreed to sell to the underwriters, and each of
the underwriters has agreed to purchase from us, the number of shares of common
stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
CIBC World Markets Corp. ...................................
FAC/Equities, a division of First Albany Corporation........
Lazard Freres & Co. LLC.....................................
---------
Total.......................................... 1,300,000
=========
</TABLE>
The several underwriters have agreed to purchase all of the shares of
common stock being sold under the purchase agreement if any of the shares are
purchased. If an underwriter defaults, the purchase agreement provides that the
purchase commitments of the non-defaulting underwriters may be increased or the
purchase agreement may be terminated.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments that the 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 agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify this offer and to reject orders in whole or in part.
Any offers and sales of the shares of common stock outside the United
States will be made through affiliates of each of the several underwriters
authorized to make offers and sales in those jurisdictions.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public at the public offering price
set forth on the cover page of this prospectus and to dealers at that price less
a concession not in excess of $ per share. The underwriters may allow, and
the dealers may reallow, a discount not in excess of $ per share to other
dealers. After the offering, the public offering price, concession and discount
may be changed.
The following table shows the per share and total public offering price,
underwriting discount and the proceeds, before expenses, to us. This information
is presented assuming either no exercise or full exercise by the underwriters of
their over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ------- ------
<S> <C> <C> <C>
Public offering price....................................... $ $ $
Underwriting discount....................................... $ $ $
Proceeds, before expenses, to us............................ $ $ $
</TABLE>
The expenses of this offering, not including the underwriting discount, are
estimated at $500,000 and are payable by us.
39
<PAGE> 44
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters to purchase up to 195,000
additional shares at the public offering price, less the underwriting discount.
The underwriters may exercise this option for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
this option, each will be obligated, subject to conditions contained in the
purchase agreement, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the table above.
NO SALES OF SIMILAR SECURITIES
We and each of our executive officers and directors and MTU and Loeb
Investors Co. LXXV have agreed, with exceptions, not to sell or transfer any of
our common stock for a period of 180 days after the date of this prospectus
without first obtaining the written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. Specifically, we and our executive officers and directors
and such security holders have agreed not to directly or indirectly
- offer, pledge, sell or contract to sell any shares of our common stock,
- sell any option or contract to purchase any shares of our common stock,
- purchase any option or contract to sell any shares of our common stock,
- grant any option, right or warrant to purchase any shares of our common
stock,
- otherwise dispose of or transfer any shares of our common stock,
- file any registration statement related to our common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock, whether
any swap or transaction is to be settled by delivery of common stock or
other securities, in cash or otherwise.
This lockup provision applies to our common stock and to securities
convertible into or exchangeable or exercisable for or repayable with our 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.
LISTING
The shares are listed on the American Stock Exchange under the symbol
"FCL." We have applied to have the common stock quoted on the Nasdaq National
Market under the symbol "FCEL." We expect that this application will be approved
shortly after the consummation of this offering.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the representatives are permitted to engage in
transactions that stabilize the price of the common stock, such as bids or
purchases to peg, fix or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the representatives may reduce that short position
by purchasing shares in the open market. The representatives may also elect to
reduce any short position by exercising all or part of the over-allotment option
described above. 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.
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 representatives
will
40
<PAGE> 45
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
LEGAL MATTERS
The validity of the shares of common stock being sold in the offering and
other legal matters will be passed upon for us by Robinson & Cole LLP, Stamford,
Connecticut. Certain legal matters relating to the offering will be passed upon
for the underwriters by Winthrop, Stimson, Putnam & Roberts, New York, New York.
EXPERTS
The audited consolidated financial statements of FuelCell Energy, Inc. as
of October 31, 1999 and 1998, and for each of the years in the three-year period
ended October 31, 1999, have been included and incorporated by reference herein
and in the registration statement, of which this prospectus is a part, in
reliance on the report of KPMG LLP, independent certified public accountants,
appearing elsewhere and incorporated by reference herein and upon the authority
of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement (which contains this
prospectus) on Form S-3 under the Securities Act of 1933. Certain information in
the registration statement has been omitted from this prospectus in accordance
with the rules of the SEC. We are subject to the informational requirements of
the Securities Exchange Act of 1934 and, therefore, we file reports, proxy
statements, information statements and other information with the SEC. You may
inspect and copy this information (at prescribed rates) at the SEC's public
reference facilities at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at the regional offices of the Commission located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048. You may call the SEC at
1-800-SEC-0330 for more information about its public reference rooms. The SEC
also maintains an internet website at http://www.sec.gov that contains reports,
proxy statements, information statements and other information regarding
issuers, like us, that file electronically with the SEC. Reports, proxy and
information statements and other information concerning us can be inspected at
the offices of the American Stock Exchange located at 86 Trinity Place, New
York, New York 10006-1881.
The SEC allows us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and information that we later file with the SEC
will automatically update and supersede the information contained or
incorporated by reference in this prospectus. Accordingly, we incorporate by
reference the documents listed below and any future filings we make with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
prior to the termination of this offering:
- Our annual report on Form 10-K for the fiscal year ended October 31,
1999, as amended on February 7, 2000.
- Our quarterly report on Form 10-Q for the quarter ended January 31, 2000.
- Our definitive proxy statement dated February 28, 2000, filed in
connection with our 2000 annual meeting of shareholders.
- All of the filings pursuant to the Securities Exchange Act of 1934 after
the date of filing the original registration statement and prior to the
effectiveness of the registration statement.
41
<PAGE> 46
All documents which we subsequently file pursuant to Section 13(a), 13(c),
14, or 15(d) of the Securities Exchange Act of 1934 prior to the termination of
this offering shall be deemed to be incorporated by reference into this
prospectus from the date of filing of such documents.
We will provide without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, upon written or oral request, a
copy of any and all of the documents that have been incorporated by reference in
this prospectus (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference but not delivered with this prospectus).
You should direct requests for these documents to Jerry D. Leitman, FuelCell
Energy, Inc., 3 Great Pasture Road, Danbury, Connecticut 06813. The telephone
number is (203) 825-6000.
42
<PAGE> 47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FUELCELL ENERGY, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets As of October 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Income (Loss) For the Years Ended
October 31, 1999, 1998 and 1997........................... F-4
Consolidated Statements of Changes in Common Shareholders'
Equity For the Years Ended October 31, 1999, 1998 and
1997...................................................... F-5
Consolidated Statements of Cash Flows For the Years Ended
October 31, 1999, 1998 and 1997........................... F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
Consolidated Condensed Balance Sheets As of January 31, 2000
and October 31, 1999...................................... F-18
Consolidated Condensed Statements of Income (Loss) For the
Three Months Ended January 31, 2000 and 1999.............. F-19
Consolidated Condensed Statements of Cash Flows For the
Three Months Ended January 31, 2000 and 1999.............. F-20
Notes to Consolidated Condensed Financial Statements........ F-21
</TABLE>
F-1
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FuelCell Energy, Inc.
We have audited the accompanying consolidated balance sheets of FuelCell
Energy, Inc, formerly Energy Research Corporation (the "Company") as of October
31, 1999 and 1998, and the related consolidated statements of income (loss),
changes in common shareholders' equity and cash flows for each of the years in
the three-year period ended October 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FuelCell
Energy, Inc. as of October 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
January 28, 2000
Stamford, CT
F-2
<PAGE> 49
FUELCELL ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER
SHARE AMOUNTS)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 6,163 10,304
Accounts receivable....................................... 2,332 3,813
Inventories............................................... 1,204 30
Deferred income taxes..................................... 291 1,073
Other current assets...................................... 405 646
------- ------
Total current assets................................... 10,395 15,866
Property, plant and equipment, net.......................... 7,195 8,347
Other assets, net........................................... 2,241 2,630
------- ------
Total assets........................................... $19,831 26,843
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt......................... $ 341 755
Accounts payable.......................................... 484 620
Accrued liabilities....................................... 1,787 1,758
Deferred license fee income............................... 29 1,329
Customer advances......................................... 550 1,170
------- ------
Total current liabilities.............................. 3,191 5,632
Long-term liabilities:
Long-term debt............................................ 1,625 1,944
Deferred income taxes..................................... -- 177
------- ------
Total liabilities...................................... 4,816 7,753
------- ------
Minority interest........................................... 200 3,220
------- ------
Shareholders' equity:
Convertible preferred stock, Series C ($.01 par value);
30,000 shares outstanding in 1998...................... -- 600
------- ------
Common shareholders' equity:
Common stock, ($.0001 par value); 20,000,000 shares
authorized: 6,325,872 and 6,193,910 shares issued and
outstanding in 1999 and 1998, respectively.............
Additional paid-in capital................................ 14,142 12,943
Retained earnings......................................... 673 2,327
------- ------
Total common shareholders' equity...................... 14,815 15,270
------- ------
Total shareholders' equity............................. 14,815 15,870
------- ------
Total liabilities and shareholders' equity............. $19,831 26,843
======= ======
</TABLE>
The accompanying notes beginning on page F-7 are an integral part of the
consolidated financial statements.
F-3
<PAGE> 50
FUELCELL ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues.................................................. $ 19,965 24,318 24,830
Costs and expenses:
Cost of revenues........................................ 12,422 14,590 15,642
Administrative and selling.............................. 6,615 6,986 6,081
Depreciation............................................ 1,362 1,529 1,768
Research and development................................ 1,813 2,258 1,270
--------- --------- ---------
Total costs and expenses............................. 22,212 25,363 24,761
--------- --------- ---------
Income (loss) from operations............................. (2,247) (1,045) 69
License fee income, net................................... 1,527 678 650
Interest expense.......................................... (169) (269) (354)
Interest and other income, net............................ 195 267 307
--------- --------- ---------
Income (loss) before provision for income taxes........... (694) (369) 672
Provision for income taxes................................ 291 13 247
--------- --------- ---------
Net income (loss)......................................... $ (985) (382) 425
========= ========= =========
Basic earnings (loss) per share........................... $ (0.16) (0.06) 0.07
========= ========= =========
Basic shares outstanding.................................. 6,226,714 6,121,527 5,931,760
========= ========= =========
Diluted earnings (loss) per share......................... $ (0.16) (0.06) 0.07
========= ========= =========
Diluted shares outstanding................................ 6,226,714 6,121,527 6,287,745
========= ========= =========
</TABLE>
The accompanying notes beginning on page F-7 are an integral part of the
consolidated financial statements.
