UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: OCTOBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 0-24852
FUELCELL ENERGY, INC.
(Exact name of registrant as specified in its charter)
----------------------
DELAWARE 06-0853042
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
3 GREAT PASTURE ROAD
DANBURY, CONNECTICUT 06813
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (203) 825-6000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $204,755,246, which is based on the closing price
of $46.00 on January 24, 2000. On January 24, 2000, there were 6,334,831 shares
of Common Stock of the registrant issued and outstanding.
The purpose of this amendment is to replace the following item in the
Company's annual report on Form 10-K for the fiscal year ended October 31, 1999,
as amended, with the paragraphs set forth below: Part I, Item 1 "BUSINESS".
<PAGE>
PART I
ITEM 1. BUSINESS
BUSINESS
- --------
INTRODUCTION
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.
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.
<PAGE>
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>
=========================================================================================================
ELECTRICAL OPERATING PROPOSED BY-
EFFICIENCY TEMPERATURE CAPACITY PRODUCT
FUEL CELL TYPE ELECTROLYTE % (degree)F RANGE HEAT USE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PEM Polymer 30-35 180 25kW to Warm Water
Membrane 250kW
- ---------------------------------------------------------------------------------------------------------
Phosphoric Acid Phosphoric 35-40 400 50kW to Hot Water
Acid 200kW
- ---------------------------------------------------------------------------------------------------------
CARBONATE POTASSIUM/ 50-55 1200 250kW TO HIGH
(DIRECT FUEL LITHIUM 3MW PRESSURE
CELL(TM)) CARBONATE STEAM
- ---------------------------------------------------------------------------------------------------------
Solid Oxide Zirconium 45-50 1800 25kW to High Pressure
dioxide ceramic 3MW Steam
=========================================================================================================
</TABLE>
Our Direct FuelCell(TM) is so named because of its ability to generate
electricity directly from a hydrocarbon fuel, such as natural gas, by reforming
the fuel inside the fuel cell itself to produce hydrogen. We believe that this
"one-step" reforming process results in a simpler, more efficient and
cost-effective energy conversion system compared with external reforming fuel
cells. External reforming fuel cells, such as PEM and phosphoric acid, generally
use complex, external fuel processing equipment to convert the fuel into
hydrogen.
Our Direct FuelCell(TM) has been demonstrated using a variety of
hydrocarbon fuels, including natural gas, methanol, ethanol, biogas and coal
gas. Our commercial Direct FuelCell(TM) power plant products are expected to
achieve an electrical efficiency of between 50% and 55%. Depending on location,
application and load size, we expect that a cogeneration configuration will
reach an overall energy efficiency of between 70% and 80%.
Conventional non-nuclear power plants burn a hydrocarbon, such as coal,
oil or natural gas, to create heat. The heat boils water, converting it to
steam, which rotates a turbine, which produces the electricity. Some large power
plants use a combined cycle approach where the gas is fired in the turbines and
the exhaust heat produces steam, which generates additional power in steam
turbines. Each step in these processes consumes some of the potential energy in
the fuel, and the combustion process typically creates emissions of sulfur and
nitrogen oxides, carbon monoxide, soot and other air pollutants.
Because of the non-combustion, non-mechanical power generation process,
our Direct FuelCell(TM) is more efficient than conventional power plants.
Emissions of sulfur and nitrogen oxides from our Direct FuelCell(TM) are nearly
zero, and other pollutants are minimal or non-existent. With the only moving
parts being the air blower, in contrast to large rotating turbines, fuel cells
are quieter than these turbines. In addition, fuel cells typically achieve high
efficiency at extremely small sizes, allowing fuel cells to satisfy the needs of
the distributed generation market, such as providing electrical power to a
hospital or a retail store. Also, since they are quieter than other power
generation sources, fuel cells can be located near the customer and provide both
electrical and thermal energy.
<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 heat by-product 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 (OEMs) as potential buyers and
distributors of our products. Utilities are also potential customers as they
will need to add generating capacity to meet increasing demand.
In connection with the Vision 21 program of the Department of Energy
(DOE), we plan to design a 40 MW ultra-high efficiency power system that will
combine our Direct FuelCell(TM) and a gas turbine that we expect will compete
for applications between 10 and 50 MW in the distributed generation market. In
addition, because of the ability to operate on a variety of hydrocarbon fuels,
we are currently developing in conjunction with the U.S. Navy, a Direct
FuelCell(TM) power plant to provide power to ships using diesel fuel. A
diesel-powered fuel cell could also be used by many island communities that have
limited natural gas or similar resources and rely on the use of diesel fuel for
the generation of electricity.
<PAGE>
THE ELECTRIC POWER SUPPLY INDUSTRY AND DISTRIBUTED GENERATION
The United States electric utility industry has been changing for
several years triggered in part by the Energy Policy Act of 1992, which called
for open access for consumers. In 1994, a major upheaval in the industry began
as a result of significant moves toward direct access and deregulation of the
electric utility industry in various states. As a result, a heightened
atmosphere of competition, as well as uncertainty, exists in the industry.
Furthermore, some electric utilities have already decided to exit the power
generation aspect of the business, leaving this aspect of the business to
independent power producers and non-utility generators. Other electric utilities
have merged with either other electric utilities or gas distribution companies.
