AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2000
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FUELCELL ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-0853042
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION
ORGANIZATION) NUMBER)
------------------------
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)
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
------------------------
<PAGE>
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. [ ]
------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==================================================================================================
Title of Each Proposed Maximum Proposed Maximum Amount of
Class of Securities Amount to be Offering Price Aggregate Registration
to be Registered Registered (1) Per Share (2) Offering Price (2) Fee
<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.
------------------------
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>
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 JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion
Preliminary Prospectus dated March 22, 2000
PROSPECTUS
- ----------
1,300,000 SHARES
FUELCELL ENERGY, INC.
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 17, 2000, the last sale price of the common stock as reported on
the American Stock Exchange was $75.875 per share. We have applied to have the
common stock quoted on the Nasdaq National Market under the symbol "FCEL."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
------------------
PER SHARE TOTAL
--------- -----
Public offering price ................................. $ $
Underwriting discount ................................. $ $
Proceeds, before expenses, to FuelCell Energy, Inc. ... $ $
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>
[Inside cover art work]
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................1
RISK FACTORS.................................................................11
FORWARD-LOOKING STATEMENTS...................................................19
USE OF PROCEEDS..............................................................20
CAPITALIZATION...............................................................20
PRICE RANGE OF COMMON STOCK..................................................21
DIVIDEND POLICY..............................................................21
BUSINESS.....................................................................22
MANAGEMENT...................................................................33
DESCRIPTION OF CAPITAL STOCK.................................................35
UNDERWRITING.................................................................37
LEGAL MATTERS................................................................39
EXPERTS......................................................................39
WHERE YOU CAN FIND MORE INFORMATION..........................................39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
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
(oF) 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.
----------
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.
i
<PAGE>
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 oF, 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 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].
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<PAGE>
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:
o customers with a requirement for premium power quality or 24 hour
a day, 7 day a week reliability;
o industrial and commercial customers who can make use of the high
quality by-product heat for cogeneration;
o customers with opportunity fuels such as landfill gas or waste
gases from industrial processes;
o customers in regions where air pollution requirements are
particularly strict;
o those seeking to address electric grid distribution or
transmission shortages or congestion;
o utility and non-utility power producers who want to improve their
knowledge of fuel cell technology; and
o 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 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 are designing an 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.
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<PAGE>
THE POWER INDUSTRY AND DISTRIBUTED GENERATION
According to the DOE's report ENERGY INFORMATION ADMINISTRATION ENERGY
OUTLOOK 1999, a projected 363,000 MW of new electricity capacity generation 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 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 or closer to the customer's site than centrally sited
generation stations." Currently in the United States, approximately 86% of the
811,000 MW of installed power generation capacity is in the form of traditional,
centralized generating facilities. While distributed generation currently
accounts for approximately 14% of installed power generation capacity in the
United States, Frost & Sullivan, an energy consulting firm, forecasts that
distributed generation applications will account for at least 20% of power
generation capacity added through 2003. 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 $1.3 billion. 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 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:
3
<PAGE>
o 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.
o OPTIMAL OPERATING TEMPERATURE. Our Direct FuelCell(TM)operates at
a temperature of approximately 1200oF. 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.
o 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 fuel cells, that operate in a pressurized environment. This
also allows our Direct FuelCell(TM)to operate unattended.
o 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.
o 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:
o 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 the largest
carbonate fuel cell power plant in the world and the largest fuel
cell of any type operated in the United States.
o 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.
4
<PAGE>
o 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%.
o 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:
o 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
production 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.
o 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 April 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 300 kW 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>
KEY RELATIONSHIPS. We have strategic alliances with the following
partners:
o DOE. From the inception of our carbonate fuel cell development
program in the mid-1970's 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.
o 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 owns approximately 11% of
our outstanding common stock.
o 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.
o BATH IRON WORKS. In August 1999, we entered into an agreement
with 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.
0 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.
6
<PAGE>
o 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.
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 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 4 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 production facility in Tuscaloosa, Alabama and at an
LADWP customer site. MTU has scheduled a demonstration at the Rhon clinic, a
hospital in Bavaria, Germany in 2000 and at another facility in Germany in 2001
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 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>
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 on 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
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 the 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>
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 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."