F-4
<PAGE> 51
FUELCELL ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SHARES TOTAL
OF ADDITIONAL COMMON
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
--------- ---------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1996.................... 5,867,680 $11,178 2,284 13,462
Issuance of common stock under benefit plans... 144,932 188 -- 188
Common stock retired........................... (12,179) -- -- --
Conversion of notes payable to common stock.... 542 3 -- 3
Tax effect of disposition of stock options..... -- 91 -- 91
Net income..................................... -- -- 425 425
--------- ------- ----- ------
BALANCE AT OCTOBER 31, 1997.................... 6,000,975 11,460 2,709 14,169
Compensation for stock options granted......... -- 239 -- 239
Issuance of common stock under benefit plans... 22,839 172 -- 172
Common stock retired........................... (3,033) (31) -- (31)
Stock options exercised........................ 173,129 718 -- 718
Tax effect of disposition of stock options..... -- 385 -- 385
Net loss....................................... -- -- (382) (382)
--------- ------- ----- ------
BALANCE AT OCTOBER 31, 1998.................... 6,193,910 12,943 2,327 15,270
Compensation for stock options granted......... -- 133 -- 133
Issuance of common stock under benefit plans... 19,388 138 -- 138
Common stock retired........................... (6,712) (87) -- (87)
Stock options exercised........................ 74,286 415 -- 415
Preferred stock conversion..................... 45,000 600 -- 600
Transfer of net assets to Evercel, Inc......... -- -- (669) (669)
Net loss....................................... -- -- (985) (985)
--------- ------- ----- ------
BALANCE AT OCTOBER 31, 1999.................... 6,325,872 $14,142 673 14,815
========= ======= ===== ======
</TABLE>
The accompanying notes beginning on page F-7 are an integral part of the
consolidated financial statements.
F-5
<PAGE> 52
FUELCELL ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (985) (382) 425
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Compensation for options granted....................... 133 239 --
Depreciation and amortization.......................... 1,770 1,942 2,162
Deferred income taxes.................................. 605 (738) (90)
Conversion of accrued interest to Principal on
long-term debt....................................... -- -- 38
(Gain) loss on disposal of property.................... (15) 6 (1)
(Increase) decrease in operating assets:
Accounts receivable.................................. 1,445 (985) 20
Inventories.......................................... (1,174) 17 25
Other current assets................................. 241 (367) (48)
Increase (decrease) in operating liabilities:
Accounts payable....................................... (136) (245) (367)
Accrued liabilities.................................... 98 1,746 63
Customer advances...................................... (620) -- --
Deferred license fee income............................ (1,300) 1,283 (66)
------- ------ ------
Net cash provided by operating activities............ 62 2,516 2,161
------- ------ ------
Cash flows from investing activities:
Capital expenditures...................................... (1,244) (1,650) (2,801)
Proceeds-sale of marketable securities.................... -- -- 2,025
Proceeds from sale of fixed assets........................ 603 -- --
Payments on other assets.................................. (213) (3) (77)
------- ------ ------
Net cash used in investing activities................ (854) (1,653) (853)
------- ------ ------
Cash flows from financing activities:
Transfer of minority interest to Evercel, Inc. ........... (3,082) -- --
Repayment on long-term debt............................... (733) (1,701) (2,382)
Sale of minority interest in joint venture................ -- 3,220 --
Common stock issued....................................... 466 858 188
Tax effect of stock options exercised..................... -- 262 91
------- ------ ------
Net cash provided by (used in) financing
activities........................................ (3,349) 2,639 (2,103)
------- ------ ------
Net increase (decrease) in cash and cash equivalents........ (4,141) 3,502 (795)
------- ------ ------
Cash and cash equivalents -- beginning of year.............. 10,304 6,802 7,597
------- ------ ------
Cash and cash equivalents -- end of year.................... $ 6,163 10,304 6,802
======= ====== ======
Cash paid during the period for:
Interest.................................................. $ 158 269 344
Income taxes.............................................. 104 620 446
Other non cash transactions:
Conversion of preferred stock............................. 600 -- --
Net assets transferred to Evercel, Inc.................... 669 -- --
</TABLE>
The accompanying notes beginning on page F-7 are an integral part of the
consolidated financial statements.
F-6
<PAGE> 53
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
FuelCell Energy, Inc. (the Company or FCE) is engaged in the development
and commercialization of electrochemical technologies for electric power
generation. The Company manufactures carbonate fuel cells, generally on a
contract basis.
The Company's revenues are generated from customers located throughout the
United States and Europe. The Company generally does not require collateral in
providing credit except for international sales where a deposit may be required
with the purchase orders.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its subsidiary: Xiamen-ERC High Technology Joint Venture, Inc. a 66 2/3%
owned joint venture formed between the Company and the City of Xiamen, PRC.
Cash and Cash Equivalents
Cash equivalents consist primarily of investments in a money market fund
with original maturities of three months or less at date of acquisition. The
Company places its temporary cash investments with high credit quality financial
institutions.
Inventories
Inventories consist principally of raw materials and are stated at the
lower of cost or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation provided on the straight-line method over the estimated useful
lives of the respective assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the lease.
When property is sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations for the period.
Intellectual Property
Intellectual property including patents and know-how is carried at no
value.
Impairment of Long Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
F-7
<PAGE> 54
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue/License Fee Revenue, Recognition
Revenues and fees on long-term contracts, including government and
commercial cost reimbursement contracts, are recognized on the
percentage-of-completion method. Percentage-of-completion is measured by costs
(including applicable general and administrative) incurred and accrued to date
as compared with the estimated total costs for each contract. Contracts
typically extend over a period of one or more years. In accordance with industry
practice, receivables include amounts relating to contracts and programs having
production cycles longer than one year and a portion thereof will not be
realized within one year. Provisions for estimated losses, if any, are made in
the period in which such losses are determined to be probable. The Company
recognized approximately $2,579, $74, and $42 of long-term contract revenues
from corporate shareholders of the Company during fiscal years ended October 31,
1999, 1998 and 1997, respectively.
License fee income arises from license agreements whereby the Company
grants the right to use Company patents and know-how. Amounts are deferred and
recognized ratably over the respective terms of the agreements. The Company
recognized approximately $250, $266 and, $316 of license fee income during each
of the fiscal years ended October 31, 1999, 1998 and 1997, under license
agreements with corporate shareholders of the Company.
Revenues from the U.S. Government and its agencies directly and through
primary contractors were $17,386, $24,221 and $23,377 for the years ended
October 31, 1999, 1998 and 1997, respectively.
Income Taxes
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.
Stock Option Plan
The Company continues to account for its stock option plans in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees, and related interpretations." As
such, compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price.
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
applies the recognition provisions of APB Opinion No. 25 and provides the pro
forma disclosure provisions of SFAS No. 123.
Earnings Per Share (EPS)
Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period.
The computation of diluted EPS is similar to the computation of basic EPS except
that it gives effect to all potentially dilutive instruments that were
outstanding during the period. In 1999 and 1998, the Company computed diluted
EPS without
F-8
<PAGE> 55
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consideration to potentially dilutive instruments due to the loss incurred by
the Company. All per share data and the number of shares of common stock have
been retroactively adjusted to reflect the three-for-two stock dividend which
became effective November 16, 1999.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Recent Accounting Pronouncements
SFAS No. 130 -- During 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. For the Company, comprehensive income is the same
as net income (loss) accordingly separate disclosure of comprehensive income is
not presented.
SFAS No. 133 -- SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" requires that an entity recognize all derivative instruments
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. As amended, this statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company does not expect the adoption of this statement to have a material impact
on its financial position or results of operations because it does not currently
purchase derivative instruments or enter into hedging activities.
During 1998, the American Institute of Certified Public Accountants
("AICPA") released its Statement of Position No. 98-1 ("SOP 98-1") "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" and
Statement of Position No. 98-5 ("SOP 98-5") "Reporting on the Costs of Start-Up
Activities," both of which are effective for fiscal years beginning after
December 15, 1998. SOP 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. SOP 98-1 also requires that the
costs related to the preliminary project stage and the post-implementation stage
of an internal-use computer software development project be expensed as
incurred. SOP 98-5 requires that the costs of start-up activities be expensed as
incurred. SOP 98-5 requires companies to report the initial application of the
standard as a cumulative effect of an accounting change. The Company is required
to adopt these standards in fiscal 2000. Management believes that the adoption
of these standards will not have a material effect on the Company's results.
(2) SPIN-OFF OF EVERCEL, INC., JOINT VENTURES AND LICENSE AGREEMENTS
On February 22, 1999, the Company effected a spin-off to its stockholders
of 100% of the shares of Evercel, Inc. ("Evercel"). The Company had previously
transferred to Evercel the principal assets and liabilities of its battery
business group. The Company distributed to its stockholders in a tax-free
distribution one share of Evercel Common Stock for every three shares of common
stock of the Company held on the record date of February 19, 1999.
In accordance with the License Assistance Agreement between the Company and
Evercel, Evercel has agreed to provide all services and assistance necessary for
Evercel to effectively fulfill, on behalf of the Company, all of the Company's
obligations under the joint venture contract for Xiamen Three Circles-ERC
Battery Corp., Ltd. (the "Joint Venture") and the related license agreement
until such time as the Company obtains the approval from the Chinese partner and
appropriate Chinese governmental authority for the assignment of such agreements
to Evercel. In return for such assistance, the Company will pay to
F-9
<PAGE> 56
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Evercel and Evercel will pay to the Company an amount equal to the sum of all
money, dividends, profits, reimbursements, distributions and payments actually
paid to the Company or paid by the Company in cash or in kind or otherwise
accruing to the Company pursuant to the Joint Venture contract and related
license agreement.
On February 22, 1999, the effective date of the spin-off, the Company
deconsolidated the financial statements of Evercel and the Joint Venture from
the consolidated financial statements of the Company. As part of the spin-off of
Evercel, the Company transferred capital assets (net), prepaid spin-off costs,
accounts receivable and short-term liabilities amounting to $1,228, $501, $36,
and $1,096, respectively.
During 1998 the Company also formed a joint venture with the City of
Xiamen, China, called Xiamen-ERC High Technology Joint Venture, Inc. This joint
venture has been formed to fund other entities, such as Xiamen University, to
conduct research in advanced electrochemical technologies, which will benefit
the Company and Xiamen. The Company has invested $400 of capital into this joint
venture.
(3) ACCOUNTS RECEIVABLE
Accounts receivable at October 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
U.S. Government:
Amount billed............................................. $1,850 382
Unbilled recoverable costs................................ 52 2,361
Retainage................................................. 185 724
------ -----
2,087 3,467
------ -----
Commercial Customers:
Amount billed............................................. 235 56
Unbilled recoverable costs................................ 1 283
Retainage................................................. 9 7
------ -----
245 346
------ -----
$2,332 3,813
====== =====
</TABLE>
Unbilled recoverable costs represent amounts of revenue recognized on costs
incurred on contracts in progress which will be billed within the next 30 days.
The balances billed but not paid by customers pursuant to retainage provisions
in the contracts will be due upon completion of the contracts and acceptance by
the customer.
