SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material pursuant to Rule 14a-11(c) or Rule 14a-12
FUELCELL ENERGY, INC.
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(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
PROPOSED
AGGREGATE NUMBER OF MAXIMUM
SECURITIES TO WHICH PRICE PER AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO WHICH TRANSACTION APPLIES TRANSACTION APPLIES(1) UNIT(2) VALUE(3) TOTAL FEE
-------------------------------------------------------------- ---------------------- --------- ----------- ---------
Common Shares of Global Thermoelectric Inc. .......... 29,201,450 $3.14 $91,692,553 $ 7,418
(1) This total represents Global Thermoelectric Inc. ("Global") common
shares to be acquired by FuelCell Energy, Inc. ("FuelCell") pursuant to
the Combination Agreement entered into between FuelCell and Global as
of August 4, 2003.
(2) This total represents Cdn.$4.25, the average of the high and low sales
price of Global Common Shares on the Toronto Stock Exchange on
September 30, 2003, converted to U.S. dollars by applying the exchange
rate on September 24, 2003, which was 1.3543 Canadian dollars for each
U.S. dollar.
(3) Proposed maximum value calculated pursuant to Rule 0-11 of the
Securities Exchange Act of 1934, as amended.
(4) Of the fee, $6,166 has been previously paid and $1,252 is paid
herewith.
[X] Fee paid previously with preliminary materials.
[ ] Check box, if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[FUELCELL ENERGY LOGO] [GLOBAL THERMOELECTRIC LOGO]
NOTICE OF THE SPECIAL MEETING OF STOCKHOLDERS
OF FUELCELL ENERGY, INC.
TO BE HELD OCTOBER 31, 2003
-AND-
NOTICE OF THE SPECIAL MEETING OF COMMON
SHAREHOLDERS OF
GLOBAL THERMOELECTRIC INC.
TO BE HELD OCTOBER 31, 2003
-AND-
NOTICE OF PETITION
-AND-
JOINT MANAGEMENT INFORMATION CIRCULAR
AND PROXY STATEMENT
WITH RESPECT TO AN ARRANGEMENT INVOLVING
FUELCELL ENERGY, INC.
-AND-
GLOBAL THERMOELECTRIC INC.
SEPTEMBER 30, 2003
[FUELCELL ENERGY LOGO]
September 30, 2003
Dear FuelCell Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"FuelCell Meeting") of FuelCell Energy, Inc., a Delaware corporation
("FuelCell"), to be held at 10:00 a.m. (Eastern time) on Friday, October 31,
2003 at the Sheraton Danbury Hotel, 18 Old Ridgebury Road, Danbury, Connecticut.
The FuelCell Meeting relates to the acquisition by FuelCell of Global
Thermoelectric Inc., an Alberta, Canada, corporation ("Global"), pursuant to the
terms of a combination agreement (the "Combination Agreement") dated as of
August 4, 2003 between FuelCell and Global. The Combination Agreement provides
for a share exchange whereby either exchangeable shares of an indirect
wholly-owned Canadian subsidiary of FuelCell or shares of FuelCell common stock
will be issued in consideration for all of the issued and outstanding common
shares of Global. Each exchangeable share will be exchangeable for one share of
FuelCell common stock.
Global is a leader in the development of solid oxide fuel cell ("SOFC")
products. Global is developing fuel cell products compatible with natural gas or
propane and is currently testing systems for residential and remote
applications. Global believes that it is also the world's largest manufacturer
and distributor of thermoelectric power generators for use in remote locations.
Thermoelectric generators produce electricity directly from heat and are used
for remote power applications in the pipeline, oil and gas and telecommunication
industries. Upon closing, FuelCell expects to integrate the businesses of the
combined companies and to significantly reduce the combined company's level of
cash expenditures, with head office functions consolidated into FuelCell's
Connecticut headquarters. The combined company will retain the name FuelCell
Energy, Inc. I will remain as Chairman, President and Chief Executive Officer,
and Joseph G. Mahler, FuelCell's Senior Vice President and Chief Financial
Officer, will assist me in leading the combined company in our respective roles.
Upon closing, FuelCell's board of directors will be expanded to up to thirteen
voting members to include at least one and a maximum of two designees of Global.
At the FuelCell Meeting, you will be asked to approve the Combination
Agreement and the transactions contemplated thereby, which include: (i) at the
election of each Global common shareholder (other than a dissenting shareholder)
who is a resident of Canada for purposes of the Income Tax Act (Canada), the
issuance of (a) shares of an indirect wholly-owned Canadian subsidiary of
FuelCell exchangeable for shares of FuelCell common stock or (b) shares of
FuelCell common stock, in exchange for the shareholder's Global common shares;
(ii) for each Global common shareholder (other than a dissenting shareholder)
who is not a resident of Canada for purposes of the Income Tax Act (Canada), the
issuance of shares of FuelCell common stock in exchange for the shareholder's
Global common shares; (iii) FuelCell's assumption of outstanding options to
purchase Global common shares; and (iv) FuelCell's assumption of the obligation
to issue FuelCell common stock upon conversion of Global's outstanding
Cumulative Redeemable Convertible Preferred Shares, Series 2 (which we refer to
collectively as the "Combination"). Details of the Combination are contained in
the joint management information circular and proxy statement (the "Joint Proxy
Statement") being delivered with this letter.
If the proposals contained in the Joint Proxy Statement are approved by
FuelCell's stockholders, Global's common shareholders and the Court of Queen's
Bench of Alberta, Global will become a consolidated subsidiary of FuelCell, and
each existing holder of common shares of Global will have the right to receive
between 0.279 and 0.342 exchangeable shares or shares of FuelCell common stock
in consideration for each Global common share held by such holder, determined in
accordance with the exchange ratio (as defined in the Combination Agreement) and
as otherwise set forth in the Joint Proxy Statement. Upon completion of the
Combination, and depending on the exchange ratio in effect at the time of
completion of the Combination,
Global common shareholders will own between approximately 17% and 20% of the
outstanding shares of FuelCell common stock, on a fully diluted basis.
FuelCell's board of directors has carefully considered and has unanimously
approved the terms and conditions of the Combination Agreement and the
Combination and recommends that the FuelCell stockholders approve the
Combination Agreement and the Combination. In reaching this conclusion, the
FuelCell board of directors considered, among other things, the opinion dated
August 1, 2003 of Lazard Freres & Co. LLC ("Lazard"), an investment banking firm
engaged by FuelCell, that, as of such date and based on and subject to the
factors and assumptions set forth in the opinion, the exchange ratio set forth
in the Combination Agreement is fair, from a financial point of view, to
FuelCell. A copy of Lazard's opinion, including the assumptions, qualifications
and other matters contained in the opinion, is included in the Joint Proxy
Statement as Annex E.