According to the DOE's report ENERGY INFORMATION ADMINISTRATION ENERGY
OUTLOOK 1999, a projected 363,000 MW of new generating capacity will be needed
by 2020 to meet the growing demand for electricity in the United States and to
offset planned retirements of existing generating capacity. We believe that this
represents approximately $300 to $500 billion of facilities and equipment for
new generating capacity. Reliance upon the existing infrastructure has been and
continues to be problematic due to capacity constraints, environmental concerns
and other issues. In addition, utility deregulation is creating new challenges
and opportunities in the electric power supply industry. This evolving
competitive industry environment, coupled with the consumer demand for more
reliable, accessible and competitively priced sources of electric power, is
driving traditional energy providers to develop new strategies and seek new
technologies for electricity generation, transmission and distribution.
One solution to meet the growing worldwide demand for electricity is
distributed generation.
The Distributed Power Coalition of America defines distributed
generation as "any small scale power generation technology that provides
electric power at a site closer to customers than central station generation."
Distributed generation should play a growing role in electricity generation in
the United States and around the world due to three related global trends.
The first and most important trend is electricity deregulation. In
deregulation, the traditional electric utilities will no longer be integrated
providers of electricity to a captive geographic area. Most deregulation
policies focus on separating the utility's three business lines (generation,
transmission /distribution and marketing). Most legislation intends to create
competitive markets in the generation and marketing of power while leaving the
distribution function as a regulated operation, much the way natural gas was
deregulated in the late 1980s and early 1990s. Thus, deregulation will allow new
entrants into the electricity generation business, as customers will be free to
choose power producers and marketers.
The second trend accelerating distributed generation is the rapid
improvement of electricity generation technology, especially small gas turbines
and fuel cells. These improvements have resulted in dramatically lower costs for
smaller operating units and increased operating efficiency, allowing these
technologies to begin to become cost competitive with traditional grid-based
electrical generation. More importantly, these technologies have proven to be
more reliable than the existing grid-based system when it comes to providing
reliable service.
The final trend is an increasing worldwide awareness of environmental
issues, especially air pollution. One step to reducing air pollution is cutting
down on the amount of electricity generated by oil and coal-fired power plants.
Most distributed generation technologies use natural gas, biogas or liquid
fuels. These three trends are converging rapidly in the United States.
Currently in the United States, according to the DOE, there are
approximately 805,000 MW of installed power generation capacity. We believe that
distributed generation currently accounts for approximately 10% of this
capacity. In addition, we believe that the combined available United States and
European market for distributed generation will reach approximately 5,400 MW per
year by 2001, and approximately 7,600 MW per year by 2004, and that fuel cells
will be one of the leading technologies in meeting these market demands.
<PAGE>
In its 1999 report on SMALL-SCALE POWER GENERATION, Business
Communications Co., Inc. states that fuel cells have emerged as one of the most
promising technologies for meeting the growing worldwide energy needs. They
project that during the period between 1998 and 2003, distributed generation
will grow at an average annual rate of 14.9% in the United States and 28.4%
worldwide, and that the total annual market in 2003 for fuel cells can be
expected to reach $1.1 billion in the United States. We expect this trend to
grow beyond 2003 as fuel cells gain market acceptance and fuel cell product cost
begins to challenge the product cost of traditional generating technologies.
According to a report published in 1999 by Allied Business Intelligence, Inc.,
total global stationary fuel cell generating capacity is expected to grow to
13,669 MW in 2010.
In March 2000, the DOE released a report of the findings and
recommendations of its Power Outage Study Team. This panel of DOE, national
laboratory and academic experts provided recommendations based on a review of
six power outages and two power system disturbances that took place in the
United States between early June and early August 1999. Their recommendations to
help avoid future power outages included removing barriers to distributed
generation and adopting energy efficient technologies.
We believe that the growth of the distributed generation market
combined with the continuing deregulation of the utility industry, and the
increasing demands for higher efficiency, higher quality, more environmentally
friendly and lower cost power generation capacity, provide market opportunities
for our Direct FuelCell(TM) products.
OUR FUEL CELL DEVELOPMENT PROGRAM
SUCCESSFUL FIELD TRIALS AND DEMONSTRATION PROJECTS. We have extensive
experience in testing our products in a variety of conditions and settings and
on a range of fuels. Some significant demonstrations include the following:
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 approximately 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.
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 10,000 hours, providing
approximately 1,500,000 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.
<PAGE>
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. 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
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.
o LOS ANGELES DEPARTMENT OF WATER AND POWER. LADWP recently selected
us to install a 250 kW fuel cell power plant on the site of a
yet-to-be selected LADWP customer. The installation of this power
plant will help LADWP gain knowledge and experience in the
installation, maintenance and operation of fuel cell power plants.
We plan to finalize this agreement by May 2000 and commence
construction shortly thereafter. The proposed agreement provides
for LADWP to contribute $2.4 million to this project. We will agree
to install the 250 kW power plant upon the later of nine months
from the date of this agreement or five months from the date LADWP
identifies the site. 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 a wholly-owned subsidiary of
Global Energy, Inc., a Cincinnati based independent power producer.
This project is one of the largest power plant projects in the
federal clean coal technology program, and is the first clean coal
technology plant to employ a fuel cell. The objective of this
project is to demonstrate an innovative coal gasification
technology along with a carbonate fuel cell power plant. The clean,
low-cost fuel generated in this process will be used to fire gas
turbines and to demonstrate the operation of a 2 MW fuel cell power
plant. The 2 MW fuel cell power plant is part of a $432 million 400
MW project funded in part by the DOE. We are named in the project
contract as the supplier of the fuel cell technology, and have
recently entered into a sub-contract for the design, construction
and operation of the 2 MW fuel cell power plant. We expect this
fuel cell power plant to be operational in 2003. Up to $17 million
in DOE funding will be available to us under this project, subject
to the annual congressional appropriations process. We plan to
obtain non-government financing for the remaining cost of the power
plant, which is expected to be $17 million.