F-10
<PAGE> 57
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
ESTIMATED
1999 1998 USEFUL LIFE
-------- ------- -----------
<S> <C> <C> <C>
Land............................................... $ 524 524 --
Building and improvements.......................... 4,581 4,508 30 years
Machinery and equipment............................ 14,618 15,121 3-8 years
Furniture and fixtures............................. 1,415 1,409 6-10 years
Construction in progress........................... 527 1,938
-------- -------
21,665 23,500
Less accumulated depreciation and amortization..... (14,470) (15,153)
-------- -------
$ 7,195 8,347
======== =======
</TABLE>
(5) OTHER ASSETS
Other assets at October 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Power Plant License......................................... $1,937 2,221
Other....................................................... 304 409
------ -----
Total..................................................... $2,241 2,630
====== =====
</TABLE>
The Power Plant License is being amortized over 10 years. Accumulated
amortization was $1,658, $1,374, and $1,091 at October 31, 1999, 1998 and 1997,
respectively.
(6) LONG-TERM DEBT
Long-term debt at October 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Note payable(a)............................................. $ 191 774
Note payable(b)............................................. 1,775 1,925
------ -----
1,966 2,699
Less -- current portion................................... (341) (755)
------ -----
Long-term debt, less current portion...................... $1,625 1,944
====== =====
</TABLE>
As of October 31, 1999, the above notes payable mature as follows: fiscal
2000, $341; fiscal 2001, $1,625.
(a) During 1995, the Company entered into a $2,500 credit facility with GE
Capital (formerly MetLife Capital Corporation, an affiliate of Metropolitan Life
Insurance Company). Repayment of this note commenced during 1996 and the
remaining balance of $191 at October 31, 1999 is included in current portion as
this facility expires February 2000.
(b) The note is payable to First Union Bank in monthly installments of $13
plus interest. Interest on this note is payable at LIBOR plus 1.75% or 7.17% at
October 31, 1999 and 7.19% at October 31, 1998.
The borrowings under the First Union Bank agreement are collateralized by a
substantial portion of the Company's equipment and other assets, and a mortgage
is collateralized by a first mortgage on the
F-11
<PAGE> 58
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's Danbury, Connecticut location. The credit agreement associated with
the Notes above require the Company to maintain certain financial covenants,
including tangible net worth, debt service coverage and liabilities to tangible
net worth.
(7) COMMITMENTS AND CONTINGENCIES
The Company leases certain computer and office equipment and the
Torrington, Connecticut manufacturing facility, and office space in Washington,
D.C. under operating leases expiring on various dates through 2004. Rent expense
was $517, $472 and $463 for the fiscal years ended October 31, 1999, 1998 and
1997, respectively. Aggregate minimum annual payments under the lease agreements
for the five years subsequent to October 31, 1999 are: 2000, $510; 2001, $230;
2002, $133; 2003, $117; and 2004, $82.
The Company has an agreement with Electric Power Research Institute (EPRI)
pursuant to which FCE has agreed to pay EPRI royalties based upon commercial
sales of carbonate fuel cells. Through October 31, 1999, the Company has not
paid any royalties to EPRI.
In connection with certain contracts and grants from the United States
Department of Energy (DOE), FCE has agreed to pay DOE 10% of the annual license
income received from MTU-Friedrichshafen GmbH ("MTU"), up to $500. Through 1999,
FCE has paid to DOE a total of $250.
(8) SHAREHOLDERS' EQUITY
In 1999, 30,000 shares of Preferred "C" were converted to 30,000 shares of
the Company's common stock.
At October 31, 1999, 889,253 shares of common stock have been reserved for
issuance pursuant to the Company's stock option plans, and the Company's Section
423 Stock Purchase Plan.
(9) STOCK OPTION PLAN
The board of directors has adopted the 1988 and 1998 Stock Option Plans
(collectively the Plans). Under the terms of the Plans, options to purchase up
to 1,801,500 shares of common stock may be granted to officers, key employees
and directors of the Company. Pursuant to the Plans, the Board is authorized to
grant incentive stock options or nonqualified options and stock appreciation
rights to officers and key employees of the Company and may grant nonqualified
options and stock appreciation rights to directors of the Company. Stock options
and stock appreciation rights have restrictions as to transferability. The
option exercise price shall be fixed by the Board but, in the case of incentive
stock options, shall not be granted at an exercise price less than 100% of the
fair market value of the shares subject to the option on the date the option is
granted. Stock appreciation rights may be granted in conjunction with options
granted under the Plans. Stock options that have been granted are exercisable
commencing one year after grant at the rate of 25% of such shares in each
succeeding year. There were no stock appreciation rights outstanding at October
31, 1999 and 1998.
In 1997, in connection with the hiring of the Company's Chief Executive
Officer, options were granted to purchase 223,500 shares of the Company's common
stock at the purchase price of $6.587 per share (the market value at the date of
the grant). The Company also granted options to purchase an additional 151,500
shares at $6.587 per share based upon the approval of the shareholders at the
1998 annual meeting of the shareholders.
F-12
<PAGE> 59
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The per share weighted-average fair value of stock options granted in 1999,
1998 and 1997 was $8.43, $7.99, and $7.15, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
RISK FREE
DIVIDEND INTEREST RATE EXPECTED VOLATILITY
YEAR RATE RANGE LIFE FACTOR
- ---- -------- ------------- -------- ----------
<S> <C> <C> <C> <C>
1999 0% 5.20-5.34% 10 .6300
years...
1998 0% 4.31-4.43% 10 .5495
years...
1997 0% 6.07-6.66% 10 .5044
years...
</TABLE>
No compensation cost has been recognized for stock options in the
consolidated financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options, the Company's
net income (loss) and earnings (loss) per share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ----
<S> <C> <C> <C>
Net income(loss):
As reported............................................. $ (985) (382) 425
Pro forma............................................... $(1,999) (1,070) 39
Earnings(loss) per share:
As reported -- Basic.................................... $ (0.16) (0.06) 0.07
Pro forma -- Basic...................................... $ (0.32) (0.17) 0.01
As reported -- Diluted.................................. $ (0.16) (0.06) 0.07
Pro forma -- Diluted.................................... $ (0.32) (0.17) 0.01
</TABLE>
The following table summarizes the Plan's activity for the years ended
October 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES OPTION PRICE
--------- ----------------
<S> <C> <C>
Outstanding at October 31, 1996........................... 434,850 $3.39
Granted................................................. 328,500 $7.07
Exercised............................................... (136,848) $1.23
--------
Outstanding at October 31, 1997........................... 626,502 $5.79
Granted................................................. 226,500 $7.28
Exercised............................................... (172,903) $4.17
Cancelled............................................... (4,500) $8.17
--------
Outstanding at October 31, 1998........................... 675,599 $6.47
Granted................................................. 154,692 $6.11
Exercised............................................... (74,288) $5.60
Cancelled............................................... (4,500) $8.17
--------
Outstanding at October 31, 1999........................... 751,503 $6.25
========
</TABLE>
F-13
<PAGE> 60
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at October 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.52 45,842 0.9 years $2.52 45,842 $2.52
$5.46 - $7.28 705,661 7.7 years $6.50 353,494 $6.38
</TABLE>
The shareholders of the Company adopted a Section 423 Stock Purchase Plan
on April 30, 1993 and was last amended on October 6, 1999. The total shares
allocated to the Plan are 225,000. The shares are offered to employees over an
eight-year period commencing January 1, 1993. It allows an employee with one
year of service to purchase up to 450 shares per year at 85% of the lower of the
average price on the day of grant or issue. An employee may not sell the stock
for six months after the date of issue.
Plan activity for the years ended October 31, 1999, 1998 and 1997, was as
follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Balance at October 31, 1996................................. 188,060
Issued @ $6.88............................................ (1,614)
Issued @ $5.70............................................ (6,470)
-------
Balance at October 31, 1997................................. 179,976
Issued @ $5.70............................................ (10,496)
Issued @ $9.10............................................ (12,343)
-------
Balance at October 31, 1998................................. 157,137
Issued @ $7.37............................................ (2,400)
Issued @ $6.18............................................ (1,950)
Issued @ $7.23............................................ (15,037)
-------
Balance at October 31, 1999................................. 137,750
=======
</TABLE>
(10) EMPLOYEE BENEFITS
The Capital Accumulation Plan for employees of FuelCell Energy, Inc. was
established by the Company on January 19, 1987 and was last amended on June 1,
1997. The Plan is administered by a three-member pension committee. The plan is
a 401(k) plan covering full-time employees of the Company who have completed one
year of service. The Company contributes an amount equal to 5% of each
participant's W-2 compensation to the plan on a monthly basis. Participants are
required to contribute 3% and may make voluntary contributions up to an
additional 7% of W-2 compensation out of pretax earnings. Effective June 1,
1997, participants may make voluntary contributions up to an additional 6% of
W-2 compensation out of after-tax earnings. The Company charged $402, $435, and
$412 to expense during the years ended October 31, 1999, 1998 and 1997,
respectively.
The FuelCell Energy, Inc. Pension Plan, a defined contribution plan was
established by the Company on May 10, 1976 and was last amended on June 1, 1997.
The Plan covers full-time employees of the Company who have completed one year
of service. The Company contributes an amount equal to 4% effective April 1,
1993 (previously 5%) of each participant's W-2 compensation to the plan on a
monthly
F-14
<PAGE> 61
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis. The Company charged $312, $343 and $346 to expense during the years ended
October 31, 1999, 1998 and 1997, respectively.
(11) INCOME TAXES
The components of Federal income tax expense (benefit) were as follows for
the years ended October 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................... $(188) 122 327
Foreign................................................... -- 460 10
----- ---- ---
(188) 582 337
----- ---- ---
Deferred:
Federal................................................... 479 (569) (90)
Foreign................................................... -- -- --
----- ---- ---
479 (569) (90)
----- ---- ---
Total income tax expense............................... $ 291 13 247
===== ==== ===
</TABLE>
The components of state income tax expense which are included in
administrative and selling expenses were as follows for the years ended October
31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current..................................................... $ 48 227 148
Deferred.................................................... 126 (169) (9)
---- ---- ---
Total state income tax expense......................... $174 58 139
==== ==== ===
</TABLE>
The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate for the years ended October 31, 1999, 1998
and 1997 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Statutory Federal Income tax rate........................... (34.0)% (34.0)% 34.0%
Nondeductible expenditures.................................. 17.4 34.8 --
Other, net.................................................. .9 2.8 2.7
Valuation Allowance......................................... 57.6 -- --
----- ----- ----
Effective income tax rate................................... 41.9% 3.6% 36.7%
===== ===== ====
</TABLE>
F-15
<PAGE> 62
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's federal and state deferred tax assets and liabilities
consisted of the following at October 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Deferred tax assets:
Bad debt.................................................. $ 31 --
Deferred revenue.......................................... -- 573
Compensation recognized on options........................ 183 121
Incentive bonuses......................................... 189 150
Capital loss carryforward................................. 24 24
Vacation accrual.......................................... 50 34
Self-insurance............................................ 50 53
Tax credit carryforwards.................................. 590 140
Other..................................................... 14 26
------ -----
Gross deferred tax assets................................... 1,131 1,121
Valuation allowance....................................... (573) (24)
------ -----
Deferred tax assets after valuation allowance............... 558 1,097
------ -----
Deferred liability -
Accumulated depreciation.................................. (267) (201)
------ -----
Gross deferred tax liability.............................. (267) (201)
------ -----
Net deferred tax assets..................................... $ 291 896
====== =====
</TABLE>
The valuation allowance increased by $549 and relates to foreign tax credit
and state net operating loss carryforwards that management believes more likely
than not will expire unutilized.