The respective obligations of FuelCell and Global to consummate the
Combination are subject to, among other conditions, FuelCell's stockholders'
approval of the Combination Agreement and the Combination at the FuelCell
Meeting and the approval of a plan of arrangement by Global's common
shareholders and by the Court of Queen's Bench of Alberta. If FuelCell's
stockholders do not approve the Combination Agreement and the Combination, or if
the plan of arrangement is not approved by Global's common shareholders and by
the Court of Queen's Bench of Alberta, then none of the proposals will be
implemented and the Combination will not be completed. THE FUELCELL BOARD OF
DIRECTORS BELIEVES THAT THE TERMS OF THE COMBINATION AGREEMENT AND THE
COMBINATION ARE FAIR TO THE HOLDERS OF FUELCELL COMMON STOCK AND ARE IN THE BEST
INTERESTS OF FUELCELL, HAS APPROVED THE COMBINATION AGREEMENT AND THE
COMBINATION AND RECOMMENDS THAT FUELCELL STOCKHOLDERS VOTE "FOR" APPROVAL OF THE
COMBINATION AGREEMENT AND THE COMBINATION.
In view of the importance of the actions to be taken at the FuelCell
Meeting, you are urged to read the Joint Proxy Statement carefully and vote your
shares, regardless of the number of shares you own or whether you will attend
the FuelCell Meeting. Even if you will not attend the FuelCell Meeting, you can
vote your shares in any of three ways: (i) via the internet; (ii) by using a
toll-free telephone number; or (iii) by promptly completing, signing, dating and
returning the enclosed proxy card in the accompanying prepaid envelope.
Instructions for using these convenient voting methods appear on your proxy
card. You may, of course, attend the FuelCell Meeting and vote in person, even
if you have previously returned your proxy card or voted by telephone or via the
internet.
Sincerely,
/s/ Jerry D. Lietman
Jerry D. Leitman
Chairman, President and Chief
Executive Officer
2
FUELCELL ENERGY, INC.
3 GREAT PASTURE ROAD
DANBURY, CONNECTICUT 06813
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 31, 2003
---------------------
Notice is hereby given that a special meeting of stockholders (the
"FuelCell Meeting") of FuelCell Energy, Inc., a Delaware corporation
("FuelCell"), will be held at 10:00 a.m. (Eastern time) on Friday, October 31,
2003 at the Sheraton Danbury Hotel, 18 Old Ridgebury Road, Danbury, Connecticut
for the following purposes:
1. to consider and vote upon a proposal to approve the combination
agreement dated as of August 4, 2003 (the "Combination Agreement") between
FuelCell and Global Thermoelectric Inc., an Alberta corporation ("Global"),
and the transactions contemplated thereby, including the issuance of either
FuelCell common stock or shares of a Canadian subsidiary of FuelCell
exchangeable for shares of FuelCell common stock, in exchange for all
issued and outstanding Global common shares, the assumption by FuelCell of
outstanding Global options and the assumption by FuelCell of the obligation
to issue FuelCell common stock upon conversion of the outstanding Global
Cumulative Redeemable Convertible Preferred Shares, Series 2 (collectively
referred to as the "Combination"), as more fully described in the
accompanying Joint Management Information Circular and Proxy Statement; and
2. to transact such other business as may properly be presented to
the FuelCell Meeting or any adjournment or postponement thereof.
The respective obligations of FuelCell and Global to consummate the
Combination are subject to, among other conditions, FuelCell's stockholders'
approval of the Combination Agreement and the Combination at the FuelCell
Meeting and the approval of a plan of arrangement by Global's common
shareholders and by the Court of Queen's Bench of Alberta. If FuelCell's
stockholders do not approve the Combination Agreement and the Combination, or if
the plan of arrangement is not approved by Global's common shareholders and by
the Court of Queen's Bench of Alberta, then none of the proposals will be
implemented and the Combination will not be completed.
Only stockholders of record at the close of business on September 16, 2003,
will be entitled to notice of and to vote at the FuelCell Meeting and any
adjournments thereof. A list of stockholders of FuelCell entitled to vote at the
FuelCell Meeting will be available for inspection during normal business hours
for the ten days prior to the FuelCell Meeting at the offices of FuelCell,
located at 3 Great Pasture Road, Danbury, Connecticut 06813, and at the time and
place of the FuelCell Meeting.
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN YOUR PROXY CARD OR VOTE VIA
THE INTERNET OR THE TOLL-FREE TELEPHONE NUMBER AS INSTRUCTED ON YOUR PROXY CARD
SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND SO THAT THE
PRESENCE OF A QUORUM MAY BE ASSURED. THE GIVING OF A PROXY DOES NOT AFFECT YOUR
RIGHT TO VOTE IN PERSON IF YOU ATTEND THE FUELCELL MEETING. YOU MAY REVOKE YOUR
PROXY AT ANY TIME.
By Order of the Board of Directors,
/s/ Joseph G. Mahler
Joseph G. Mahler
Senior Vice President, CFO, Treasurer
and Secretary
Danbury, Connecticut
September 30, 2003
[GLOBAL THERMOELECTRIC LOGO]
September 30, 2003
Dear Global Common Shareholder:
You are cordially invited to attend a special meeting of the common
shareholders (the "Global Meeting") of Global Thermoelectric Inc., an Alberta
corporation ("Global"), to be held at 10:00 a.m. (Calgary time) on October 31,
2003 in Rooms 105 and 106 in the North Building of the TELUS Convention Centre,
136-8th Avenue S.E., Calgary, Alberta, Canada.
Global began a search for strategic partners in November 2000 and engaged
Citigroup Global Markets Inc. ("Citigroup," formerly Salomon Smith Barney Inc.)
in November 2002 to assist Global with a review of Global's strategic
alternatives and solicit proposals from interested third parties.
On April 8, 2003, Global entered into a combination agreement, amended as
of June 27, 2003 (the "Quantum Combination Agreement"), with Quantum Fuel
Systems Technologies Worldwide, Inc. ("Quantum") to combine Global and Quantum
in a share-for-share exchange. Under the terms of the Quantum Combination
Agreement, the Global board of directors was entitled to consider unsolicited
competing proposals from third parties, if Global's board of directors
determined the proposals to be "superior proposals" as that term was defined in
the Quantum Combination Agreement. On July 11, 2003, Global received an
unsolicited competing proposal from FuelCell Energy, Inc., a Delaware
corporation ("FuelCell"), that Global's board of directors determined to be a
superior proposal. Global furnished information to and entered into negotiations
and discussions with FuelCell about a possible business combination. Prior to
entering into a definitive agreement with FuelCell, Global terminated the
Quantum Combination Agreement in accordance with its terms and paid a U.S.$2
million termination fee.
On August 4, 2003 Global and FuelCell entered into a combination agreement
(the "Combination Agreement") to combine Global with FuelCell in a
share-for-share exchange. At the Global Meeting, you will be asked to approve an
arrangement and the transactions contemplated thereby (the "Arrangement") which
will combine the business of Global with that of FuelCell. FuelCell stockholders
will meet on the same day to consider the approval of the Combination Agreement
and the transactions contemplated thereby.