<PAGE>
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 and the hot exhaust air will be
used to produce process steam for clinic use.
o BREWERY PROJECT. The European Community, MTU and a brewery located
in Einbeck, Germany intend to run a joint program to demonstrate
the use of a fuel cell power plant in the environment of a brewery.
The 250 kW Hot Module power plant is expected to be commissioned in
late 2000 and is planned to start-up operation in the first quarter
of 2001.
PRINCIPAL GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACTS
Our revenues have been principally derived from U.S. government and
industry research and development contracts. Government funding, principally
from the DOE, provided approximately 87%, 99%, and 92% of our revenue for the
fiscal years ended 1999, 1998, and 1997, respectively. From the inception of our
carbonate fuel cell development program in the mid-1970s to date, over $350
million has been invested under DOE programs to support the development,
demonstration and field testing of our Direct FuelCell(TM) technology. This
includes funding we have received from the DOE of approximately $200 million. We
have complemented the DOE's funding with additional support from a variety of
other sources that have contributed approximately $150 million.
We perform our services under government-funded contracts or agreements
that usually require performance over a period of one to five years. However
congressional budget limits could prolong the contracts. Generally, our U.S.
government research and development contracts are subject to the risk of
termination at the convenience of the contracting agency. Furthermore, these
contracts, irrespective of the amounts allocated by the contracting agency, are
subject to annual congressional appropriations and the results of government or
agency sponsored audits of our cost reduction efforts and our cost projections.
We can only receive funds under these contracts ultimately made available to us
annually by Congress as a result of the appropriations process.
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.
<PAGE>
In 1995, the DOE granted us a Small Business Innovation Research award
to research and develop internal electrolyte replenishment for long fuel cell
life. The present estimated value of the award is $825,000, excluding cost share
funding. The award expires on October 30, 2000. In 1997, the DOE granted us a
Small Business Innovation Research award to research and develop novel coatings
as barriers for carbonate fuel cell components. The present estimated value of
the award is $825,000, excluding cost share funding. The award expires on June
15, 2000. In 1999, we received an award from the DOE to develop a high
temperature membrane to overcome some of the shortcomings of present generation
polymer electrolyte membrane fuel cells. The present estimated value of the
award is $756,000, excluding cost share funding. The award expires on February
15, 2001.
The DOE, under the Vision 21 Program, recently selected us for a $2.5
million project to develop a high utilization fuel cell and key system
components, and to perform a sub-scale test of a fuel cell/turbine system
utilizing the 250 kW Direct FuelCell(TM) power plant currently providing
electricity to our Danbury facility. Under the Vision 21 Program, we will also
design a 40 MW ultra-high efficiency, fuel cell/turbine power plant based on our
existing Direct FuelCell(TM) technology. This selection is subject to the
completion of the formal DOE contract process.
We have also been working on the development of our Direct FuelCell(TM)
technology since 1976 with various government agencies in addition to the DOE,
including the Department of Defense, the Defense Advanced Research Projects
Agency and the National Aeronautics and Space Administration.
In addition to the activities listed above, we have been active in
soliciting other business from government organizations. We have been working on
Direct FuelCell(TM) power plants for marine applications under programs with the
U.S. Navy and the U.S. Coast Guard. These power plants are required to operate
on liquid fuels such as diesel. We have already produced a fuel cell compatible
fuel from marine diesel using a compact fuel processing system. In 1999, a
sub-scale fuel cell stack was tested on this fuel under conditions simulating
marine requirements. Another sub-scale stack was successfully tested for shock
and vibration tolerance. We have submitted a proposal to the U.S. Navy to
continue development work under Phase II of this project, leading to a 500 kW
land based demonstration.
STRATEGIC ALLIANCES AND LICENSE AGREEMENTS
We have entered into international licensing agreements with major
corporations. Generally, we have reserved the exclusive rights to manufacture
and sell our carbonate fuel cells in North America. The licensees pay annual
license fees and royalties on equipment sales to us.
We have benefited from our licenses and have received valuable
technical and manufacturing information from our licensees. By coordinating our
own development program with the extensive effort of our partners, we have
leveraged our own efforts substantially.
MTU. In 1989, we entered into a license agreement with DASA, a German
aerospace and aircraft equipment manufacturer and a subsidiary of Daimler Benz
Corporation, one of the largest industrial companies in Europe. In 1993, that
agreement was transferred to a subsidiary of DASA, MTU, now a DaimlerChrysler
subsidiary.
In December 1999, the 1989 license agreement was replaced by a revised
MTU license agreement, in which we have granted MTU an exclusive license to use
our Direct FuelCell(TM) patent rights and know-how in Europe and the Middle
East, and a non-exclusive license in South America and Africa, subject to
certain rights of us and others, in each case for a royalty. Under this
agreement, MTU has granted us an exclusive, royalty-free license to use any
improvements to our Direct FuelCell(TM) made by MTU anywhere in the world except
Europe and the Middle East. In addition, MTU has agreed to negotiate a license
grant of any separate fuel cell know-how it develops once it is ready for
commercialization. Under this agreement, we have also agreed to sell our Direct
FuelCell(TM) components and stacks to MTU at cost, plus a modest fee. The new
MTU agreement continues through December 2004 and may be extended, at the option
of MTU, by written notice at least 180 days prior to expiration. Upon
termination, MTU will retain a non-exclusive license to use our Direct
FuelCell(TM) patent rights and know-how for a royalty.