- ----------
(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>
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>
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-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 hav
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
11
<PAGE>
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 in 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.
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.
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<PAGE>
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:
o the cost competitiveness of our Direct FuelCell(TM) products;
o the future costs of natural gas and other fuels used by our
Direct FuelCell(TM) products;
o consumer reluctance to try a new product;
o consumer perceptions of the safety of our Direct FuelCell(TM)
products;
o the pace of utility deregulation nationwide, which could affect
the market for distributed generation;
o local permitting and environmental requirements; and
o 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
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.
13
<PAGE>
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.
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 capability and processes that
14
<PAGE>
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:
o 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
o 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
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 we use at present could cause us to incur substantial liabilities and
to suspend the manufacture, 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.
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<PAGE>
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 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
of using our Direct FuelCell(TM) products to our customers and could make our
products less desirable, thereby harming our business, prospects, results of
operations and financial condition.
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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 capability 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 interests 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.
WE HAVE LARGE AND INFLUENTIAL STOCKHOLDERS
MTU will own approximately 8.9% of our outstanding common stock upon
completion of this offering. Loeb Investors Co. LXXV and Warren Bagatelle (a
managing director of an affiliate of Loeb Investors Co. LXXV) collectively will
own approximately 8.6% of our outstanding common stock upon completion of this
offering. 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, a general partner 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:
o failure to meet our product development and commercialization
milestones;
o due to our stage of development, variations in our quarterly
operating results from the expectations of securities analysts or
investors;
o downward revisions in securities analysts' estimates or changes
in general market conditions;
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o announcements of technological innovations or new products or
services by us or our competitors;
o announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o additions or departures of key personnel;
o investor perception of our industry or our prospects;
o demand for our common stock; and
o 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 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, ________ shares will be freely
tradable and ________ 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 $75.875 per share, your investment
will suffer immediate and substantial dilution of approximately $61.83 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."
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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:
o the development and commercialization schedule for our fuel cell
technology and products;
o future funding under government research and development
contracts;
o the expected cost competitiveness of our fuel cell technology and
products;
o our intellectual property;
o the timing and availability of our products;
o the power industry and the distributed generation market;
o our business strategy; and
o general economic conditions in the power 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.
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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 $92.96 million, or $106.98 million if the underwriters'
over-allotment option is exercised in full, assuming a public offering price of
$75.875 per share, the last reported sale price of our common stock on the
American Stock Exchange on March 17, 2000.
We intend to use the net proceeds from this offering as follows:
o for manufacturing equipment, manufacturing facilities and other
capital expenditures to support our commercialization activities;
and
o 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 $75.875 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.
As of January 31, 2000
----------------------
Actual As Adjusted
----------------------
(In thousands)
----------------------
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 ..................... 14,236 107,195
Retained earnings .............................. 678 678
------- -------
Total common shareholders' equity ............ 14,914 107,874
------- -------
Total capitalization ....................... $16,702 109,662
======= =======
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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."
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:
YEAR ENDED OCTOBER 31, 1998 HIGH LOW
---- ---
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 17, 2000) ......... 95.50 36.75
On March 17, 2000, the last sale price of the common stock as reported
on the American Stock Exchange was $75.875 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.
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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 1200oF, 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>
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FUEL CELL ELECTROLYTE ELECTRICAL OPERATING PROPOSED BY-
TYPE EFFICIENCY TEMPERATURE CAPACITY PRODUCT
% (degree)F RANGE HEAT USE
- -----------------------------------------------------------------------------------------------------
Polymer 25kW to
PEM Membrane 35-40 180 250kW Warm Water
- -----------------------------------------------------------------------------------------------------
Phosphoric 50kW to
Phosphoric Acid Acid 35-40 400 200 kW Hot Water
- -----------------------------------------------------------------------------------------------------
CARBONATE Potassium/ High
(DIRECT FUEL Lithium 50-55 1200 250kW to Pressure
CELL(TM)) Carbonate 3MW Steam
- -----------------------------------------------------------------------------------------------------
Zirconium 25kW to High Pressure
Solid Oxide dioxide ceramic 45-50 1800 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 processes consumes some of the
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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 POWER 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 electricity capacity generation 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 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 or closer to the customer's site than centrally sited
generation stations." 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.