FuelCell, based in Danbury, Connecticut, is a world leader in the
development and manufacture of highly efficient hydrogen fuel cells for clean
electric power generation, currently offering Direct FuelCell(R)("DFC(R)") power
plant products ranging in size from 250 kilowatts to 2 megawatts for
applications up to 50 megawatts. FuelCell has developed strategic and commercial
distribution alliances for its carbonate DFC technology with MTU CFC Solutions
GmbH, a subsidiary of DaimlerChrysler AG in Europe; Marubeni Corporation in
Asia; and Caterpillar, Inc., PPL Energy Plus, Chevron Energy Solutions L.P. and
Alliance Power in the U.S. FuelCell is developing DFC technology for stationary
power plants with the U.S. Department of Energy through its Office of Fossil
Energy's National Energy Technology Laboratory. Upon closing, FuelCell expects
to integrate the businesses of the combined company and to significantly reduce
the combined company's level of cash expenditures, with head office functions
consolidated into FuelCell's Connecticut headquarters. Jerry D. Leitman,
FuelCell's Chairman, President and Chief Executive Officer, and Joseph G.
Mahler, FuelCell's Senior Vice President and Chief Financial Officer, will lead
the combined company in those respective roles. Upon closing, FuelCell's board
of directors will be expanded to up to thirteen voting members to include at
least one and a maximum of two designees of Global.
Under the terms of the Combination Agreement, if approved, (i) each Global
common shareholder (other than dissenting shareholders) who is a resident of
Canada for purposes of the Income Tax Act (Canada) will receive, at the
shareholder's election, either exchangeable shares or shares of FuelCell common
stock for each Global common share held by that shareholder at the effective
time of the Arrangement determined in accordance with the exchange ratio; and
(ii) each Global common shareholder (other than dissenting shareholders) who is
a non-resident of Canada for purposes of the Income Tax Act (Canada) will
receive shares of FuelCell common stock for each Global common share held by
that shareholder at the effective time of the Arrangement determined in
accordance with the exchange ratio. Each exchangeable share will be exchangeable
for one share of FuelCell common stock. The exchangeable shares will have
economic and voting rights equivalent to shares of FuelCell common stock and
have been conditionally approved for listing on the Toronto Stock Exchange.
Holding exchangeable shares rather than shares of FuelCell common stock may
appeal to Global shareholders resident in Canada for tax and investment reasons
that are summarized in the accompanying joint management information circular
and proxy statement (the "Joint Proxy Statement"). The FuelCell common stock
issuable pursuant to the Arrangement is expected to be listed on the Nasdaq
National Market. The exchange ratio will be determined by dividing U.S.$2.72
(approximately Cdn.$3.82 using an exchange rate of Cdn.$1.4048 to U.S.$1.00,
which was the exchange rate in effect on August 1, 2003) by the 20-day
volume-weighted average FuelCell common stock price ending three days prior to
the Global Meeting. The exchange ratio will not be less than 0.279 or more than
0.342 of FuelCell common stock. Using FuelCell's trailing 20-day volume-weighted
average stock price for the period ended September 30, 2003 for purposes of
calculating the exchange ratio and utilizing FuelCell's closing stock price on
September 30, 2003 of $11.70, each Global common shareholder would receive
approximately U.S.$3.26 (or approximately Cdn.$4.40 using an exchange rate of
Cdn.$1.3499 to U.S.$1.00) of exchangeable shares or FuelCell common stock at an
exchange ratio of 0.279 for each Global common share held. Upon completion of
the Arrangement and depending on the exchange ratio in effect at the time of
completion of the Arrangement, Global common shareholders will own between
approximately 17% and 20% of the outstanding shares of FuelCell common stock, on
a fully-diluted basis.
Global's board of directors has carefully considered and has unanimously
approved the terms and conditions of the Combination Agreement and has
determined that the Arrangement is fair to its holders of common shares and
preferred shares. In reaching this conclusion, the Global board of directors
considered, among other things, the opinion dated August 4, 2003 of Citigroup to
the effect that, as of such date and based on and subject to the considerations
and limitations set forth therein, the exchange ratio set forth in the
Combination Agreement was fair, from a financial point of view, to Global common
shareholders. The full text of Citigroup's opinion, which sets forth the
assumptions made, general procedures followed, matters considered and limits on
the review undertaken, is included in the Joint Proxy Statement as Annex F.
BASED ON THE FACTORS CONSIDERED BY THE BOARD OF DIRECTORS, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT GLOBAL COMMON SHAREHOLDERS VOTE "FOR" THE
SPECIAL RESOLUTION TO APPROVE THE ARRANGEMENT, INCLUDED IN THE ACCOMPANYING
JOINT PROXY STATEMENT AS ANNEX A.
We have included with this booklet a form of proxy to enable you to vote at
the Global Meeting and a letter of transmittal to enable shareholders who are
residents of Canada for purposes of the Income Tax Act (Canada) to elect the
form of consideration you wish to receive if the Arrangement is approved, which
election must be made prior to the closing of the Arrangement. You will not
actually receive your exchangeable shares or FuelCell common stock until after
the closing of the Arrangement and you have returned a properly completed letter
of transmittal and share certificates. Please review the Joint Proxy Statement
carefully as it has been prepared to help you make an informed decision. You
should also carefully read the Risk Factors section which begins at page 27 of
the Joint Proxy Statement.
We hope that you will be able to attend the meeting. However, if you are
unable to attend the meeting in person, we urge you to complete the enclosed
form of proxy and return it, not later than the time specified in the Notice of
Special Meeting of Common Shareholders, in the postage-paid envelope provided.
Yours truly,
GLOBAL THERMOELECTRIC INC.
/s/ Peter Garrett
Peter Garrett
President and Chief Executive Officer
2
GLOBAL THERMOELECTRIC INC.
4908 - 52ND STREET S.E.
CALGARY, ALBERTA T2B 3R2
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NOTICE OF SPECIAL MEETING OF COMMON SHAREHOLDERS
TO BE HELD OCTOBER 31, 2003
---------------------
Notice is hereby given that a special meeting of the common shareholders
(the "Global Meeting") of Global Thermoelectric Inc., an Alberta corporation
("Global"), will be held at 10:00 a.m. (Calgary time) on October 31, 2003 in
Rooms 105 and 106 in the North Building of the TELUS Convention Centre, 136-8th
Avenue S.E., Calgary, Alberta, Canada for the following purposes:
1. to consider, pursuant to an Interim Order of the Court of Queen's
Bench of Alberta dated September 30, 2003, and, if deemed advisable, to
pass, with or without variation, a special resolution in the form of Annex
A to the accompanying joint management information circular and proxy
statement (the "Joint Proxy Statement") to approve an arrangement under
Section 193 of the Business Corporations Act (Alberta), all as more
particularly described in the Joint Proxy Statement; and
2. to transact such further or other business as may properly come
before the Global Meeting or any adjournment thereof.
Each person who is a holder of record of Global common shares at the close
of business on October 1, 2003 (the "Global Record Date") is entitled to notice
of, and to attend and vote at, the Global Meeting and any adjournment or
postponement thereof, provided that to the extent a person has transferred any
Global common shares after the Global Record Date and the transferee of such
shares establishes that the transferee owns the shares and demands not later
than ten days before the Global Meeting to be included in the list of holders
eligible to vote at the Global Meeting, the transferee will be entitled to vote
the shares at the Global Meeting.