<PAGE>
In 1992, MTU formed a European consortium (ARGE) with RWE Energie, the
largest electric utility in Germany; Ruhrgas, the largest natural gas supplier
in Germany; Elkraft, a large Danish utility; and Haldor Topsoe A/S, a Danish
industrial company. The activities of this group complement our efforts to
design and manufacture natural gas and coal gas fueled carbonate fuel cell
systems based on our designs.
During 1998, MTU designed and built a 250 kW cogeneration fuel cell
unit labeled the Hot Module, which incorporates our fuel cell assemblies and
uses an innovative integration of a portion of the balance of plant into the
fuel cell stack module itself, with the expectation of reducing costs to the
power plant as a whole. The design is compact and especially suitable for
cogeneration applications.
In July 1998, we entered into a cross-licensing and cross-selling
agreement with MTU pursuant to which we have granted MTU a non-exclusive license
to use our balance of plant know-how (excluding fuel cell technology included in
the 1999 license agreement) in Europe, the Middle East, South America and
Africa, and MTU has granted us a worldwide, non-exclusive license to use MTU's
balance of plant know-how (excluding fuel cell technology included in the 1999
license agreement), in all territories except Europe and the Middle East. We and
MTU are required to pay to the other a royalty for each kW of rating which uses
the licensed balance of plant know-how of the other. MTU is not required to pay
us royalties under this agreement if MTU is obligated to pay us royalties under
the 1999 license agreement. This agreement continues through 2003 and may be
extended by written notice at least 180 days prior to expiration.
MARUBENI CORPORATION OF JAPAN. Under an agreement with Marubeni, we
have agreed to supply to Marubeni, and Marubeni has agreed to site and test,
based on customer commitment, our Direct FuelCell(TM) power plants in Japan and
other select Asian markets. Marubeni will provide field trial marketing,
management and distribution services under this agreement. Pursuant to this
agreement, Marubeni will order a minimum of five sub-megawatt class Direct
FuelCell(TM) power plants or, alternatively, one megawatt class Direct
FuelCell(TM) power plant and one sub-megawatt class Direct FuelCell(TM) power
plant. In connection with this agreement, Marubeni has an option, prior to
October 1, 2001, to negotiate an exclusive arrangement with us for the sale,
distribution and service of our Direct FuelCell(TM) power plants in Japan and
other select Asian markets. Marubeni will receive a distributor discount on our
fuel cell products that will be negotiated.
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
<PAGE>
three years after commencement of production of fuel cells at a commercial scale
manufacturing plant, we are required to make royalty payments of $15 per
kilowatt (subject to consumer price index and other upward adjustments) on sales
of fuel cell power plant stacks of capacities of 100 kW or more. The license
becomes non-exclusive after 2005 or earlier, at the option of Santa Clara, if we
do not meet certain commercialization milestones.
ELECTRIC POWER RESEARCH INSTITUTE. In 1988, we entered into a license
agreement with the Electric Power Research Institute, Inc. (EPRI), granting us
an unreserved, non-exclusive, worldwide license to use carbonate fuel cell
proprietary data developed under certain EPRI contracts with us. We have agreed
to pay EPRI a one-time license fee of approximately $50,000 within six months of
our first commercial sale of a carbonate fuel cell stack greater than one
megawatt in size, and a royalty of 0.5% to 1% of net sales upon commercial sales
of carbonate fuel cell stacks. The license and our obligation to make royalty
payments continue until the later of the expiration of all patents licensed to
us by EPRI, or fifteen years from our first commercial sale of a carbonate fuel
cell stack.
COST REDUCTION PROGRESS
We 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.
We regularly review and revise our cost reduction plans. The DOE has on
several occasions assigned an independent outside auditor to examine our present
and projected cost figures to determine if the DOE's continued support of us
through development contracts will achieve its intent of creating commercially
viable fuel cell power generation technology in the United States. In 1999, at
the request of the DOE, we presented our cost projections to a panel of
independent consultants. Our presentation indicated that our commercial design
fuel cell would be capable of being manufactured, delivered and installed by
2005 at a cost per kW of approximately $1,200 (assuming full and sustained
commercial production of at least 400 MW of fuel cells per year). Although
subject to a number of assumptions and uncertainties, some of which are beyond
our control, including the price of fuel, we believe that, by 2005, such a cost
per kW would result in a cost of generating electricity of between 5 and 7 cents
per kWh.
If this cost reduction is achieved, from a cost per kWh standpoint, our
Direct FuelCell(TM) will be an economically attractive source of energy in many
places in the United States. According to the DOE, 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 2.5 times as expensive as in the lowest cost region (the northwest
United States). The DOE predicts that, even in a competitive environment,
electricity prices in New York will be 8.88 cents per kWh in 2005 and 8.84 cents
per kWh in 2012. We believe that our Direct FuelCell(TM) will be a viable
alternative as transmission and distribution costs, as well as losses in
efficiency due to transmission and distribution, will be substantially lessened
or eliminated.
We plan to achieve our cost goals through a combination of factors,
including manufacturing process improvements, economies of scale, completion or
elimination of first time or one of a kind costs, and through technology
maturation that increases power output without additional product cost. These
factors are as described below:
MANUFACTURING COST REDUCTION: Manufacturing costs are being
reduced by multi-faceted efforts including supplier management,
material and labor utilization, vertical integration and engineering
for manufacturing efficiencies.