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.
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Currently in the United States, approximately 86% of the 811,000 MW of
installed power generation capacity is in the form of traditional, centralized
generating facilities. While distributed generation currently accounts for
approximately 14% of installed power generation capacity in the United States,
Frost & Sullivan, an energy consulting firm, forecasts that distributed
generation applications will account for at least 20% of power generation
capacity added through 2003. 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 $1.3 billion. 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:
o 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 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.
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o 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.
o 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%.
o 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:
o 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
production 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.
0 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 April 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. 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.
o GLOBAL ENERGY CLEAN COAL PROJECT. In late 1999, the DOE
transferred a long standing clean coal project to Global Energy,
Inc., a Cincinnati based independent power producer. The
objective of the project is to demonstrate an innovative
gasification technology. 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. We are named in
the project contract as the fuel cell developer, and are
currently in sub-
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contract negotiations with Global Energy. Up to $17 million in
DOE funding would be available to us under this project, subject
to the annual Congressional appropriations process.
In addition to our planned demonstrations, MTU expects to conduct
various field trials and demonstration projects, including the following:
o 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 including
load following tests and the hot exhaust air will be used to
produce process steam for clinic use.
o BREWERY PROJECT. The European Community, MTU and a local brewery
intend to run a joint program to demonstrate the use of a fuel
cell power plant in the environment of a brewery. The power plant
is expected to be commissioned in late 2000, and is planned for
start-up and 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-1970's 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.
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.
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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 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.
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
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
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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.
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
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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, the
Direct FuelCell(TM) will be an economically attractive source of energy in many
places in the United States. According to the DOE, 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 the 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.
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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
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
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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
4,024 and 12,474 stock options, respectively, under our stock option plans at an
average price of $5.85 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 behalf
of us, 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 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. 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 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.
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Many of our United States patents are the result of government-funded
research and development programs, including under 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. 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.
32
<PAGE>
MANAGEMENT
The following table provides certain information regarding our
executive officers and directors as of March 1, 2000:
NAME AGE POSITION
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
James D. Gerson 56 Director
Thomas L. Kempner 72 Director
William A. Lawson 66 Director
John A. Rolls 58 Director
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, 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, a former subsidiary of us, 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.
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. Mr.
Bagatelle is also a director of Evercel.
33
<PAGE>
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.
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 of directors 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., 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.
34
<PAGE>
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 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.
35
<PAGE>
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:
o 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;
o 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
o 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.
36
<PAGE>
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.
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
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
=========
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.
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.
37
<PAGE>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ------ ------
Public offering price........................... $ $ $
Underwriting discount........................... $ $ $
Proceeds, before expenses, to us................ $ $ $
The expenses of this offering, not including the underwriting discount,
are estimated at $500,000 and are payable by us.
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
o offer, pledge, sell or contract to sell any shares of our common
stock,
o sell any option or contract to purchase any shares of our common
stock,
o purchase any option or contract to sell any shares of our common
stock,
o grant any option, right or warrant to purchase any shares of our
common stock,
o otherwise dispose of or transfer any shares of our common stock,
o file any registration statement related to our common stock, or
o 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."
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
38
<PAGE>
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 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:
o Our annual report on Form 10-K for the fiscal year ended October
31, 1999, as amended on February 7, 2000.
o Our quarterly report on Form 10-Q for the quarter ended January
31, 2000.
39
<PAGE>
o Our definitive proxy statement dated February 28, 2000, filed in
connection with our 2000 annual meeting of shareholders.
o 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.
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.
40
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FUELCELL ENERGY, INC.
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
F-1
<PAGE>
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>
FUELCELL ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
October 31, 1999 and 1998
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1999 1998
------------ ---------
<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
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>
FUELCELL ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share amounts)
1999 1998 1997
--------------- ------------- -----------
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
============= ============= ===========
The accompanying notes beginning on page F-7 are an integral part of the
consolidated financial statements.