Pursuant to the Interim Order, a copy of which is attached as Annex C to
the Joint Proxy Statement, registered common shareholders have been granted the
right to dissent in respect of the arrangement. If the arrangement becomes
effective, a dissenting common shareholder will be entitled to be paid the
judicially determined fair value of the Global common shares held by such
shareholder provided that Global, c/o Bennett Jones LLP, 4500, 855 - 2nd Street
S.W., Calgary, Alberta T2P 4K7, Attention: Mr. John MacNeil, or the chairman of
the Global Meeting, also c/o Bennett Jones LLP at the address above, shall have
received from such dissenting common shareholder no later than 24 hours before
the Global Meeting, a written objection to the resolution in respect of the
arrangement and the dissenting common shareholder shall have otherwise complied
with the provisions of Section 191 of the Business Corporations Act (Alberta),
as modified by the plan of arrangement and the Interim Order. The dissent right
is described in the accompanying Joint Proxy Statement, and the full text of
Section 191 of the Business Corporations Act (Alberta) is attached as Annex G to
the Joint Proxy Statement. FAILURE TO STRICTLY COMPLY WITH THE REQUIREMENTS SET
FORTH IN SECTION 191 OF THE BUSINESS CORPORATIONS ACT (ALBERTA), AS MODIFIED BY
THE PLAN OF ARRANGEMENT AND INTERIM ORDER, MAY RESULT IN THE LOSS OF ANY RIGHT
OF DISSENT. PERSONS WHO ARE BENEFICIAL OWNERS OF COMMON SHARES REGISTERED IN THE
NAME OF A BROKER, CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY WHO WISH TO DISSENT
SHOULD BE AWARE THAT ONLY THE REGISTERED HOLDERS OF SUCH SHARES ARE ENTITLED TO
DISSENT. ACCORDINGLY, IF YOU ARE SUCH A BENEFICIAL OWNER OF COMMON SHARES
DESIRING TO EXERCISE YOUR RIGHT OF DISSENT, YOU MUST MAKE ARRANGEMENTS FOR THE
COMMON SHARES BENEFICIALLY OWNED BY YOU TO BE REGISTERED IN YOUR NAME PRIOR TO
THE TIME THE WRITTEN OBJECTION TO THE RESOLUTION IN RESPECT OF THE ARRANGEMENT
IS REQUIRED TO BE RECEIVED BY GLOBAL OR, ALTERNATIVELY, MAKE ARRANGEMENTS FOR
THE REGISTERED HOLDER OF YOUR COMMON SHARES TO DISSENT ON YOUR BEHALF.
Common shareholders are urged to complete, sign, date and return the
enclosed proxy promptly in the envelope provided and mail it to or deposit it
with Computershare Trust Company of Canada, 9th Floor, 100 University Avenue,
Toronto, Ontario, M5J 2Y1. To be effective, proxies must be received by
Computer-
share Trust Company of Canada, not later than 10:00 a.m. (Calgary time) on
October 29, 2003, or, if the Global Meeting is adjourned or postponed, not later
than 48 hours (excluding Saturdays, Sundays and holidays) before the time of the
adjourned or postponed Global Meeting, or any further adjournment or
postponement thereof.
DATED at Calgary, Alberta, September
30, 2003
By Order of the Board of Directors of
GLOBAL THERMOELECTRIC INC.
/s/ Paul A. Crilly
Paul A. Crilly
Vice President, Finance, Chief
Financial Officer and
Corporate Secretary
2
ACTION NO. 0301-14930
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
IN THE MATTER OF SECTION 193 OF THE
BUSINESS CORPORATIONS ACT (ALBERTA), R.S.A. 2000, AS AMENDED
AND IN THE MATTER OF AN ARRANGEMENT
PROPOSED BY GLOBAL THERMOELECTRIC INC. INVOLVING
GLOBAL THERMOELECTRIC INC., ITS COMMON SHAREHOLDERS
AND FUELCELL ENERGY, INC.
NOTICE OF PETITION
NOTICE IS HEREBY GIVEN that a Petition has been filed with the Court of
Queen's Bench of Alberta, Judicial District of Calgary (the "Court"), by Global
Thermoelectric Inc. ("Global") with respect to a proposed arrangement (the
"Arrangement") under Section 193 of the Business Corporations Act (Alberta),
R.S.A. 2000, c.B-9, as amended (the "ABCA") involving Global, its common
shareholders and FuelCell Energy, Inc. ("FuelCell"), which Arrangement is
described in greater detail in the Joint Management Information Circular and
Proxy Statement of Global and FuelCell dated September 30, 2003 accompanying
this Notice of Petition.
AND NOTICE IS FURTHER GIVEN that the Petition will be heard before the
presiding Justice in Chambers at the Court House, 611 -- 4th Street S.W.,
Calgary, Alberta, Canada, on October 31, 2003 at 2:00 p.m. (Calgary time) or as
soon thereafter as counsel may be heard.
At the hearing of the Petition, Global intends to seek the following:
(a) a declaration that the terms and conditions of the Arrangement are
fair to the persons affected;
(b) an order approving the Arrangement pursuant to the provisions of
Section 193 of the ABCA;
(c) a declaration that the Arrangement will, upon the filing of
Articles of Arrangement under the ABCA, be effective in accordance with its
terms; and
(d) such other and further orders, declarations and directions as the
Court may deem just.
ANY SECURITYHOLDER OF GLOBAL OR OTHER INTERESTED PARTY DESIRING TO SUPPORT
OR OPPOSE THE PETITION MAY APPEAR AT THE TIME OF HEARING IN PERSON OR BY COUNSEL
FOR THAT PURPOSE, PROVIDED SUCH SECURITYHOLDER OR OTHER INTERESTED PARTY FILES
WITH THE COURT AND SERVES UPON GLOBAL AND FUELCELL, ON OR BEFORE OCTOBER 23,
2003, A NOTICE OF INTENTION TO APPEAR, TOGETHER WITH ANY EVIDENCE OR MATERIALS
WHICH ARE TO BE PRESENTED TO THE COURT, SETTING OUT SUCH SECURITYHOLDER'S OR
OTHER INTERESTED PARTY'S ADDRESS FOR SERVICE BY ORDINARY MAIL AND INDICATING
WHETHER SUCH SECURITYHOLDER OR OTHER INTERESTED PARTY INTENDS TO SUPPORT OR
OPPOSE THE PETITION OR MAKE SUBMISSIONS. SERVICE ON GLOBAL AND FUELCELL IS TO BE
EFFECTED BY DELIVERY TO THE SOLICITORS FOR GLOBAL AND FUELCELL AT THE ADDRESSES
SET FORTH BELOW.
AND NOTICE IS FURTHER GIVEN that, at the hearing and subject to the
foregoing, the securityholders and any other interested persons will be entitled
to make representations as to, and the Court will be requested to consider, the
fairness of the Arrangement. If you do not attend, either in person or by
counsel, at the time, the Court may approve or refuse to approve the Arrangement
as presented, or may approve it subject to such terms and conditions as the
Court shall deem fit, without any further notice.