ECONOMIES OF SCALE: Volume directly affects purchased material
cost and reduces fixed cost allocation. Volume also has a secondary
effect on direct labor by providing justification to invest in capital
projects for improved productivity.
FIRST TIME COSTS: The elimination of first time development
and engineering costs is a large and straightforward element of our
cost reduction plan. At commercial volumes, power plant installations
are expected to be virtually identical. Furthermore, indirect costs
associated with developing the initial field trial projects will not
exist.
<PAGE>
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.
OUR STRATEGY
Our business strategy is to be the leading provider of carbonate fuel
cell products for stationary power generation. We plan on being the first to
provide high quality, low cost sub-megawatt and megawatt class fuel cell power
plants to the distributed generation market. We plan to manufacture the
proprietary fuel cell stack components and to purchase balance of plant
equipment from suppliers who will deliver it as modularized packages to the
power plant site. We plan on continuing to be the industry leader in carbonate
fuel cell technology focused on expanding our proprietary technology and
developing future applications, products and markets. To accomplish our
strategy, we plan to:
FOCUS ON OUR SUPERIOR TECHNOLOGY FOR STATIONARY MARKETS. We believe
that our Direct FuelCell(TM) is the fuel cell technology most suited to
stationary power generation based on its highly efficient operating
characteristics and the ability to use multiple hydrocarbon fuels such as
natural gas, oil, gasoline, diesel, propane, methanol, ethanol, biogas and coal
gas. We plan to continue to focus on the distributed generation market where we
believe that our technology and our power plant product design afford us a
significant competitive advantage. We also plan to develop new products, based
on our existing power plant design, for applications in the 10 to 50 MW range,
and for marine and stationary applications utilizing diesel fuel.
DEMONSTRATE OUR SUPERIOR TECHNOLOGY. We plan to conduct additional
demonstrations of our Direct FuelCell(TM) in various applications and utilizing
a range of fuels. We are planning demonstrations in early 2001 in the United
States at the Mercedes-Benz facility in Tuscaloosa, Alabama and at a LADWP
customer site. MTU has scheduled a demonstration at the Rhon Clinic, a hospital
in Bavaria, Germany, in late 2000 and at a brewery in Einbeck, Germany in early
2001, both utilizing our Direct FuelCell(TM) components. In connection with our
strategic alliance with Marubeni, additional demonstrations are planned for
Japan and Asia. As these demonstration projects progress, we believe that we
will begin to deliver our sub-megawatt class commercial products to the market
in late 2001.
DEVELOP DISTRIBUTION ALLIANCES AND CUSTOMER RELATIONSHIPS. We
anticipate multiple third-party distribution channels to service our customers.
In the United States, we initially expect our products to be sold to power
generation product suppliers, value added distributors and energy service
providers. In Europe, we plan to manufacture and deliver fuel cell components to
our partner MTU, a subsidiary of DaimlerChrysler, who will package the fuel cell
power plants for distribution. In Asia, we initially expect to sell power plants
through distributors, and then, as volume increases, through the delivery of
fuel cell components to OEMs. We plan to leverage our existing relationships and
the success of our field trials and demonstration projects into long-term
distributor and OEM relationships while continuing to pursue additional
distribution partners.
ACHIEVE PROFITABILITY BY REDUCING COSTS. As a result of the simple
design of our Direct FuelCell(TM), we plan to focus our fuel cell component cost
reduction efforts on improving manufacturing processes, reducing purchased
material cost through economies of scale and improving the performance of our
fuel cells. Our strategy for reducing the balance of plant cost is to develop
strategic alliances with equipment suppliers who will recognize the potential
mutual benefit of joint cost reduction programs.
EXPAND MANUFACTURING CAPACITY. Our current manufacturing facilities are
capable of producing 5 MW of fuel cells per year. We plan to expand our current
production capacity to 50 MW per year in early 2001. We expect to increase our
manufacturing capacity in stages to 400 MW in 2004.
BENEFIT FROM STRATEGIC RELATIONSHIPS AND ALLIANCES. We plan to continue
to develop and benefit from strategic alliances with leading developers,
suppliers, manufacturers and distributors of electrical power and electric power
systems and components. We expect these alliances will develop into mutually
beneficial relationships where the ability of each party to lower costs of their
respective components of the Direct FuelCell(TM) power plant will make
competitive pricing more achievable.
<PAGE>
CREATE BRAND AWARENESS. We are working to develop in our target markets
the association of our Direct FuelCell(TM) name with the highest quality
stationary fuel cell products. We are also working to have the design of our
Direct FuelCell(TM) accepted as the industry standard for stationary fuel cell
systems, OEMs and other customers.
AGGRESSIVELY PROTECT INTELLECTUAL PROPERTY. We plan to aggressively
protect our intellectual property, through the use of patents, trademarks, trade
secret protection, confidentiality procedures and confidentiality agreements. We
believe that our intellectual property affords us a distinct competitive
advantage, and that protecting our intellectual property is an essential part of
preserving this advantage.
DEVELOP PRODUCTS FOR THE 10 TO 50 MW DISTRIBUTED GENERATION MARKET. We
plan to accelerate our research and development, leveraging our existing
technology, to develop additional commercial applications for the 10 to 50 MW
distributed generation market. For example, in connection with the DOE's Vision
21 program, we plan to design a 40 MW ultra-high efficiency system that will
combine our Direct FuelCell(TM) and a gas turbine. We estimate that this system
could reach an electrical efficiency of between 75% and 80%.