The Company has foreign tax credits of approximately $400 available for
carryforward which expire in 2002-2003. The Company has state net operating loss
carryforwards of approximately $1.4 million which expire in 2004.
(12) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
data:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average basic Common shares.............. 6,226,714 6,121,527 5,931,760
Effect of dilutive securities.....................
Stock options................................... -- -- 205,985
Preferred "C" Convertible....................... -- -- 45,000
Convertible debt................................ -- -- 105,000
--------- --------- ---------
Weighted average basic common shares adjusted for
diluted calculations............................ 6,226,714 6,121,527 6,287,745
========= ========= =========
</TABLE>
The computation of diluted loss per share for fiscal years 1999 and 1998
follows the basic calculation since common stock equivalents were antidilutive.
The weighted average shares of dilutive securities that would have been used to
calculate diluted EPS had their effect not been antidilutive are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Stock options............................................... 729,875 522,720
</TABLE>
F-16
<PAGE> 63
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) SUBSEQUENT EVENTS
On November 16, 1999, the Company paid a stock dividend of one additional
share of common stock for every two shares of the Company's Common Stock held on
November 1, 1999, the record date. All per share data and the number of shares
of common stock have been adjusted retroactively to give effect to the stock
dividend.
F-17
<PAGE> 64
FUELCELL ENERGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JANUARY 31, 2000 AND OCTOBER 31, 1999
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE
AMOUNTS)
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 6,478 6,163
Accounts receivable....................................... 2,322 2,332
Inventories............................................... 1,235 1,204
Deferred income taxes..................................... 289 291
Other current assets...................................... 749 405
------- ------
Total current assets................................... 11,073 10,395
Property, plant and equipment, net........................ 6,935 7,195
Other assets, net......................................... 2,103 2,241
------- ------
Total assets........................................... $20,111 19,831
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt......................... $ 198 341
Accounts payable.......................................... 507 484
Accrued liabilities....................................... 1,891 1,787
Deferred license fee income............................... 263 29
Customer advances......................................... 550 550
------- ------
Total current liabilities.............................. 3,409 3,191
Long-term debt.............................................. 1,588 1,625
------- ------
Total liabilities........................................... 4,997 4,816
------- ------
Minority interest........................................... 200 200
------- ------
Common shareholders' equity:
Common stock, ($.0001 par value); 20,000,000 shares
authorized: 6,378,757 and 6,325,872 shares issued and
outstanding at January 31, 2000 and October 31,1999,
respectively........................................... -- --
Additional paid-in capital................................ 14,236 14,142
Retained earnings......................................... 678 673
------- ------
Total shareholders' equity............................. 14,914 14,815
------- ------
Total liabilities and shareholders' equity............. $20,111 19,831
======= ======
</TABLE>
The accompanying notes beginning on page F-21 are an integral part of these
financial statements.
F-18
<PAGE> 65
FUELCELL ENERGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 3,600 6,284
Costs and expenses:
Cost of revenues.......................................... 1,965 4,355
Administrative and selling................................ 670 1,361
Depreciation.............................................. 385 330
Research and development.................................. 671 823
--------- ---------
3,691 6,869
--------- ---------
Loss from operations........................................ (91) (585)
License fee income, net (includes income from related
parties of $58 and $62 for the three months ended January
31, 2000 and 1999, respectively).......................... 63 (16)
Interest expense............................................ (37) (53)
Interest and other income, net.............................. 72 65
--------- ---------
Income(loss) before provision for income taxes............ 7 (589)
Provision for (benefit from) income taxes................... 2 (241)
--------- ---------
Net income (loss)........................................... $ 5 (348)
========= =========
Basic earnings (loss) per share............................. $ .00 (.06)
========= =========
Basic shares outstanding.................................... 6,332,898 6,247,488
========= =========
Diluted earnings (loss) per share........................... $ .00 (.06)
========= =========
Diluted shares outstanding.................................. 6,745,827 6,247,488
========= =========
</TABLE>
The accompanying notes beginning on page F-21 are an integral part of these
financial statements.
F-19
<PAGE> 66
FUELCELL ENERGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 5 (348)
Adjustments to reconcile net income (loss) to net cash
provided by/(used in) operating activities:
Compensation for options granted.......................... 33 33
Depreciation and amortization............................. 526 433
Deferred income taxes..................................... 2 --
Changes in operating assets and liabilities:
Accounts receivable.................................... 10 (1,404)
Inventories............................................ (31) (236)
Other current assets................................... (344) (91)
Accounts payable....................................... 23 28
Accrued liabilities.................................... 104 1,102
Deferred license fee income............................ 234 263
------ ------
Net cash provided by (used in) operating
activities.......................................... 562 (220)
------ ------
Cash flows from investing activities:
Capital expenditures...................................... (128) (412)
Payments on other assets.................................. -- (23)
------ ------
Net used in investing activities..................... (128) (435)
------ ------
Cash flows from financing activities:
Proceeds from short term debt............................... -- 821
Repayment of debt........................................... (180) (190)
Common stock issued......................................... 61 57
------ ------
Net cash provided by(used in) financing activities... (119) 688
------ ------
Net increase(decrease) in cash and cash equivalents......... 315 33
Cash and cash equivalents, beginning of period.............. 6,163 10,304
------ ------
Cash and cash equivalents, end of period.................... $6,478 10,337
====== ======
Supplemental disclosure of cash paid during the period for:
Interest.................................................. $ 26 54
Income taxes.............................................. 3 100
</TABLE>
The accompanying notes beginning on page F-21 are an integral part of these
financial statements.
F-20
<PAGE> 67
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements for FuelCell
Energy Inc. (the "Company"), have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position of the Company as of January
31, 2000 and the results of operations for the three months ended January 31,
2000 and 1999 and cash flows for such three month periods have been included.
Information included in the Consolidated Condensed Balance Sheet as of
October 31, 1999 has been derived from audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended October 31, 1999
("1999 10-K"), but does not include all disclosures required by generally
accepted accounting principles.
The results of operations for the three months ended January 31, 2000 and
1999 are not necessarily indicative of the results to be expected for the full
year.
The reader should supplement the information in this document with prior
disclosures in the 1999 10-K.
On November 16, 1999, the Company paid a stock dividend of one additional
share of common stock for every two shares of the Company's common stock held on
November 1, 1999, the record date. All per share data and the number of shares
of common stock have been adjusted retroactively to give effect to the stock
dividend.
In accordance with the License Assistance Agreement between the Company and
Evercel, Inc. ("Evercel"), Evercel has agreed to provide all services and
assistance necessary to effectively fulfill on behalf of the Company all of the
Company's obligations under the joint venture contract for Xiamen Three
Circles -- ERC Battery Corp., Ltd. (the "Joint Venture") and the related license
agreement until such time as the Company obtains the approval from the Chinese
partner and appropriate Chinese governmental authority for the assignment of
such agreements to Evercel. In return for such assistance, the Company will pay
to Evercel and Evercel will pay to the Company an amount equal to the sum of all
money, dividends, profits, reimbursements, distributions and payments actually
paid to the Company or paid by the Company in cash or in kind or otherwise
accruing to the Company pursuant to the Joint Venture contract and related
license agreement.
F-21
<PAGE> 68
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(2) EARNINGS PER SHARE
Basic and diluted earnings (loss) per share are calculated based upon the
following data:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JANUARY 31,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Weighted average basic
Common Shares............................................... 6,332,898 6,247,488
Effect of dilutive securities
Stock options............................................... 412,929 --
--------- ---------
Weighted Average Basic
Common Shares Adjusted for diluted calculation.............. 6,745,827 6,247,488
========= =========
</TABLE>
The computation of diluted loss per share for the first quarter of 1999
follows the basic calculation since common stock equivalents were antidilutive.
The weighted average number of options outstanding for the period ended January
31, 1999 was 670,080.
F-22
<PAGE> 69
[PICTURE OF 250kW FUEL CELL]
250kW Plant, Powering Danbury Headquarters Since February 1999
Fuel: Natural Gas
Hours in Operation: 9,000
Electricity Produced: 1,400,000 kWh
<PAGE> 70
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,300,000 SHARES
[FUELCELL ENERGY LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
CIBC WORLD MARKETS
FAC/EQUITIES
LAZARD FRERES & CO. LLC
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses payable in connection
with the sale of the securities being registered, other than underwriting
discounts. All of the amounts shown are estimates, except the SEC registration
fee, the American Stock Exchange listing fee, and the filing fee with the
National Association of Securities Dealers, Inc.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 25,840
American Stock Exchange listing fee......................... $ 17,500
NASD filing fee............................................. $ 10,288
Printing and engraving expenses............................. $150,000
Accountants' fees and expenses.............................. $ 70,000
Legal fees and expenses..................................... $175,000
Blue sky qualification fees and expenses.................... $ 5,000
Miscellaneous............................................... $ 46,372
--------
Total..................................................... $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person, including an officer or director, who was
or is, or is threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, 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 such corporation, and, with respect to any criminal actions and
proceedings, had no reasonable cause to believe that his conduct was unlawful. A
Delaware corporation may indemnify any person, including an officer or director,
who was or is, or is threatened to be made, a party to any threatened, pending
or contemplated action or suit by or in the right of such corporation, under the
same conditions, except that no indemnification is permitted without judicial
approval if such person is adjudged to be liable to such corporation. Where an
officer or director of a corporation is successful, on the merits or otherwise,
in the defense of any action, suit or proceeding referred to above, or any
claim, issue or matter therein, the corporation must indemnify such person
against the expenses (including attorneys' fees) which such officer or director
actually and reasonably incurred in connection therewith.
The registrant's Certificate of Incorporation provides that none of our
directors will be personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director, except to the extent such
exemption from liability or limitation thereof is not permitted under the
Delaware General Corporation Law as currently in effect or as the same may
hereafter be amended.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law, the
registrant's Certificate of Incorporation eliminates the liability of our
directors to us or our stockholders, except for liabilities related to breach of
duty of loyalty, actions not in good faith and certain other liabilities.
II-1
<PAGE> 72
The registrant maintains directors' and officers' liability insurance
policies. The registrant's by-laws provide for indemnification of the
registrant's officers and directors to the fullest extent permitted by
applicable law.