AND NOTICE IS FURTHER GIVEN that the Court, by an Interim Order dated
September 30, 2003, has given directions as to the calling and holding of a
special meeting of the common shareholders of Global for the purpose of such
shareholders voting upon a special resolution to approve the Arrangement and, in
particular, has directed that registered holders of common shares of Global
shall have the right to dissent under the provisions of Section 191 of the ABCA
upon compliance with the terms of the Interim Order.
AND NOTICE IS FURTHER GIVEN that the final order approving the Arrangement
will, if made, serve as the basis of an exemption from the registration
requirements of the United States Securities Act of 1933, pursuant to Section
3(a)(10) thereof, with respect to (i) the exchangeable shares and the shares of
FuelCell common stock to be issued to Global securityholders and (ii) FuelCell's
assumption of the obligation to issue FuelCell common stock upon conversion of
the Global Cumulative Redeemable Convertible Preferred Shares, Series 2 pursuant
to the Arrangement.
AND NOTICE IS FURTHER GIVEN that a copy of the Petition and other documents
in the proceedings will be furnished to any securityholder of Global or other
interested party requesting the same by the undermentioned solicitors for Global
and FuelCell upon written request delivered to such solicitors as follows:
Global: FuelCell:
Bennett Jones LLP Stikeman Elliott LLP
Barristers and Solicitors Barristers and Solicitors
4500 Bankers Hall East 4300 Bankers Hall West
855 -- 2nd Street S.W. 888 -- 3rd Street S.W.
Calgary, Alberta T2P 4K7 Calgary, Alberta T2P 5C5
Attention: Mr. Anthony L. Friend, Q.C. Attention: Christopher Nixon
DATED at the City of Calgary, in the Province of Alberta, this 30th day of
September, 2003.
By Order of the Board of Directors of
GLOBAL THERMOELECTRIC INC.
/s/ Peter Garrett
Peter Garrett
President and Chief Executive Officer
2
[FUELCELL ENERGY LOGO] [GLOBAL THERMOELECTRIC LOGO]
JOINT MANAGEMENT INFORMATION CIRCULAR
AND PROXY STATEMENT
This joint management information circular and proxy statement (the "Joint
Proxy Statement") is being furnished to holders of common stock of FuelCell
Energy, Inc., a Delaware corporation ("FuelCell"), in connection with the
solicitation of proxies by the board of directors of FuelCell for use at the
special meeting of FuelCell stockholders (the "FuelCell Meeting") to be held at
10:00 a.m. (Eastern time) on Friday, October 31, 2003 at the Sheraton Danbury
Hotel, located at 18 Old Ridgebury Road, Danbury, Connecticut, and any
adjournment or postponement thereof.
This Joint Proxy Statement is also being furnished to holders of common
shares of Global Thermoelectric Inc., an Alberta corporation ("Global"), in
connection with the solicitation of proxies by management of Global for use at
the special meeting of the Global common shareholders (the "Global Meeting"), to
be held at 10:00 a.m. (Calgary time) on October 31, 2003 in Rooms 105 and 106 in
the North Building of the TELUS Convention Centre, 136-8th Avenue S.E., Calgary,
Alberta, Canada and any adjournment or postponement thereof.
This Joint Proxy Statement and the accompanying form of proxy and letter of
transmittal will first be mailed to common shareholders of Global and
stockholders of FuelCell on or about October 2, 2003.
The information concerning FuelCell contained in this Joint Proxy
Statement, including the annexes attached hereto, has been provided by FuelCell,
and the information concerning Global contained in this Joint Proxy Statement,
including the annexes attached hereto, has been provided by Global. The
information concerning FuelCell and Global after the completion of the
combination of the two companies and the information used to derive the pro
forma financial information has been jointly provided by FuelCell and Global.
PLEASE SEE THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 27 FOR
CERTAIN CONSIDERATIONS RELEVANT TO APPROVAL OF THE PROPOSALS AND AN INVESTMENT
IN THE SECURITIES REFERRED TO IN THIS JOINT PROXY STATEMENT.
No person is authorized to give any information or to make any
representation not contained in this Joint Proxy Statement and, if given or
made, such information or representation should not be relied upon as having
been authorized. This Joint Proxy Statement does not constitute an offer to
sell, or a solicitation of an offer to purchase, any securities, or the
solicitation of a proxy, by any person in any jurisdiction in which such an
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to any person to whom it is
unlawful to make such an offer or solicitation of an offer or proxy
solicitation. Neither delivery of this Joint Proxy Statement nor any
distribution of the securities referred to in this Joint Proxy Statement shall,
under any circumstances, create an implication that there has been no change in
the information set forth herein since the date of this Joint Proxy Statement.
THE SHARES OF FUELCELL COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE
COMBINATION HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U.S. SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OF THE
UNITED STATES OR PROVINCE OR TERRITORY OF CANADA, NOR HAS THE U.S. SECURITIES
AND EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OF
THE UNITED STATES OR PROVINCE OR TERRITORY OF CANADA PASSED ON THE ADEQUACY OR
ACCURACY OF THIS JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NOTICE TO CANADIAN SHAREHOLDERS OF GLOBAL
FuelCell is organized under the laws of the State of Delaware, United
States. All of the directors and executive officers of FuelCell and many of the
experts named herein are residents of the United States. In addition,
substantial portions of the assets of FuelCell and of such individuals and
experts are located outside of Canada. As a result, it may be difficult or
impossible for persons who become securityholders of FuelCell to effect service
of process upon such persons within Canada with respect to matters arising under
Canadian securities laws or to enforce against them in Canadian courts judgments
predicated upon the civil liability provisions of Canadian securities laws.
There is some doubt as to the enforceability in the United States in original
actions, or in actions for enforcement of judgments of Canadian courts, of civil
liabilities predicated upon the Canadian securities laws. In addition, awards of
punitive damages in actions brought in Canada or elsewhere may be unenforceable
in the United States.
The disclosure relating to FuelCell included in this Joint Proxy Statement
has been prepared in accordance with U.S. securities laws. Canadian shareholders
of Global should be aware that these requirements may differ from Canadian
requirements. The financial statements of FuelCell included in this Joint Proxy
Statement have been prepared in accordance with U.S. generally accepted
accounting principles ("U.S. GAAP"), which differ in certain respects from
Canadian generally accepted accounting principles ("Canadian GAAP").
NOTICE TO UNITED STATES SHAREHOLDERS OF GLOBAL
The solicitation of proxies by Global is not subject to the requirements of
Section 14(a) of the United States Securities Exchange Act of 1934. Global is a
Canadian issuer subject to Canadian corporate and securities laws, and the
information in this Joint Proxy Statement with respect to the solicitation of
proxies from Global common shareholders has been prepared in accordance with
disclosure requirements applicable in Canada. Global shareholders in the United
States should be aware that these requirements are different from those of the
United States applicable to registration statements under the United States
Securities Act of 1933 and proxy statements under the United States Securities
Exchange Act of 1934.