DEVELOP DIESEL FUELED APPLICATIONS. We plan to accelerate our research
and development related to diesel fueled applications for our technology. In
conjunction with the U.S. Navy and the U.S. Coast Guard, we are developing a
fuel processing system to convert diesel fuel into a fuel compatible with our
existing fuel cell technology. This product would also have significant
opportunities for stationary applications on islands that are dependent on
diesel as their primary fuel source.
DEVELOP NEXT GENERATION PRODUCTS. We are currently developing and plan
to continue to develop next generation fuel cell power plant technologies that
have the potential to significantly reduce the cost per kWh by increasing the
power output and cell life of our power plant products.
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.
<PAGE>
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 intellectual
property related to our battery operations. Following the transfer, we
distributed to our stockholders, in a tax-free distribution, one share of
Evercel common stock for every three shares of our common stock held on the
record date of February 19, 1999. In connection with this transfer, our board of
directors re-priced certain stock options held on February 22, 1999 by certain
of our officers and directors under our stock option plans to reflect the
reduction in value of our common stock as a result of the spin-off. In addition,
our board of directors granted to Dr. Hansraj C. Maru and Christopher R. Bentley
4,599 and 12,474 stock options, respectively, under our stock option plans at an
average price of $5.99 and $3.12, respectively.
Under a services agreement entered into with Evercel in contemplation
of the spin-off, we have provided and continue to provide certain administrative
and management services to Evercel, as well as the use of certain office,
research and development and manufacturing and support facilities and services.
As Evercel continues its development as a stand-alone company, we will continue
to reduce the support that we have provided to Evercel under this services
agreement.
In accordance with a license assistance agreement entered into with
Evercel in contemplation of the spin-off, Evercel has agreed to provide all
services and assistance necessary for Evercel to effectively fulfill, on our
behalf, all of our obligations under a joint venture contract for Xiamen Three
Circles-ERC Battery Corp., Ltd. and a related license agreement until we obtain
the approval from our Chinese partner and the 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.
<PAGE>
During 1998, we formed a joint venture with Xiamen Hi-Tech Innovation
Centre called Xiamen ERC Technology Corp. Ltd. This joint venture has been
formed to fund other entities, such as Xiamen University, to conduct research in
advanced electrochemical technologies, which will benefit us and Xiamen Hi-Tech
Innovation Centre. We have invested $400,000 of capital into this joint venture
to date, which is currently two-thirds owned by us. After we obtain the
requisite third-party approvals, as contemplated by the distribution agreement
we have entered into with Evercel in contemplation of the spin-off, we will
transfer a one-third ownership interest in this joint venture to Evercel for no
consideration.
RESEARCH AND DEVELOPMENT
A significant portion of our research and development has been funded
by government contracts and, therefore, a substantial amount of our total
research and development expense has been classified as a cost of revenues in
our consolidated financial statements. In addition, we have incurred
discretionary research and development expense under our government contracts
for fuel cell and battery development that has been included in research and
development expense although it, too, has been reimbursed fully under these
government contracts. For the fiscal years ended 1999, 1998 and 1997, total
research and development expense, including amounts received from the DOE, other
government agencies and our customers, and amounts that have been self-funded,
was $14.2 million, $16.8 million and $16.9 million, respectively.
PROPRIETARY RIGHTS
We rely primarily on a combination of copyright and trademark laws,
trade secrets, patents, confidentiality procedures (including, in some
instances, the encryption of certain technical information) and confidentiality
agreements and inventors' rights agreements with our strategic partners and
employees to protect our proprietary rights. We have obtained patents and will
continue to make efforts to obtain patents, when available, in connection with
our technologies. We have 47 U.S. and 98 international patents covering our fuel
cell technology. Of the 47 U.S. patents, 34 relate to our Direct FuelCell(TM)
technology. We also have submitted 5 U.S. and 24 international patent
applications. The patents that we have obtained will expire between 2000 and
2018, and the average remaining life of our patents is approximately 8 years.
Some of our intellectual property is not covered by any patent or patent
application and includes trade secrets and other know-how that is not
patentable, particularly as it relates to our manufacturing processes and
engineering design. In addition, some of our intellectual property includes
technologies and processes that may be similar to the patented technologies and
processes of third parties. Certain of our intellectual property has been
licensed to us on a non-exclusive basis from third parties who may also license
such intellectual property to others, including our competitors.
Many of our United States patents are the result of government-funded
research and development programs including 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.
<PAGE>
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.
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.
RISK FACTORS.
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YOU SHOULD CONSIDER THE FOLLOWING FACTORS. IF ANY OF THE FOLLOWING
RISKS OCCUR, OUR BUSINESS, PROSPECTS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION COULD BE HARMED.
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,
<PAGE>
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 have
any agreements providing for field trials of these products.
Field trials and demonstration projects may encounter problems and
delays for a number of reasons, including the failure of our technology, the
failure of the technology of others, the failure to combine these technologies
properly and the failure to maintain and service the test prototypes properly.
Many of these potential problems and delays are beyond our control.
A failure by us to conduct field trials and demonstration projects of
our megawatt class products or a failure to site the scheduled sub-megawatt
power plants and complete these commercial field trials and research and
development as currently planned could delay the timetable by which we believe
we can begin to commercially sell our Direct FuelCell(TM) products. The failure
of planned commercial field trials to perform as well as we anticipate could
also have a material adverse effect on our commercialization plans, including
the ability to enter into long-term distributor-type relationships for our
Direct FuelCell(TM) products. Any delay, performance failure or perceived
problem with our field trials could hurt our reputation in the distributed
generation market and, therefore, could have a material adverse effect on our
business, prospects, results of operations and financial condition.