The purchase agreement to be entered into by the registrant and the
underwriters will contain certain provisions for the indemnification of, among
others, our directors, officers who sign this registration statement and
controlling persons for certain liabilities.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S>
1.1 Form of Purchase Agreement
4.1 Certificate of Incorporation of the registrant, as amended
(incorporated by reference to Exhibit 3.1 contained in the
registrant's Current Report on Form 8-K dated September 21,
1999)
4.2 Restated By-Laws of the registrant, dated July 13, 1999
(incorporated by reference to Exhibit 3.2 contained in the
registrant's Current Report on Form 8-K dated September 21,
1999)
4.3 Specimen of Common Share Certificate (incorporated by
reference to Exhibit 4 contained in the registrant's Annual
Report on Form 10-K for the fiscal year ended October 31,
1999)
5.1 Opinion of Robinson & Cole LLP
23.1 Consent of Robinson & Cole LLP (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
24.1 Power of Attorney (included on signature page of
registration statement)*
</TABLE>
- ---------------
* Previously filed
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(a) for purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to Sections
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement 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;
(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 foregoing provisions,
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 Act 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 Act and will be governed by the final
adjudication of such issue;
(c)(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
II-2
<PAGE> 73
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 shall be deemed to be part of this registration statement as of the
time it was declared effective; and
(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> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Danbury, State of Connecticut on the 31st day of
March, 2000.
FUELCELL ENERGY, INC.
/s/ JERRY D. LEITMAN
--------------------------------------
Jerry D. Leitman, Chief Executive
Officer, President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------- -------- ----
<C> <S> <C>
* Chief Executive Officer, March 31, 2000
- --------------------------------------------------- President, Director
Jerry D. Leitman (Principal Executive Officer)
* Chief Financial Officer, Vice March 31, 2000
- --------------------------------------------------- President, Corporate
Joseph G. Mahler Secretary, Treasurer
(Principal Accounting and
Financial Officer)
* Director March 31, 2000
- ---------------------------------------------------
Warren D. Bagatelle
* Director March 31, 2000
- ---------------------------------------------------
Christopher R. Bentley
* Director March 31, 2000
- ---------------------------------------------------
Michael Bode
* Director March 31, 2000
- ---------------------------------------------------
James D. Gerson
* Director March 31, 2000
- ---------------------------------------------------
Thomas L. Kempner
* Director March 31, 2000
- ---------------------------------------------------
William A. Lawson
</TABLE>
<PAGE> 75
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------- -------- ----
<C> <S> <C>
* Director March 31, 2000
- ---------------------------------------------------
Hansraj C. Maru
* Director March 31, 2000
- ---------------------------------------------------
Bernard S. Baker
* Director March 31, 2000
- ---------------------------------------------------
John A. Rolls
Director
- ---------------------------------------------------
Thomas R. Casten
*By:/s/ JOSEPH G. MAHLER
------------------------------------------
Joseph G. Mahler
Attorney-in-fact
</TABLE>
<PAGE> 76
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S>
1.1 Form of Purchase Agreement
4.1 Certificate of Incorporation of the registrant, as amended,
(incorporated by reference to Exhibit 3.1 contained in the
registrant's Current Report on Form 8-K dated September 21,
1999)
4.2 Restated By-Laws of the registrant, dated July 13, 1999
(incorporated by reference to Exhibit 3.2 contained in the
registrant's Current Report on Form 8-K dated September 21,
1999)
4.3 Specimen of Common Share Certificate (incorporated by
reference to Exhibit 4 contained in the registrant's Annual
Report on Form 10-K for the fiscal year ended October 31,
1999)
5.1 Opinion of Robinson & Cole LLP
23.1 Consent of Robinson & Cole LLP (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
24.1 Power of Attorney (included on signature page of
registration statement)*
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
Exhibit 1.1
FUELCELL ENERGY, INC.
(a Delaware corporation)
1,300,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: April __, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1. Representations and Warranties................................................................. 3
(a) Representations and Warranties by the Company.................................................. 3
(i) Compliance with Registration Requirements............................................. 3
(ii) Incorporated Documents................................................................ 3
(iii) Independent Accountants............................................................... 4
(iv) Financial Statements.................................................................. 4
(v) Subsidiaries; Equity Interests........................................................ 4
(vi) No Material Adverse Change in Business................................................ 4
(vii) Good Standing of the Company.......................................................... 4
(viii) Capitalization........................................................................ 5
(ix) Authorization of Agreement............................................................ 5
(x) Authorization and Description of Securities........................................... 5
(xi) Absence of Defaults and Conflicts..................................................... 5
(xii) Absence of Labor Dispute.............................................................. 6
(xiii) Absence of Proceedings................................................................ 6
(xiv) Accuracy of Exhibits.................................................................. 6
(xv) Possession of Intellectual Property................................................... 6
(xvi) Absence of Further Requirements....................................................... 7
(xvii) Possession of Licenses and Permits.................................................... 7
(xviii) Title to Property..................................................................... 7
(xix) Investment Company Act................................................................ 8
(xx) Environmental Laws.................................................................... 8
(b) Officer's Certificates......................................................................... 8
SECTION 2. Sale and Delivery to Underwriters; Closing..................................................... 8
(a) Initial Securities............................................................................. 8
(b) Option Securities.............................................................................. 8
(c) Payment........................................................................................ 9
(d) Denominations; Registration.................................................................... 9
SECTION 3. Covenants of the Company...................................................................... 10
(a) Compliance with Securities Regulations and Commission Requests................................ 10
(b) Filing of Amendments.......................................................................... 10
(c) Delivery of Registration Statements........................................................... 10
(d) Delivery of Prospectuses...................................................................... 11
(e) Continued Compliance with Securities Laws..................................................... 11
(f) Blue Sky Qualifications....................................................................... 11
(g) Rule 158...................................................................................... 11
(h) Use of Proceeds............................................................................... 12
(i) Listing....................................................................................... 12
(j) Restriction on Sale of Securities............................................................. 12
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
(k) Reporting Requirements........................................................................ 12
SECTION 4. Payment of Expenses........................................................................... 12
(a) Expenses...................................................................................... 12
(b) Termination of Agreement...................................................................... 13
SECTION 5. Conditions of Underwriters' Obligations....................................................... 13
(a) Effectiveness of Registration Statement....................................................... 13
(b) Opinion of Counsel for Company................................................................ 13
(c) Opinion of Counsel for Underwriters........................................................... 13
(d) Officers' Certificate......................................................................... 14
(e) Accountant's Comfort Letter................................................................... 14
(f) Bring-down Comfort Letter..................................................................... 14
(g) Approval of Listing........................................................................... 14
(h) No Objection.................................................................................. 14
(i) Lock-up Agreements............................................................................ 15
(j) Conditions to Purchase of Option Securities................................................... 15
(k) Additional Documents.......................................................................... 15
(l) Termination of Agreement...................................................................... 15
SECTION 6. Indemnification............................................................................... 16
(a) Indemnification of Underwriters............................................................... 16
(b) Indemnification of Company, Directors and Officers............................................ 17
(c) Actions against Parties; Notification......................................................... 17
(d) Settlement without Consent if Failure to Reimburse............................................ 17
SECTION 7. Contribution.................................................................................. 18
SECTION 8. Representations, Warranties and Agreements to Survive Delivery................................ 19
SECTION 9. Termination of Agreement...................................................................... 19
(a) Termination; General.......................................................................... 19
(b) Liabilities................................................................................... 19
SECTION 10. Default by One or More of the Underwriters.................................................... 19
SECTION 11. Notices....................................................................................... 20
SECTION 12. Parties....................................................................................... 20
SECTION 13. Governing Law and Time........................................................................ 21
SECTION 14. Effect of Headings............................................................................ 21
</TABLE>
ii
<PAGE> 4
FUELCELL ENERGY, INC.
(a Delaware corporation)
1,300,000 Shares of Common Stock
(Par Value $.0001 Per Share)
PURCHASE AGREEMENT
April __, 2000
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
CIBC World Markets Corp.
FAC/Equities, a division of
First Albany Corporation
Lazard Freres & Co. LLC
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
FuelCell Energy, Inc., a Delaware corporation (the "Company"), confirms
its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters," which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, CIBC World Markets Corp., FAC/Equities, a
division of First Albany Corporation, and Lazard Freres & Co. LLC are acting as
representatives (in such capacity, the "Representatives"), with respect to the
issuance and sale by the Company and the purchase by the Underwriters, acting
severally and not jointly, of the respective number of shares of Common Stock,
par value $.0001 per share, of the Company (the "Common Stock") set forth in
said Schedule A, and with respect to the grant by the Company to the
Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of 195,000 additional shares of
Common Stock to cover over-allotments, if any. The aforesaid 1,300,000 shares of
Common Stock (the "Initial Securities") to be purchased by the Underwriters and
all or any part of the 195,000 shares of Common Stock subject to the option
described in Section 2(b) hereof (the "Option Securities") are hereinafter
called, collectively, the "Securities."
<PAGE> 5
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-32972) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations, or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits and schedules thereto, if any, and the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the 1933 Act, at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing, the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
prospectus, including the documents incorporated by reference therein pursuant
to Item 12 of Form S-3 under the 1933 Act, in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated March __, 2000 together with the Term
Sheet, and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. For purposes of this Agreement, all references
to the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to mean and include the filing of
any document under the Securities Exchange Act of
2
<PAGE> 6
1934, as amended (the "1934 Act"), which is incorporated by reference in the
Registration Statement, such preliminary prospectus or the Prospectus, as the
case may be.
SECTION 1. Representations and Warranties. (a) Representations and
Warranties by the Company. The Company represents and warrants to each
Underwriter as of the date hereof, as of the Closing Time referred to in Section
2(c) hereof, and as of each Date of Delivery, if any, referred to in Section
2(b) hereof, and agrees with each Underwriter, as follows:
(i) Compliance with Registration Requirements. The
Company meets the requirements for use of Form S-3 under the 1933 Act.
Each of the Registration Statement and any Rule 462(b) Registration
Statement has become effective under the 1933 Act and no stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective, and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments
and supplements thereto complied and will comply in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations and did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
Neither the Prospectus nor any amendments or supplements thereto, at
the time the Prospectus or any such amendment or supplement was issued,
and at the Closing Time (and, if any Option Securities are purchased,
at the Date of Delivery), included or will include an untrue statement
of a material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations, and each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Incorporated Documents. The documents incorporated
or deemed to be incorporated by reference in the Registration Statement
and the Prospectus, when they
3
<PAGE> 7
became effective or at the time they were or hereafter are filed with
the Commission, complied and will comply in all material respects with
the requirements of the 1934 Act and the rules and regulations of the
Commission thereunder (the "1934 Act Regulations"), as applicable, and,
when read together with the other information in the Prospectus, at the
time the Registration Statement became effective, at the time the
Prospectus was issued, and at the Closing Time (and if any Option
Securities are purchased, at the Date of Delivery), did not and will
not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(iii) Independent Accountants. The accountants who
certified the financial statements and supporting schedules, if any,
included in the Registration Statement are independent public
accountants as required by the 1933 Act and the 1933 Act Regulations.