The summary historical consolidated financial data of Global are presented
in Canadian dollars in accordance with Canadian GAAP, which differs in certain
respects from U.S. GAAP. Note 18 to Global's December 31, 2002 audited
consolidated financial statements (in Global's Annual Information Form for the
year ended December 31, 2002 included in Annex I to this Joint Proxy Statement)
provides a reconciliation of the measurement differences between Global's
financial statements and U.S. GAAP.
Enforcement by Global shareholders of civil liabilities under U.S.
securities laws may be affected adversely by the fact that Global is organized
under the laws of a jurisdiction other than the United States, that all of
Global's officers and directors are residents of Canada, that some of the
experts named in this Joint Proxy Statement may be residents of Canada, and that
all or a substantial portion of the assets of Global are and such persons may be
located outside of the United States.
FOR NEW HAMPSHIRE RESIDENTS ONLY
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR
LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE
FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE
STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY
DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY
SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY
UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY
PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO
ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT
WITH THE PROVISIONS OF THIS PARAGRAPH.
2
TABLE OF CONTENTS
PAGE
----
CHAPTER ONE -- THE COMBINATION.............................. 1
QUESTIONS AND ANSWERS ABOUT THE COMBINATION............... 1
SUMMARY................................................... 11
Overview of the Combination............................ 11
The Companies.......................................... 12
Reasons for the Combination............................ 14
Recommendation to FuelCell Stockholders................ 15
Recommendation to Global Common Shareholders........... 16
Opinions of Financial Advisors......................... 16
What Global Common Shareholders Will Receive in the
Transaction........................................... 16
Market Price Data...................................... 17
Stock Exchange Listings................................ 17
Who Can Vote at the Meetings........................... 18
Shareholder Votes Required............................. 18
Dissent Rights......................................... 18
Risk Factors........................................... 18
Regulatory Approvals................................... 18
Covenants of FuelCell and Global....................... 18
Conditions to the Completion of the Combination........ 19
Termination of the Combination Agreement............... 19
Termination and Expense Reimbursement Fees............. 19
Interests of Certain Persons........................... 20
No Solicitation........................................ 20
Transaction Documents.................................. 20
Tax Consequences of the Combination.................... 20
Comparative Per Share Data............................. 21
Summary Unaudited Pro Forma Condensed Combined
Financial Data........................................ 23
Summary Historical Financial Data of FuelCell.......... 24
Anticipated Accounting Treatment....................... 24
Summary Historical Consolidated Financial Data of
Global Under Canadian GAAP............................ 25
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS............................................. 26
RISK FACTORS.............................................. 27
Risks Related to the Combination....................... 27
Risks Related to the Operations of the Combined
Company............................................... 31
DESCRIPTION OF THE COMBINATION............................ 45
Overview of the Combination............................ 45
Background............................................. 46
Reasons for the Combination............................ 51
Recommendation of the FuelCell Board of Directors...... 54
Opinion of Lazard...................................... 57
Recommendation of the Global Board of Directors........ 62
Opinion of Citigroup................................... 63
Mechanics for Implementing the Combination and
Description of Exchangeable Shares.................... 68
PAGE
----
Retraction, Redemption and Call Rights Applicable to
Exchangeable Shares................................... 72
The Combination Agreement.............................. 81
Agreements of Certain Persons.......................... 88
Dissenting Shareholder Rights.......................... 88
Anticipated Accounting Treatment....................... 89
Business Combination Costs............................. 89
Procedures for Exchange by Global Common
Shareholders.......................................... 90
Stock Exchange Listings................................ 91
Eligibility for Investment in Canada................... 91
Other Regulatory Matters............................... 92
Resales of Exchangeable Shares and FuelCell Common
Stock................................................. 92
Ongoing Canadian Reporting Requirements................ 93
Interests of Certain Persons in the Combination........ 94
CHAPTER TWO -- CERTAIN FINANCIAL AND OTHER INFORMATION ABOUT
THE COMPANIES............................................. 96
BUSINESS OF FUELCELL...................................... 96
Market Opportunities for Distributed Generation........ 97
FuelCell's Development Program......................... 98
Solid State Energy Conversion Alliance ("SECA")........ 99
FuelCell's Strategy.................................... 100
More Information....................................... 100
Selected Consolidated Financial Data of FuelCell....... 100
BUSINESS OF CALLCO........................................ 102
BUSINESS OF EXCHANGECO.................................... 102
BUSINESS OF GLOBAL........................................ 103
Recent Developments.................................... 103
Selected Consolidated Financial Data of Global......... 103
THE COMBINED COMPANY...................................... 105
Pro Forma Condensed Combined Financial Information..... 105
Management of the Combined Company After the
Combination........................................... 106
Fiscal Year............................................ 106
Capitalization......................................... 106
COMPARATIVE MARKET PRICE DATA............................. 107
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES............ 108
COMPILATION REPORT........................................ 110
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS OF FUELCELL ENERGY, INC. ................... 110
CHAPTER THREE -- DESCRIPTION OF FUELCELL'S CAPITAL STOCK,
GLOBAL'S PREFERRED SHARES AND EXCHANGECO AND CALLCO SHARE
CAPITAL................................................... 120
FUELCELL CAPITAL STOCK.................................... 120
Authorized Capital Stock............................... 120
Common Stock........................................... 120
Preferred Stock........................................ 120
Warrants............................................... 121
2
PAGE
----
Anti-Takeover Effects of Provisions of Delaware and
Connecticut Law, the FuelCell Charter and FuelCell's
Bylaws................................................ 121
Limitation on Liability and Indemnification of Officers
and Directors......................................... 122
Global Series 2 Preferred Shares....................... 123
EXCHANGECO SHARE CAPITAL.................................. 124
Authorized Capital..................................... 124
Common Shares.......................................... 124
Exchangeable Shares.................................... 125
Transfer Agent and Registrar........................... 125
CALLCO SHARE CAPITAL...................................... 125
Authorized Capital..................................... 125
Common Shares.......................................... 125
COMPARISON OF SHAREHOLDER RIGHTS.......................... 125
CHAPTER FOUR -- INFORMATION ABOUT TAX CONSIDERATIONS........ 133
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS TO
SHAREHOLDERS........................................... 133