F-4
<PAGE>
FUELCELL ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Shares Total
Of Additional Common
Common Paid-in Retained Shareholders'
Stock Capital Earnings Equity
------------ -------------- -------------- ----------------
<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>
FUELCELL ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ----------------
<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 (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>
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(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>
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
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.
F-8
<PAGE>
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
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 $400 of capital into this joint venture.
F-9
<PAGE>
(3) Accounts Receivable
Accounts receivable at October 31, 1999 and 1998 consisted of the
following:
1999 1998
-------------- ----------
U.S. Government:
Amount billed.................$ 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
============ ==========
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.
(4) Property, Plant and Equipment
Property, plant and equipment at October 31, 1999 and 1998 consisted
of the following:
Estimated
1999 1998 Useful Life
----------- --------- ----------
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
=========== =========
(5) Other Assets
Other assets at October 31, 1999 and 1998 consisted of the following:
F-10
<PAGE>
1999 1998
----------- -------------
Power Plant License................. $ 1,937 2,221
Other............................... 304 409
----------- -------------
Total............................... $ 2,241 2,630
=========== =============
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:
1999 1998
--------------- -----------------
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
=============== =================
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 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.
F-11
<PAGE>
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.
The per share weighted-average fair value of stock options granted in
1999, 1998 and 1997 was $8.43, $7.99, and $7.15, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions:
Risk free
Dividend interest rate Expected Volatility
Year rate range life factor
---- -------- ------------- -------- ----------
1999 0% 5.20-5.34% 10 years .6300
1998 0% 4.31-4.43% 10 years .5495
1997 0% 6.07-6.66% 10 years .5044
F-12
<PAGE>
No compensation cost has been recognized for stock options in the
consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options, the Company's net income (loss) and earnings (loss) per
share would have been the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net income(loss): As reported.................$ (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
The following table summarizes the Plan's activity for the years ended
October 31, 1999, 1998 and 1997:
Number Weighted average
of shares option price
-------------- ---------------
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
===============
The following table summarizes information about stock options
outstanding and exercisable at October 31, 1999:
Options Outstanding Options Exercisable
------------------------ -----------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
Price Outstanding life price life exercisable price
-------- ----------- ----------- ---------- ----------- ---------
$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
F-13
<PAGE>
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:
Number of Shares
-------------------
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
===================
(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 basis. The
Company charged $312, $343 and $346 to expense during the years ended
October 31, 1999, 1998 and 1997, respectively.
F-14
<PAGE>
(11) Income Taxes
The components of Federal income tax expense (benefit) were as follows
for the years ended October 31, 1999, 1998 and 1997:
1999 1998 1997
----------- ------------ ----------
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
=========== ============ ==========
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:
1999 1998 1997
------------- ------------- ---------
Current............ $ 48 227 148
Deferred........... 126 (169) (9)
------------- ------------- ---------
Total state income
tax expense $ 174 58 139
============= ============= ===========
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:
1999 1998 1997
------------ ------------- -----------
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%
============ ============= ===========
F-15
<PAGE>
The Company's federal and state deferred tax assets and liabilities
consisted of the following at October 31, 1999 and 1998:
1999 1998
------------- ------------
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
============= ============
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.
F-16
<PAGE>
(12) Earnings Per Share
Basic and diluted earnings per share are calculated using the
following data:
1999 1998 1997
------------- ----------- -----------
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
============= =========== ===========
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:
1999 1998
--------------- -----------------
Stock options................... 729,875 522,720
(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>
FUELCELL ENERGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JANUARY 31, 2000 AND OCTOBER 31, 1999
(Dollars in thousands, except per share amounts)
January 31, October 31,
2000 1999
---------------------- -----------
(unaudited)
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
================== ============
The accompanying notes beginning on page F-21 are an integral part of these
financial statements.
F-18
<PAGE>
FUELCELL ENERGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
(Dollars in thousands, except per share amounts)
(unaudited)
2000 1999
-------------- ---------------
Revenues........................ $ 3,600 6,284
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
============= ===============
The accompanying notes beginning on page F-21 are an integral part of these
financial statements.