(iv) Financial Statements. The financial statements
included in the Registration Statement and the Prospectus, together
with the related schedules and notes, present fairly the financial
position of the Company and its consolidated subsidiary at the dates
indicated and the statement of operations, stockholders' equity and
cash flows of the Company and its consolidated subsidiary for the
periods specified; said financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved. The
supporting schedules, if any, included in the Registration Statement
present fairly, in accordance with GAAP, the information required to be
stated therein. The selected financial data and the summary financial
information included in the Prospectus present fairly the information
shown therein and have been compiled on a basis consistent with that of
the audited financial statements included in the Registration
Statement.
(v) Subsidiaries; Equity Interests. The only subsidiary
of the Company is Xiamen-ERC High Technology Joint Venture, Inc., a
66 2/3% owned joint venture formed between the Company and the City of
Xiamen, People's Republic of China ("Xiamen"). Except for Xiamen, the
Company does not have any equity interest in any person or entity.
(vi) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of the Company and Xiamen, considered as one enterprise,
whether or not arising in the ordinary course of business (a "Material
Adverse Effect"), (B) there have been no transactions entered into by
the Company or Xiamen, other than those in the ordinary course of
business, which are material with respect to the Company and Xiamen,
considered as one enterprise, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.
(vii) Good Standing of the Company. The Company has been
duly organized and is validly existing as a corporation in good
standing under the laws of the
4
<PAGE> 8
State of Delaware and has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus and to enter into and perform its obligations under this
Agreement; and the Company is duly qualified as a foreign corporation
to transact business and is in good standing in each other jurisdiction
in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except
where the failure to so qualify or to be in good standing would not
result in a Material Adverse Effect.
(viii) Capitalization. The authorized, issued and
outstanding capital stock of the Company is as set forth in the
Prospectus in the column entitled "Actual" under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to
this Agreement, pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise
of options referred to in the Prospectus). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any
securityholder of the Company.
(ix) Authorization of Agreement. This Agreement has been
duly authorized, executed and delivered by the Company.
(x) Authorization and Description of Securities. The
Securities have been duly authorized by the Company for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued
and delivered by the Company pursuant to this Agreement against payment
of the consideration set forth herein, will be validly issued, fully
paid and non-assessable; the Common Stock conforms to all statements
relating thereto contained in the Prospectus and such description
conforms to the rights set forth in the instruments defining the same;
no holder of the Securities will be subject to personal liability by
reason of being such a holder; and the issuance of the Securities is
not subject to the preemptive or other similar rights of any
securityholder of the Company.
(xi) Absence of Defaults and Conflicts. Neither the
Company nor Xiamen is in violation of its charter, by-laws or similar
organizational documents or in default in the performance or observance
of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company or
Xiamen is a party or by which the Company or Xiamen may be bound, or to
which any of the property or assets of the Company or Xiamen is subject
(collectively, the "Agreements and Instruments"), except for such
defaults that would not result in a Material Adverse Effect; except as
contemplated by clauses (xv) and (xx) of this Section 1(a), neither the
Company nor Xiamen is in violation of any law, ordinance,
administrative or governmental rule or regulation or court decree
applicable to them, except for such violations that would not result in
a Material Adverse Effect; and the execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated
hereby and by the Registration Statement (including the issuance and
sale of the Securities and the use of the proceeds from the sale of the
Securities as described
5
<PAGE> 9
in the Prospectus under the caption "Use of Proceeds") and compliance
by the Company with its obligations hereunder have been duly authorized
by all necessary corporate action and do not and will not, whether with
or without the giving of notice or passage of time or both, conflict
with or constitute a breach of, or default or Repayment Event (as
defined below) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
or Xiamen pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not result in a Material Adverse Effect), nor will such action
result in any violation of the provisions of the charter, by-laws or
similar organizational documents of the Company or Xiamen or any
applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or Xiamen or any of
their assets, properties or operations. As used herein, a "Repayment
Event" means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption
or repayment of all or a portion of such indebtedness by the Company or
Xiamen.
(xii) Absence of Labor Dispute. No labor dispute with
the employees of the Company or Xiamen exists or, to the knowledge of
the Company, is imminent, and the Company is not aware of any existing
or imminent labor disturbance by the employees of any of its principal
suppliers, manufacturers, customers or contractors which, in either
case, may reasonably be expected to result in a Material Adverse
Effect.
(xiii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened against or affecting the
Company or Xiamen, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect
the properties or assets of the Company or Xiamen or the consummation
of the transactions contemplated by this Agreement or the performance
by the Company of its obligations hereunder; the aggregate of all
pending legal or governmental proceedings to which the Company or
Xiamen is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business of the Company or Xiamen, could not reasonably be expected to
result in a Material Adverse Effect.
(xiv) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement, the Prospectus or the documents incorporated by reference
therein or to be filed as exhibits thereto which have not been so
described and filed as required.
(xv) Possession of Intellectual Property. The Company
owns or possesses, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
6
<PAGE> 10
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, the "Intellectual Property") necessary to carry on the
business now operated by it, and as proposed to be operated by it as
described in the Prospectus, and the Company has not received any
notice or is otherwise aware of any infringement of or conflict with
asserted rights of others with respect to any Intellectual Property or
of any facts or circumstances which would render any Intellectual
Property invalid or inadequate to protect the interest of the Company
therein, and which infringement or conflict (if the subject of any
unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.
(xvi) Absence of Further Requirements. No filing with,
or authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required in connection with the due
authorization, execution and delivery of this Agreement, the offering,
issuance or sale of the Securities hereunder, the consummation of the
transactions contemplated by this Agreement or for the performance by
the Company of its obligations hereunder, except such as have been
already obtained or as may be required under the 1933 Act, the 1933 Act
Regulations or state securities laws.
(xvii) Possession of Licenses and Permits. The Company
and Xiamen possess such permits, licenses, approvals, consents and
other authorizations (collectively, the "Governmental Licenses") issued
by the appropriate federal, state, local or foreign regulatory agencies
or bodies necessary to conduct the business now operated by them; the
Company and Xiamen are in compliance with the terms and conditions of
all such Governmental Licenses, except where the failure to so comply
would not, singly or in the aggregate, have a Material Adverse Effect;
all of the Governmental Licenses are valid and in full force and
effect, except where the invalidity of such Governmental Licenses or
the failure of such Governmental Licenses to be in full force and
effect would not have a Material Adverse Effect; and neither the
Company nor Xiamen has received any notice of proceedings relating to
the revocation or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a Material Adverse Effect.
(xviii)Title to Property. The Company has good and
marketable title to all real property owned by the Company and good
title to all other properties owned by it, in each case, free and clear
of all mortgages, pledges, liens, security interests, claims,
restrictions or encumbrances of any kind, except such as (a) are
described in the Prospectus or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company;
and all of the leases and subleases material to the business of the
Company, and under which the Company holds properties described in the
Prospectus, are in full force and effect, and the Company has not
received any notice of any material claim of any sort that has been
asserted by anyone adverse to the rights of the Company under any of
the leases or subleases mentioned above, or affecting or questioning
the rights of the Company to the continued possession of the leased or
subleased premises under any such lease or sublease.
7
<PAGE> 11
(xix) Investment Company Act. The Company is not, and
upon the issuance and sale of the Securities as hereby contemplated and
the application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the
Registration Statement, and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor Xiamen is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of
common law or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent, decree or
judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes,
toxic substances, hazardous substances, petroleum or petroleum products
(collectively, the "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Hazardous Materials (collectively, the "Environmental
Laws"), (B) the Company and Xiamen have all permits, authorizations and
approvals required under any applicable Environmental Laws and are each
in compliance with their requirements, (C) there are no pending or
threatened administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental
Laws against the Company or Xiamen, and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by
any private party or governmental body or agency, against or affecting
the Company or Xiamen relating to Hazardous Materials or any
Environmental Laws.
(b) Officer's Certificates. Any certificate signed by any officer of
the Company delivered to the Representatives or to counsel for the Underwriters
shall be deemed a representation and warranty by the Company to each Underwriter
as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing. (a) Initial
Securities. On the basis of the representations and warranties herein contained
and subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to each Underwriter, and each Underwriter agrees to purchase from
the Company, severally and not jointly, at the price per share set forth in
Schedule B, the number of Initial Securities set forth in Schedule A opposite
the name of such Underwriter, plus any additional number of Initial Securities
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 10 hereof.
(b) Option Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company hereby grants an option to the Underwriters, severally and
not jointly, to purchase up to an additional 195,000 shares of Common Stock at
the price per share set forth in Schedule B, less an amount per share equal to
any dividends or distributions declared by the Company and payable on the
Initial
8
<PAGE> 12
Securities but not payable on the Option Securities. The option hereby granted
will expire 30 days after the date hereof and may be exercised in whole or in
part, from time to time, only for the purpose of covering over-allotments which
may be made in connection with the offering and distribution of the Initial
Securities, upon notice by the Representatives to the Company, setting forth the
number of Option Securities as to which the several Underwriters are then
exercising the option and the time and date of payment and delivery for such
Option Securities. Any such time and date of delivery (a "Date of Delivery")
shall be determined by the Representatives, but shall be no later than seven
full business days after the exercise of said option, nor, in any event, prior
to the Closing Time, as hereinafter defined. If the option is exercised as to
all or any portion of the Option Securities, each of the Underwriters, acting
severally and not jointly, will purchase that proportion of the total number of
Option Securities then being purchased which the number of Initial Securities
set forth in Schedule A opposite the name of such Underwriter bears to the total
number of Initial Securities, subject in each case to such adjustments as the
Representatives in their discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Winthrop, Stimson, Putnam & Roberts, One Battery Park Plaza, New York, New York
10004, or at such other place as shall be agreed upon by the Representatives and
the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing
occurs after 4:30 P.M. (Eastern time) on any given day) business day after the
date hereof (unless postponed in accordance with the provisions of Section 10
hereof), or such other time not later than ten business days after such date as
shall be agreed upon by the Representatives and the Company (such time and date
of payment and delivery being herein called the "Closing Time").
In addition, in the event that any or all of the Option
Securities are purchased by the Underwriters, payment of the purchase price for,
and delivery of certificates for, such Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Representatives and the Company, on each Date of Delivery as specified in the
notice from the Representatives to the Company.
Payment shall be made to the Company by wire transfer of
immediately available funds to a bank account designated by the Company, against
delivery to the Representatives for the respective accounts of the Underwriters
of certificates for the Securities to be purchased by them. It is understood
that each Underwriter has authorized the Representatives, for its account, to
accept delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or
9
<PAGE> 13
the relevant Date of Delivery, as the case may be. The certificates for the
Initial Securities and the Option Securities, if any, will be made available for
examination and packaging by the Representatives in The City of New York not
later than 10:00 A.M. (Eastern time) on the business day prior to the Closing
Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants and agrees
with each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b) hereof, will comply with the requirements of
Rule 430A or Rule 434, as applicable, and will notify the Representatives
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectus or any amended Prospectus shall have been filed,
(ii) of the receipt of any comments from the Commission, (iii) of any request by
the Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company will
promptly effect the filings necessary pursuant to Rule 424(b) and will take such
steps as it deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and to secure the prompt removal thereof if issued.