WE CURRENTLY FACE AND WILL CONTINUE TO FACE SIGNIFICANT COMPETITION
Our Direct FuelCell(TM) products currently face and will continue to
face significant competition. Technological advances in alternative energy
products, improvements in the electric grid or other fuel cell technologies may
negatively affect the development or sale of some or all of our products or make
our products uncompetitive or obsolete prior to commercialization or afterwards.
Other companies, some of which have substantially greater resources than us, are
currently engaged in the development of products and technologies that are
similar to, or may be competitive with, certain of our products and
technologies.
As our Direct FuelCell(TM) products have the potential to replace
existing power sources, competition with our products will come from current
power technologies, from improvements to current power technologies and from new
alternative power technologies, including other types of fuel cells. The
distributed generation market, our target market, is currently serviced by
several manufacturers with existing customers and suppliers. These manufacturers
use proven and widely accepted technologies such as internal combustion engines
and turbines as well as coal, oil and nuclear powered generators.
We believe that we are the only domestic company exclusively engaged in
the development and production of carbonate fuel cells. In Japan, at least six
manufacturers have demonstrated interest in developing and marketing carbonate
fuel cells. One of these manufacturers has demonstrated extended operation of a
200 kW carbonate fuel cell. Two of these manufacturers have jointly demonstrated
extended operation of a 100 kW carbonate fuel cell and recently tested a 1 MW
plant. In Europe, there are several companies engaged in carbonate fuel cell
development that are potential competitors. Our licensee, MTU, and its partners
have conducted the most significant activity in Europe.
<PAGE>
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.
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
<PAGE>
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.
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
<PAGE>
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 capabilities and processes
that will enable us to meet our cost goals and profitability projections. Our
failure to shorten the sales cycle for our Direct FuelCell(TM) products or to
develop these advanced manufacturing capabilities and processes, or meet our
cost goals, could have a material adverse effect on our business, prospects,
results of operations and financial condition.
WE DEPEND ON OUR INTELLECTUAL PROPERTY, AND OUR FAILURE TO PROTECT THAT
INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR FUTURE GROWTH AND SUCCESS
Failure to protect our existing intellectual property rights may result
in the loss of our exclusivity or the right to use our technologies. If we do
not adequately ensure our freedom to use certain technology, we may have to pay
others for rights to use their intellectual property, pay damages for
infringement or misappropriation or be enjoined from using such intellectual
property. We rely on patent, trade secret, trademark and copyright law to
protect our intellectual property. The patents that we have obtained will expire
between 2000 and 2018 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
<PAGE>
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 that we use at present could cause us to incur substantial liabilities,
and to suspend the manufacture or shipment of products or our use of processes
requiring the use of such intellectual property.
While we are not currently engaged in any material intellectual
property litigation, we could become subject to lawsuits in which it is alleged
that we have infringed the intellectual property rights of others or commence
lawsuits against others who we believe are infringing upon our rights. Our
involvement in intellectual property litigation could result in significant
expense to us, adversely affecting the development of sales of the challenged
product or intellectual property and diverting the efforts of our technical and
management personnel, whether or not such litigation is resolved in our favor.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED
MANAGEMENT AND TECHNICAL PERSONNEL
Our future success is substantially dependent on the continued services
and on the performance of our executive officers and other key management,
engineering, scientific, manufacturing and operating personnel, particularly
Jerry Leitman, our President and Chief Executive Officer, and Dr. Hansraj Maru
and Christopher Bentley, our Executive Vice Presidents. The loss of the services
of any executive officer, including Mr. Leitman, Dr. Maru and Mr. Bentley, or
other key management, engineering, scientific, manufacturing and operating
personnel could materially adversely affect our business. Our ability to achieve
our development and commercialization plans will also depend on our ability to
attract and retain additional qualified management and technical personnel.
Recruiting personnel for the fuel cell industry is highly competitive. We do not
know whether we will be able to attract or retain additional qualified
management and technical personnel. Our inability to attract and retain
additional qualified management and technical personnel, or the departure of key
employees, could materially adversely affect our development and
commercialization plans and, therefore, our business, prospects, results of
operations and financial condition.
OUR MANAGEMENT MAY BE UNABLE TO MANAGE RAPID GROWTH EFFECTIVELY
We expect that the availability of additional capital will permit us to
expand our manufacturing capabilities, accelerate the commercialization of our
products and enter a period of rapid growth which will place a significant
strain on our senior management team and our financial and other resources. The
proposed expansion will expose us to increased competition, greater overhead,
marketing and support costs and other risks associated with the
commercialization of a new product. Our ability to manage our rapid growth
effectively will require us to continue to improve our operations, to improve
our financial and management information systems and to train, motivate and
manage our employees. Difficulties in effectively managing the budgeting,
forecasting and other process control issues presented by such a rapid expansion
could harm our business, prospects, results of operations and financial
condition.
WE HAVE CONTINGENT OBLIGATIONS RELATING TO EVERCEL
In connection with our spin-off on February 22, 1999 of our former
battery group, now owned by Evercel, Inc. (Evercel), we entered into several
agreements, including a license assistance agreement, with Evercel. Under the
license assistance agreement, Evercel has agreed to fulfill our obligations
under a joint venture contract relating to battery operations in China until we
obtain certain required third-party and governmental consents. We do not believe
that we have any remaining material exposure with respect to this joint venture
in light of the license assistance agreement. We cannot assure you, however,
that, if Evercel does not continue to perform under the license assistance
agreement, fulfilling our contingent obligations under the joint venture
contract will not have a material adverse effect on our business, prospects,
results of operations and financial condition.