Introduction........................................... 133
Shareholders Resident in Canada........................ 133
Shareholders Not Resident in Canada.................... 138
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS TO
OPTIONHOLDERS.......................................... 139
UNITED STATES FEDERAL TAX CONSIDERATIONS TO
SHAREHOLDERS........................................... 140
United States Holders.................................. 141
Non-United States Holders.............................. 141
Controlled Foreign Corporation Considerations.......... 143
Passive Foreign Investment Company Considerations...... 143
Backup Withholding and Information Reporting........... 144
CHAPTER FIVE -- INFORMATION ABOUT THE MEETINGS AND VOTING... 146
THE GLOBAL SPECIAL MEETING -- INFORMATION FOR GLOBAL
COMMON SHAREHOLDERS.................................... 146
Solicitation and Voting of Proxies..................... 146
Advice to Beneficial Holders of Global Common Shares... 146
Recommendation of the Board of Directors............... 147
Appointment of Proxy and Discretionary Authority....... 147
Revocation of Proxies.................................. 147
Required Votes......................................... 148
Principal Holders of Common Shares..................... 148
THE FUELCELL SPECIAL MEETING -- INFORMATION FOR FUELCELL
STOCKHOLDERS........................................... 148
General................................................ 148
Purpose of the FuelCell Meeting........................ 148
Recommendation of the Board of Directors............... 148
Voting Proxies at the FuelCell Meeting and Revoking
Proxies............................................... 148
Quorum, Voting Rights, Abstentions and Broker
Non-Votes............................................. 149
Reasons for Seeking Stockholder Approval............... 150
Solicitation of Proxies and Expenses................... 150
Independent Auditors................................... 150
3
PAGE
----
Stockholder Proposals at the 2004 Annual Meeting....... 150
Dissenters' Appraisal Rights........................... 151
CHAPTER SIX -- FUELCELL EXECUTIVE COMPENSATION AND RELATED
INFORMATION............................................... 152
CHAPTER SEVEN -- GLOBAL EXECUTIVE COMPENSATION AND RELATED
INFORMATION............................................... 152
EXECUTIVE COMPENSATION.................................... 152
Stock Options.......................................... 153
Employment Contracts................................... 153
Compensation of Directors.............................. 154
Indebtedness to Global................................. 154
Interest of Insiders in Material Transactions.......... 154
CHAPTER EIGHT -- CERTAIN LEGAL AND OTHER INFORMATION........ 155
AUDITORS, TRANSFER AGENT AND REGISTRAR.................... 155
LEGAL MATTERS............................................. 155
AVAILABLE INFORMATION..................................... 155
Annex A Form of Arrangement Resolution
Annex B Combination Agreement
Annex C Interim Order
Annex D Plan of Arrangement
Annex E Lazard Fairness Opinion
Annex F Citigroup Fairness Opinion
Annex G Section 191 of the Business Corporations Act
(Alberta)
Annex H Additional Information About FuelCell
Annex I Additional Information About Global
4
CHAPTER ONE -- THE COMBINATION
QUESTIONS AND ANSWERS ABOUT THE COMBINATION
QUESTIONS AND ANSWERS FOR GLOBAL COMMON SHAREHOLDERS AND FUELCELL STOCKHOLDERS
The following questions and answers are designed to assist Global common
shareholders and FuelCell stockholders in making a decision on how to vote at
their respective meetings. A more detailed description of the Combination
follows the question and answer part of this Joint Proxy Statement. References
to the "Combination" in this Joint Proxy Statement refer to the share exchange
contemplated by the plan of arrangement (the "Plan of Arrangement") and the
transactions contemplated thereby, all as set forth in the Combination Agreement
dated as of August 4, 2003 (the "Combination Agreement") between FuelCell and
Global. The Combination provides for, among other things:
- with respect to each Global common shareholder who is a resident of
Canada for purposes of the Income Tax Act (Canada) (a "Canadian Global
common shareholder"), the issuance of, at the shareholder's election,
either (i) shares of an indirect wholly-owned Canadian subsidiary of
FuelCell exchangeable for shares of FuelCell common stock or (ii) shares
of FuelCell common stock, in exchange for the Global common shares held
by the shareholder;
- with respect to each Global common shareholder who is not a resident of
Canada for purposes of the Income Tax Act (Canada) (a "non-Canadian
Global common shareholder"), the issuance of shares of FuelCell common
stock, in exchange for the Global common shares held by the shareholder;
- the assumption by FuelCell of outstanding Global options; and
- the assumption by FuelCell of the obligation to issue shares of FuelCell
common stock upon conversion of Global's Cumulative Redeemable
Convertible Preferred Shares, Series 2 (the "Global Series 2 Preferred
Shares").
ONLY CANADIAN RESIDENTS MAY ELECT TO RECEIVE EXCHANGEABLE SHARES. ANY
ELECTION TO RECEIVE EXCHANGEABLE SHARES BY A GLOBAL SHAREHOLDER WHO IS NOT A
RESIDENT OF CANADA FOR PURPOSES OF THE INCOME TAX ACT (CANADA) WILL NOT BE
VALID, AND THE SHAREHOLDER WILL RECEIVE FUELCELL COMMON STOCK.
References in this Joint Proxy Statement to "we," "our," "us," and the
"combined company" refer to the combined operations of FuelCell and Global
assuming completion of the Combination, with Global operating as a consolidated
subsidiary of FuelCell. UNLESS OTHERWISE INDICATED, DOLLAR AMOUNTS ARE EXPRESSED
IN U.S. DOLLARS AND ASSUME A CURRENCY EXCHANGE RATE OF CDN.$1.4048 TO U.S.$1.00,
WHICH WAS THE APPROXIMATE EXCHANGE RATE ON AUGUST 1, 2003, THE LAST TRADING DAY
PRIOR TO THE EXECUTION OF THE COMBINATION AGREEMENT.
1. WHY DO FUELCELL AND GLOBAL WANT TO COMBINE THEIR BUSINESSES?
FuelCell and Global believe that the Combination will result in a
diversified company with complementary revenue streams, technologies, customers
and alliances that, on a combined basis, is well positioned to address
opportunities in the fuel cell power generation market. FuelCell and Global
believe that the Combination is a complementary strategic combination that will:
- create a company with both leading high temperature carbonate Direct
FuelCell(R) (DFC(R)) and solid oxide fuel cell ("SOFC") technology;
- strengthen FuelCell's position throughout the first phase of the SECA
program to develop SOFC products, and increases the chances that FuelCell
will be able to successfully compete for advancement through the next two
phases of the 10-year $139 million Solid State Energy Conversion Alliance
("SECA") program;
- increase FuelCell's and Global's technology base in a market where there
is significant growing interest from governmental and strategic partners;
- create a combined company with a strong balance sheet with an expected
cash balance of over $200 million;
- benefit shareholders of both companies by creating a stronger, more
diversified company with increased stock liquidity;
- consolidate operations with opportunities for cost efficiencies by
integrating research and development efforts, combining product
development and commercialization, integrating manufacturing operations
and consolidating general and administrative expenses; and
- result in an expanded technology and product profile as a provider of
distributed generation solutions.
2. WHAT WILL GLOBAL SHAREHOLDERS RECEIVE AS A RESULT OF THE COMBINATION?
Under the terms of the Combination Agreement and the Plan of Arrangement:
- each Canadian Global common shareholder (other than dissenting
shareholders) will receive for the Global common shares held by that
shareholder at the effective time of the Combination at the shareholder's
election either: (i) exchangeable shares of FCE Canada Inc., an indirect
wholly-owned Canadian subsidiary of FuelCell ("ExchangeCo"); or (ii)
shares of FuelCell common stock; and
- each non-Canadian Global common shareholder (other than dissenting
shareholders) will receive for the Global common shares held by that
shareholder at the effective time of the Combination shares of FuelCell
common stock.