(b) Filing of Amendments. The Company will (i) give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectus,
whether pursuant to the 1933 Act, the 1934 Act or otherwise, (ii) furnish the
Representatives with copies of any such documents a reasonable amount of time
prior to such proposed filing or use, as the case may be, and (iii) not file or
use any such document to which the Representatives or counsel for the
Underwriters shall object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein and documents incorporated or deemed to be incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the Underwriters. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
10
<PAGE> 14
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such
number of copies of the Prospectus (as amended or supplemented) as such
Underwriter may reasonably request. The Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act
Regulations so as to permit the completion of the distribution of the Securities
as contemplated by this Agreement and the Prospectus. If at any time when a
prospectus is required by the 1933 Act to be delivered in connection with sales
of the Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time it is
delivered to a purchaser, not misleading, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement or
amend or supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b) hereof, such amendment or
supplement as may be necessary to correct such statement or omission or to make
the Registration Statement or the Prospectus comply with such requirements, and
the Company will furnish to the Underwriters such number of copies of such
amendment or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
as the Representatives may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the effective
date of the Registration Statement and any Rule 462(b) Registration Statement;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction in
which it is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such statements and
reports as may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement and any Rule 462(b) Registration
Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earning statement for the purposes of,
and to provide the benefits contemplated by, the last paragraph of Section 11(a)
of the 1933 Act.
11
<PAGE> 15
(h) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectus
under the caption "Use of Proceeds."
(i) Listing. The Company will use its best efforts to effect the
listing of the Securities on the American Stock Exchange.
(j) Restriction on Sale of Securities. During a period of one hundred
eighty (180) days from the date of the Prospectus, the Company will not, without
the prior written consent of Merrill Lynch, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder, (B) any
shares of Common Stock issued by the Company upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof and
referred to in the Prospectus, (C) any shares of Common Stock issued or options
to purchase Common Stock granted pursuant to existing employee benefit plans of
the Company referred to in the Prospectus or (D) any shares of Common Stock
issued pursuant to any non-employee director stock plan or dividend reinvestment
plan.
(k) Reporting Requirements. The Company will, during the period when
the Prospectus is required to be delivered under the 1933 Act, file all
documents required to be filed with the Commission pursuant to the 1934 Act
within the time periods required by the 1934 Act and the 1934 Act Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any agreement among underwriters and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery to the Underwriters of the certificates for the Securities, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery to the Underwriters of the Securities, (iv) the fees
and disbursements of the Company's counsel, accountants and other advisors, (v)
the qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the blue sky survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and the Prospectus and any amendments or
supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the blue sky survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities,
(ix) the filing fees incident to, and the reasonable fees and
12
<PAGE> 16
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. (the "NASD") of the terms
of the sale of the Securities and (x) the fees and expenses incurred in
connection with the listing of the Securities on the American Stock Exchange and
the proposed listing of the Common Stock on the Nasdaq National Market.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following
additional conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective, and at the Closing Time, no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the Underwriters. A
prospectus containing the Rule 430A Information shall have been filed with the
Commission in accordance with Rule 424(b) (or a post-effective amendment
providing such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has elected to
rely upon Rule 434, a Term Sheet shall have been filed with the Commission in
accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At the Closing Time, the
Representatives shall have received the favorable opinion, dated as of the
Closing Time, of (i) Robinson & Cole LLP, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, together with signed or
reproduced copies of such opinion for each of the other Underwriters to the
effect set forth in Exhibit A hereto and to such further effect as counsel to
the Underwriters may reasonably request and (ii) Ross M. Levine, Esq., Director
of Contracts/Contracts Counsel of the Company, in form and substance
satisfactory to counsel for the Underwriters, together with signed or reproduced
copies of such opinion for each of the other Underwriters with respect to the
matters set forth in clauses (xii), (xiii), with respect to the information in
the Prospectus under the captions "Business--Proprietary Rights" and
"Business--Properties," (xiv) through (xvi), inclusive, (xviii) and the
penultimate paragraph of Exhibit A hereto and to such further effect as counsel
to the Underwriters may reasonably request.
(c) Opinion of Counsel for Underwriters. At the Closing Time, the
Representatives shall have received the favorable opinion, dated as of the
Closing Time, of Winthrop, Stimson, Putnam & Roberts, counsel for the
Underwriters, together with signed or reproduced copies of such opinion for each
of the other Underwriters with respect to the matters set forth in clauses (i),
13
<PAGE> 17
(ii), (v), (vi) (solely as to preemptive or other similar rights arising by
operation of law or under the charter or by-laws of the Company), (vii) through
(ix), inclusive, (xi), (xiii) (solely as to the information in the Prospectus
under the caption "Description of Capital Stock--Common Stock") and the
penultimate paragraph of Exhibit A hereto. In giving such opinion, such counsel
may rely, as to all matters governed by the laws of jurisdictions other than the
State of New York, the General Corporation Law of the State of Delaware and the
federal law of the United States of America, upon the opinions of counsel
satisfactory to the Representatives. Such counsel may also state that, insofar
as such opinion involves factual matters, they have relied, to the extent they
deem necessary or appropriate, upon certificates of officers of the Company and
its subsidiaries and certificates of public officials.
(d) Officers' Certificate. At the Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and Xiamen, considered as one enterprise,
whether or not arising in the ordinary course of business, and the
Representatives shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of the Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as
though expressly made at and as of the Closing Time, (iii) the Company has
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to the Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or are
contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from KPMG LLP a letter dated
such date, in form and substance satisfactory to the Representatives, together
with signed or reproduced copies of such letter for each of the other
Underwriters, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At the Closing Time, the Representatives
shall have received from KPMG LLP a letter, dated as of the Closing Time, to the
effect that they reaffirm the statements made in the letter furnished pursuant
to subsection (e) of this Section, except that the specified date referred to
shall be a date not more than three business days prior to the Closing Time.
(g) Approval of Listing. At the Closing Time, the Securities shall have
been approved for listing on the American Stock Exchange, subject only to
official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
14
<PAGE> 18
(i) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule C hereto.
(j) Conditions to Purchase of Option Securities. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company contained herein and the statements in any certificates furnished
by the Company or any subsidiary of the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such
Date of Delivery, of the President or a Vice President of the Company
and of the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(d) hereof remains true and correct as of such Date of
Delivery.
(ii) Opinion of Counsel for Company. The favorable
opinion of Robinson & Cole LLP, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, dated such Date
of Delivery, relating to the Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(iii) Opinion of Counsel for Underwriters. The favorable
opinion of Winthrop, Stimson, Putnam & Roberts, counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from KPMG LLP,
in form and substance satisfactory to the Representatives and dated
such Date of Delivery, substantially in the same form and substance as
the letter furnished to the Representatives pursuant to Section 5(f)
hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than five days
prior to such Date of Delivery.
(k) Additional Documents. At the Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as hereby contemplated, or in
order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(l) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing
15
<PAGE> 19
Time, the obligations of the several Underwriters to purchase the relevant
Option Securities, may be terminated by the Representatives by notice to the
Company at any time at or prior to the Closing Time or such Date of Delivery, as
the case may be, and such termination shall be without liability of any party to
any other party except as provided in Section 4 hereof and except that Sections
1, 6, 7 and 8 hereof shall survive any such termination and remain in full force
and effect.
SECTION 6. Indemnification. (a) Indemnification of Underwriters. The
Company agrees to indemnify and hold harmless each Underwriter and each person,
if any, who controls any Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or
the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) hereof) any such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
16
<PAGE> 20
(b) Indemnification of Company, Directors and Officers. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Merrill Lynch expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof, and in any event, shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to subsection
(a) of this Section, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to subsection
(b) of this Section, counsel to the indemnified parties shall be selected by the
Company. An indemnifying party may participate at its own expense in the defense
of any such action; provided, however, that counsel to the indemnifying party
shall not (except with the consent of the indemnified party) also be counsel to
the indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to, or an admission of, fault, culpability or a
failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying
17
<PAGE> 21
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in Section
6 hereof is for any reason unavailable or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand, and the Underwriters on the other hand, from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above, but also the relative fault of the Company on the one hand, and of the
Underwriters on the other hand, in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand, and the
Underwriters on the other hand, in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Underwriters, in
each case as set forth on the cover of the Prospectus, or, if Rule 434 is used,
the corresponding location on the Term Sheet, bear to the aggregate initial
public offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand, and the Underwriters
on the other hand, shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would be unjust and
inequitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any untrue or
alleged untrue statement or omission or alleged omission.
18
<PAGE> 22
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or controlling person, or
by or on behalf of the Company, and shall survive delivery of the Securities to
the Underwriters.
SECTION 9. Termination of Agreement. (a) Termination; General. The
Representatives may terminate this Agreement, by notice to the Company, at any
time at or prior to the Closing Time, (i) if there has been, since the time of
execution of this Agreement or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and Xiamen, considered as one enterprise,
whether or not arising in the ordinary course of business, (ii) if there has
occurred any material adverse change in the financial markets in the United
States, any outbreak of hostilities or escalation thereof or other calamity or
crisis or any change or development involving a prospective change in national
or international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Representatives,
impracticable to market the Securities or to enforce contracts for the sale of
the Securities, (iii) if trading in any securities of the Company has been
suspended or materially limited by the Commission or the American Stock
Exchange, or if trading generally on the American Stock Exchange or the New York
Stock Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the NASD or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 hereof shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the Underwriters. If one or more
of the Underwriters shall fail at the Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the
19
<PAGE> 23
Representatives shall have the right, within 24 hours thereafter, to make
arrangements for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Representatives shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase, and of the
Company to sell, the Option Securities to be purchased and sold on such
Date of Delivery, shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone the Closing Time or the relevant Date of Delivery, as the case
may be, for a period not exceeding 7 days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York, 10281-1201, attention of Charles Murphy,
Managing Director; and notices to the Company shall be directed to it at 3 Great
Pasture Road, Danbury, Connecticut, 06813, attention of Joseph G. Mahler, Vice
President, Chief Financial Officer, Treasurer and Assistant Secretary.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons, officers and directors referred to in Sections 6 and 7 hereof and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters and the Company and their
respective successors, and said controlling persons,
20
<PAGE> 24
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 13. Governing Law and Time. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York. Specified
times of day refer to New York City time.
SECTION 14. Effect of Headings. The Article and Section headings and
the Table of Contents set forth herein are for convenience only and shall not
affect the construction of this Agreement.
21
<PAGE> 25
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
FUELCELL ENERGY, INC.
By:________________________
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
CIBC WORLD MARKETS CORP.