<PAGE>
WE MAY BE AFFECTED BY ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION
Although our products are not currently subject to direct regulation by
any governmental agency, it is possible that industry specific laws and
regulations will be adopted covering issues such as environmental standards,
transmission scheduling, distribution and characteristics and quality of our
products and services. Such regulation could limit the growth in the use of
carbonate fuel cells, decrease the acceptance of fuel cells as a commercial
product and increase our costs and, therefore, the price of our Direct
FuelCell(TM) products. Any such new legislation or regulation, the application
of existing laws and regulations from jurisdictions whose laws do not currently
apply to our business, or the application of existing laws and regulations to
the energy industry could have a material adverse effect on our business,
prospects, results of operations and financial condition.
UTILITY COMPANIES COULD CHARGE FEES TO OUR CUSTOMERS THAT COULD MAKE OUR
PRODUCTS LESS DESIRABLE
Utility companies commonly charge fees to larger customers for
disconnecting from the electric grid or for having the capacity to use power
from the electric grid for back up purposes. These fees could increase the cost
to our customers of using our Direct FuelCell(TM) products and could make our
products less desirable, thereby harming our business, prospects, results of
operations and financial condition.
CHANGES IN GOVERNMENT REGULATIONS AND ELECTRIC UTILITY INDUSTRY RESTRUCTURING
MAY AFFECT DEMAND FOR OUR DIRECT FUELCELL(TM) PRODUCTS
The market for electricity generation products is heavily influenced by
federal and state governmental regulations and policies. Changes in regulatory
standards or policies could reduce the level of investment in the research and
development of alternative energy sources, including fuel cells, and could
result in a reduction in the potential demand for our Direct FuelCell(TM)
products. Our target market, the distributed generation market, is driven by
deregulation and restructuring of the electric utility industry in the United
States and elsewhere and by the requirements of utilities, independent power
producers and end users. Deregulation of the electric utility industry is
subject to government policies that will determine the pace and extent of
deregulation. Changes in government and public policy over time could affect
deregulation and adversely affect our prospects for commercializing our Direct
FuelCell(TM) products and our financial results. We cannot predict how the
deregulation and restructuring of the electric utility industry will ultimately
affect the market for our Direct FuelCell(TM) products.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL TO COMPLETE OUR PRODUCT DEVELOPMENT
AND COMMERCIALIZATION PLANS
Our product development and commercialization schedule could be delayed
if we are unable to fund our research and development activities, our field
trials and demonstration projects or the development of our manufacturing
capabilities. Future capital requirements are dependent upon many factors,
including, but not limited to, the rate at which we expand production volume
capabilities, the amount used to fund demonstration projects and field trials,
the level of government funding provided to us and our investment in new
technology. We believe it is likely that we will need additional funding to
expand our manufacturing capabilities to the level where volume efficiencies can
be achieved consistent with our plans to fully commercialize our products. Some
of our potential strategic business partners have indicated interest in
investing in us. However, additional financing may not be available and, if
available, it may not be available on terms favorable to us or our stockholders.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our then current stockholders will be reduced. If
adequate funds are not available to satisfy either short or long-term capital
requirements, we may be required to limit operations in a manner inconsistent
with our commercialization plans.
WE HAVE LARGE AND INFLUENTIAL STOCKHOLDERS
MTU currently owns approximately 11% of our outstanding common stock.
Loeb Investors Co. LXXV and Warren Bagatelle (a managing director of an
affiliate of Loeb Investors Co. LXXV) collectively own approximately 10.3% of
our outstanding common stock. These ownership levels could make it difficult for
<PAGE>
a third party to acquire our common stock or have input into the decisions made
by our board of directors, which include Michael Bode of MTU, Warren Bagatelle
and Thomas L. Kempner (Chairman and Chief Executive Officer of an affiliate of
Loeb Investors Co. LXXV). MTU is also a licensee of our technology and a
purchaser of our Direct FuelCell(TM) products. Therefore, it may be in MTU's
interest to possess substantial influence over matters concerning our overall
strategy and technological and commercial development. In addition, MTU's
ownership interest could raise a conflict of interest if MTU is experimenting
with competing technologies for its own products.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FUELCELL ENERGY, INC.
/s/ Jerry D. Leitman
- -------------------------------
Jerry D. Leitman, President
Dated: April 11, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- --------- -------- ----
Chief Executive Officer,
President, Director
- ------------------------- (Principal Executive Officer) April __, 2000
Jerry D. Leitman
Chief Financial Officer, Vice
President, Corporate Secretary,
Treasurer (Principal Accounting
- ------------------------- and Financial Officer) April __, 2000
Joseph G. Mahler
- ------------------------- Director April __, 2000
Warren D. Bagatelle
- ------------------------- Director April __, 2000
Christopher R. Bentley
- ------------------------- Director April __, 2000
Michael Bode
- ------------------------- Director April __, 2000
James D. Gerson
- ------------------------- Director April __, 2000
Thomas L. Kempner
<PAGE>
- ------------------------- Director April __, 2000
William A. Lawson
- ------------------------- Director April __, 2000
Hansraj C. Maru
- ------------------------- Director April __, 2000
Bernard S. Baker
- ------------------------- Director April __, 2000
John A. Rolls
- ------------------------- Director April __, 2000
Thomas R. Casten