F-19
<PAGE>
FUELCELL ENERGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
(Dollars in thousands)
(Unaudited)
2000 1999
----------- ----------
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
The accompanying notes beginning on page F-21 are an integral part of these
financial statements.
F-20
<PAGE>
FUELCELL ENERGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except 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>
(2) Earnings Per Share
Basic and diluted earnings (loss) per share are calculated based upon the
following data:
Three Months
Ended January 31,
------------------------------
2000 1999
-------------- --------------
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
============== ==============
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>
================================================================================
1,300,000 Shares
FuelCell Energy, Inc.
Common Stock
-------------------------
PROSPECTUS
--------------------------
Merrill Lynch & Co.
CIBC World Markets
FAC/Equities
Lazard Freres & Co. LLC
, 2000
================================================================================
<PAGE>
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 Nasdaq National Market listing fee, and the filing fee
with the National Association of Securities Dealers, Inc.
SEC registration fee.................................. $ 25,840
Nasdaq National Market listing fee.................... $ *
NASD filing fee....................................... $ 10,288
Printing and engraving expenses....................... $ *
Accountants' fees and expenses........................ $ *
Legal fees and expenses............................... $ *
Blue sky qualification fees and expenses.............. $ 5,000
Transfer Agent and registrar fees..................... $ *
Miscellaneous......................................... $ *
---------
Total........................................ $ 500,000
---------
- -------------------
* To be completed by amendment
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.
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.
II-1
<PAGE>
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.
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
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).
- ------------------
* To be filed by amendment
- ------------------------------------------------------
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 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
II-2
<PAGE>
(2) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant 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 registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Danbury, State of Connecticut, on the 21st day of
March, 2000.
FUELCELL ENERGY, INC.
/s/ Jerry D. Leitman, President
----------------------------------------
Jerry D. Leitman, President
Dated: March 21, 2000
We, the undersigned directors and officers of FuelCell Energy, Inc., do
hereby constitute and appoint each of Mr. Jerry D. Leitman and Mr. Joseph G.
Mahler, each with full power of substitution, our true and lawful
attorney-in-fact and agent, to do any and all acts and things in our names and
on our behalf in our capacities stated below, which acts and things either of
them may deem necessary or advisable to enable FuelCell Energy, Inc. to comply
with the Securities Act of 1933, and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this registration
statement, including specifically, but not limited to, power and authority to
sign for any or all of us in our names, in the capacities stated below, any and
all amendments (including post-effective amendments) hereto and any subsequent
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission; and we do
hereby ratify and confirm all that they shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
Chief Executive Officer, President, March 21, 2000
/s/ Jerry D. Leitman Director (Principal Executive
- -------------------------- Officer)
Jerry D. Leitman
Chief Financial Officer, Vice
President, Corporate Secretary,
/s/ Joseph G. Mahler Treasurer (Principal Accounting March 21, 2000
- -------------------------- and Financial Officer)
Joseph G. Mahler
/s/ Warren D. Bagatelle Director March 21, 2000
- --------------------------
Warren D. Bagatelle
/s/ Christopher R. Bentley Director March 21, 2000
- --------------------------
Christopher R. Bentley
<PAGE>
/s/ Michael Bode Director March 21, 2000
- --------------------------
Michael Bode
/s/ James D. Gerson Director March 21, 2000
- --------------------------
James D. Gerson
/s/ Thomas L. Kempner Director March 21, 2000
- --------------------------
Thomas L. Kempner
/s/ William A. Lawson Director March 21, 2000
- --------------------------
William A. Lawson
/s/ Hansraj C. Maru Director March 21, 2000
- --------------------------
Hansraj C. Maru
/s/ Bernard S. Baker Director March 21, 2000
- --------------------------
Bernard S. Baker
/s/ John A. Rolls Director March 21, 2000
- --------------------------
John A. Rolls
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
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).
- ------------------
* To be filed by amendment
- ------------------------------------------------------
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.
Stamford, CT
March 21, 2000