FAC/EQUITIES, A DIVISION
OF FIRST ALBANY CORPORATION
LAZARD FRERES & CO. LLC
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:___________________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
22
<PAGE> 26
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
Name of Underwriters Securities
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................................
CIBC World Markets Corp. ...............................................................
FAC/Equities, a division of First Albany Corporation....................................
Lazard Freres & Co. LLC
---------
Total................................................................................... 1,300,000
=========
</TABLE>
Sch A-1
<PAGE> 27
SCHEDULE B
FUELCELL ENERGY, INC.
1,300,000 Shares of Common Stock
(Par Value $.0001 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in Section 2 of this Agreement, shall be $______.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $_______, being an amount equal to the initial
public offering price set forth above less $______ per share; provided that the
purchase price per share for any Option Securities purchased upon the exercise
of the over-allotment option described in Section 2(b) of this Agreement shall
be reduced by an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial Securities but not payable on
the Option Securities.
Sch B-1
<PAGE> 28
SCHEDULE C
List of Persons and Entities Subject to Lock-up
1. Jerry D. Leitman
2. Dr. Hansraj C. Maru
3. Christopher R. Bentley
4. Joseph G. Mahler
5. Warren D. Bagatelle
6. Michael Bode
7. James D. Gerson
8. Thomas L. Kemper
9. William A. Lawson
10. Dr. Bernard S. Baker
11. John A. Rolls
12. [New Director]
13. Loeb Investors Co. LXXV
14. MTU-Friedrichshafen GmbH
Sch C-1
<PAGE> 29
EXHIBIT A
[Letterhead of Robinson & Cole LLP]
_________________, 2000
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
CIBC World Markets Corp.
FAC/Equities, a division of
First Albany Corporation
Lazard Freres & Co. LLC
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under the Purchase Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock
of the Company is as set forth in the Prospectus in the column entitled
"Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to the Purchase Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of options referred to in the
Prospectus); the shares of issued and outstanding capital stock of the
Company have been duly authorized and validly issued and are fully paid
and non-assessable; and none of the outstanding shares of capital stock
of the Company was issued in violation of the preemptive or other
similar rights of any securityholder of the Company.
Exhibit A-1
<PAGE> 30
(v) The Securities have been duly authorized by the
Company for issuance and sale to the Underwriters pursuant to the
Purchase Agreement and, when issued and delivered by the Company
pursuant to the Purchase Agreement against payment of the consideration
set forth in the Purchase Agreement, will be validly issued, fully paid
and non-assessable, and no holder of the Securities is or will be
subject to personal liability by reason of being such a holder.
(vi) The issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the
Company.
(vii) The Purchase Agreement has been duly authorized,
executed and delivered by the Company.
(viii) The Registration Statement, including any Rule
462(b) Registration Statement, has been declared effective under the
1933 Act; any required filing of the Prospectus pursuant to Rule 424(b)
has been made in the manner and within the time period required by Rule
424(b); and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission.
(ix) The Registration Statement, including any Rule
462(b) Registration Statement, the Rule 430A Information and the Rule
434 Information, as applicable, the Prospectus, excluding the documents
incorporated by reference therein, and each amendment or supplement to
the Registration Statement and Prospectus, excluding the documents
incorporated by reference therein, as of their respective effective or
issue dates (other than the financial statements and supporting
schedules included therein or omitted therefrom, as to which we need
express no opinion) complied as to form in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations.
(x) The documents incorporated by reference in the
Prospectus (other than the financial statements and supporting
schedules included therein or omitted therefrom, as to which we need
express no opinion), when they were filed with the Commission, complied
as to form in all material respects with the requirements of the 1934
Act and the 1934 Act Regulations.
(xi) The form of certificate used to evidence the Common
Stock complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and
by-laws of the Company and the requirements of the American Stock
Exchange.
(xii) To the best of our knowledge, there is not pending
or threatened any action, suit, proceeding, inquiry or investigation,
to which the Company or Xiamen is a party, or to which the property of
the Company or Xiamen is subject, before or brought by any court or
governmental agency or body, domestic or foreign, which might
reasonably be expected to result in a Material Adverse Effect, or which
might reasonably be expected to materially and adversely affect the
properties or assets thereof or the
Exhibit A-2
<PAGE> 31
consummation of the transactions contemplated in the Purchase Agreement
or the performance by the Company of its obligations thereunder.
(xiii) The information in the Prospectus under the caption
"Description of Capital Stock" and in the Registration Statement under
Item 15, to the extent that it constitutes matters of law, summaries of
legal matters, the Company's charter and by-laws or legal proceedings,
or legal conclusions, has been reviewed by us and is correct in all
material respects.
(xiv) To the best of our knowledge, there are no statutes
or regulations that are required to be described in the Prospectus that
are not described as required.
(xv) All descriptions in the Registration Statement of
contracts and other documents to which the Company or Xiamen is a party
are accurate in all material respects; to the best of our knowledge,
there are no franchises, contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments required to be described
or referred to in the Registration Statement or to be filed as exhibits
thereto other than those described or referred to therein or filed or
incorporated by reference as exhibits thereto, and the descriptions
thereof or references thereto are correct in all material respects.
(xvi) To the best of our knowledge, neither the Company
nor Xiamen is in violation of its charter, by-laws or similar
organizational documents and no default by the Company or Xiamen exists
in the due performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other agreement or instrument
that is described or referred to in the Registration Statement or the
Prospectus or filed or incorporated by reference as an exhibit to the
Registration Statement.
(xvii) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency, domestic or foreign (other than under
the 1933 Act and the 1933 Act Regulations, which have been obtained, or
as may be required under the securities or blue sky laws of the various
states, as to which we need express no opinion) is necessary or
required in connection with the due authorization, execution and
delivery of the Purchase Agreement for the offering, issuance, sale or
delivery of the Securities or the transactions contemplated by the
Purchase Agreement.
(xviii) The execution, delivery and performance of the
Purchase Agreement and the consummation of the transactions
contemplated by the Purchase Agreement and the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use Of Proceeds") and compliance by the Company with
its obligations under the Purchase Agreement do not and will not,
whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(xi) of the Purchase Agreement) under or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or Xiamen pursuant to any
contract, indenture, mortgage, deed of trust,
Exhibit A-3
<PAGE> 32
loan or credit agreement, note, lease or any other agreement or
instrument, known to us, to which the Company or Xiamen is a party or
by which the Company or Xiamen may be bound, or to which any of the
property or assets of the Company or Xiamen is subject (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not have a Material Adverse Effect), nor will such action result
in any violation of the provisions of the charter, by-laws or similar
organizational documents of the Company or Xiamen, or any applicable
law, statute, rule, regulation, judgment, order, writ or decree, known
to us, of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or Xiamen or any of
their respective properties, assets or operations.
(xix) The Company is not, and upon the issuance and sale
of the Securities as hereby contemplated and the application of the net
proceeds therefrom as described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment
company," as such terms are defined in the 1940 Act.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information, as applicable (except for financial
statements and schedules and other financial data included or incorporated by
reference therein or omitted therefrom, as to which we need make no statement),
at the time such Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any amendment or supplement thereto
(except for financial statements and schedules and other financial data included
or incorporated by reference therein or omitted therefrom, as to which we need
make no statement), at the time the Prospectus was issued, at the time any such
amended or supplemented prospectus was issued or at the Closing Time, included
or includes an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
Exhibit A-4
<PAGE> 33
EXHIBIT B
Form of lock-up from directors, officers or other stockholders pursuant
to Section 5(i)
________________, 2000
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
CIBC World Markets Corp.
FAC/Equities, a division of
First Albany Corporation
Lazard Freres & Co. LLC
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by FuelCell Energy, Inc.
Ladies and Gentlemen:
The undersigned, a stockholder [and an officer and/or director] of
FuelCell Energy, Inc., a Delaware corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), CIBC World Markets Corp., FAC/Equities, a division of First
Albany Corporation, and Lazard Freres & Co. LLC propose to enter into a Purchase
Agreement (the "Purchase Agreement") with the Company providing for the public
offering of shares (the "Securities") of the Company's common stock, par value
$.0001 per share (the "Common Stock"). In recognition of the benefit that such
an offering will confer upon the undersigned as a stockholder [and an officer
and/or director] of the Company, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the undersigned
agrees with each underwriter to be named in the Purchase Agreement that, during
a period of one hundred eighty (180) days from the date of the Purchase
Agreement, the undersigned will not, without the prior written consent of
Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter
Exhibit B-1
<PAGE> 34
acquires (alone or with others) the power of disposition, or file any
registration statement under the Securities Act of 1933, as amended, with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise.
Very truly yours,
Signature:________________________________
Print Name:_______________________________
Exhibit B-2
<PAGE> 1
[ROBINSON & COLE LETTERHEAD]
March 29, 2000
Securities and Exchange Commission EXHIBIT 5.1
450 Fifth Street N.W.
Washington, D.C. 20549
Re: FUELCELL ENERGY, INC.
REGISTRATION STATEMENT ON FORM S-3
COMMISSION FILE NO. 333-32972
Ladies and Gentlemen:
We are counsel for FuelCell Energy, Inc. (the "Company") which has
filed a Registration Statement on Form S-3 (the "Registration Statement") for
registration of 1,495,000 shares of common stock of the Company, par value
$.0001 per share ("Common Stock").
For purposes of this opinion, we have reviewed such questions of law
and examined such corporate records, certificates and other documents as we have
considered necessary or appropriate. We have also examined such certificates of
public officials, corporate documents and records, and other certificates,
opinions and instruments, and have engaged in such other investigation as we
have deemed necessary in connection with the opinion hereinafter set forth. We
have assumed the authenticity of all documents submitted to us as originals, the
genuineness of all signatures, the legal capacity of natural persons, the
conformity to the originals of all documents submitted to us as copies, the
valid execution of all agreements and documents referred to herein by all
parties thereto other than the Company and the enforceability of such agreements
against all parties other than the Company.
Based on the foregoing we are of the opinion that when up to a maximum
of 1,495,000 shares of Common Stock are issued by the Company pursuant to the
Registration Statement, such shares will, when sold and paid for in accordance
with the Registration Statement, be validly issued, fully paid and
nonassessable.
<PAGE> 2
Securities and Exchange Commission
March 29, 2000
Page 2
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement and the Prospectus.
Very truly yours,
ROBINSON & COLE LLC
____________________________
Richard A. Krantz, a partner
RAK:rt
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
FuelCell Energy, Inc.:
We consent to the inclusion and incorporation by reference in the
registration statement on Form S-3 of FuelCell Energy, Inc. of our report dated
January 28, 2000 relating to the consolidated balance sheets of FuelCell Energy,
Inc. as of October 31, 1999 and 1998 and the related consolidated statements of
income (loss), changes in common shareholders' equity and cash flows for each of
the years in the three-year period ended October 31, 1999, and to the reference
to our firm under the heading "Experts" in the prospectus contained therein.
KPMG LLP
Stamford, CT
March 31, 2000