Each exchangeable share will be exchangeable for one share of FuelCell
common stock. The exchangeable shares will have economic and voting rights
equivalent to shares of FuelCell common stock and have been conditionally
approved for listing on the Toronto Stock Exchange. YOU MUST ELECT TO RECEIVE
EXCHANGEABLE SHARES BY PROPERLY FILLING OUT, DATING, EXECUTING AND SENDING THE
ENCLOSED LETTER OF TRANSMITTAL TO COMPUTERSHARE TRUST COMPANY OF CANADA AT THE
ADDRESS SPECIFIED IN THE LETTER OF TRANSMITTAL, TOGETHER WITH YOUR CERTIFICATES
REPRESENTING GLOBAL COMMON SHARES IN RESPECT OF WHICH YOU ARE MAKING THE
ELECTION, WHICH MUST BE RECEIVED BY COMPUTERSHARE TRUST COMPANY OF CANADA BY THE
CLOSE OF BUSINESS ON THE LAST BUSINESS DAY BEFORE THE CLOSING OF THE
COMBINATION. SEE "-- DESCRIPTION OF THE COMBINATION -- PROCEDURES FOR EXCHANGE
BY GLOBAL COMMON SHAREHOLDERS." The number of shares of common stock or
exchangeable shares issued to each Global common shareholder will depend on the
exchange ratio in effect at the time the Combination is completed. The exchange
ratio is based on the 20-day volume-weighted average FuelCell stock price ending
three days prior to the Global Meeting. If FuelCell's 20-day volume-weighted
average stock price is:
- greater than $9.74, the exchange ratio will be 0.279;
- less than $7.96, the exchange ratio will be 0.342; and
- between $7.96 and $9.74, Global common shareholders will receive
approximately $2.72 (approximately Cdn.$3.82 using an exchange rate of
Cdn.$1.4048 to U.S.$1.00) of exchangeable shares or FuelCell common stock
for each Global common share held.
If, at any time prior to the effective time of the Combination, FuelCell's
15-day volume-weighted average stock price is less than $6.65, then Global has
the right to terminate the Combination Agreement without having to pay a
termination or expense reimbursement fee. For more information regarding this
termination provision, please see "-- Description of the Combination -- the
Combination Agreement -- Termination." As of September 24, 2003 FuelCell's
15-day volume-weighted average stock price was approximately $11.53.
2
The chart below illustrates the exchange ratio:
(CHART GRAPHIC)
By way of illustration, the following are four examples of the exchange
ratio calculation on the basis of a range of prices of FuelCell common stock.
For purposes of these examples, we have assumed a foreign currency exchange rate
of Cdn.$1.4048 to U.S.$1.00 (the exchange rate on August 1, 2003) for purposes
of valuing the shares of FuelCell common stock received. If the 20-day
volume-weighted average price of FuelCell common stock for the period ending
three days prior to the Global Meeting is:
- $7.50, then Global common shareholders will receive 0.342 shares of
FuelCell common stock for each Global common share held, with an
approximate value of Cdn.$3.60 per share;
- $8.35, then Global common shareholders will receive 0.326 shares of
FuelCell common stock for each Global common share held, with an
approximate value of Cdn.$3.82 per share;
- $9.35, then Global common shareholders will receive 0.291 shares of
FuelCell common stock for each Global common share held, with an
approximate value of Cdn.$3.82 per share; and
- $10.50, then Global common shareholders will receive 0.279 shares of
FuelCell common stock for each Global common share held, with an
approximate value of Cdn.$4.12 per share.
The Canadian dollar value of exchangeable shares or FuelCell common stock
actually received by Global common shareholders pursuant to the Combination is
subject to fluctuations in the trading price of FuelCell common stock and the
Canadian-U.S. dollar exchange rate between the determination date for the 20-day
volume-weighted average of FuelCell stock price and the date that Global's
common shareholders actually receive exchangeable shares or FuelCell common
stock following completion of the Combination.
Global will issue a press release prior to the Global Meeting advising you
of the final determination of the exchange ratio.
3. WHO WILL MANAGE THE COMBINED COMPANY AFTER THE COMBINATION?
The combined company will retain the name "FuelCell Energy, Inc." and be
headquartered in Danbury, Connecticut. It will have a twelve-member board of
directors which will include one designee of Global. In addition, FuelCell will
consider adding one additional Global nominee to the board of directors. Jerry
D. Leitman, FuelCell's Chairman, President and Chief Executive Officer, and
Joseph G. Mahler, FuelCell's Senior Vice President and Chief Financial Officer,
will lead the combined company in those respective roles.
3
4. WHEN AND WHERE ARE THE SHAREHOLDER MEETINGS?
Both meetings will take place on October 31, 2003. The Global Meeting will
be held at 10:00 a.m. (Calgary time) in Rooms 105 and 106, in the North Building
of the TELUS Convention Centre, 136 - 8th Avenue S.E., Calgary, Alberta. The
FuelCell Meeting will be held at 10:00 a.m. (Eastern time) at the Sheraton
Danbury Hotel, located at 18 Old Ridgebury Road, Danbury, Connecticut.
5. WHAT DO I NEED TO DO NOW?
Please indicate on your proxy card how you want to vote, and sign and mail
it in the enclosed return envelope as soon as possible so that your shares may
be represented at your meeting. In addition, if you are a FuelCell stockholder,
you can simplify your voting and save FuelCell expense by either voting via the
Internet (by visiting the website shown on your proxy card and following the
instructions listed there) or calling the toll-free telephone number listed on
your proxy card. If you are a FuelCell stockholder and sign and send in your
proxy and do not indicate how you want to vote, your proxy will be counted as a
vote in favor of the approval of the Combination Agreement and the transactions
contemplated thereby. If you are a Global common shareholder and sign and send
in your proxy and do not indicate how you want to vote, your proxy will be
counted as a vote in favor of the approval of the special resolution to approve
the Combination attached as Annex A to this Joint Proxy Statement at the Global
Meeting. You may also choose to attend your meeting and vote your shares in
person. For more information regarding the FuelCell Meeting and the Global
Meeting, please see "Chapter Five -- Information about the Meetings and Voting."
6. WHAT DO I DO IF I WANT TO REVOKE MY PROXY OR CHANGE MY VOTE?
If you are a FuelCell stockholder, you may revoke your proxy at any time
prior to its use by delivering to the Secretary of FuelCell a later-dated notice
of revocation, by delivering to the Secretary of FuelCell a later-dated signed
proxy (which will automatically supersede any earlier-dated proxy that you
returned), or by attending the FuelCell Meeting and voting in person (attendance
at the FuelCell Meeting does not, by itself, constitute revocation of your
proxy).
If you are a Global common shareholder, to revoke your proxy you may send
in a later-dated signed proxy card to Global's Secretary, or you can attend the
Global Meeting in person and vote. You may also revoke your proxy by sending a
notice of revocation to Computershare Trust Company of Canada, which must be
received by 5:00 p.m. (Calgary time) on the last business day prior to the
Global Meeting, or by giving this notice to the Chairman of the Global Meeting
prior to the commencement of the Global Meeting.
7. IF MY SHARES ARE HELD BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
Your broker will vote your shares only if you provide instructions on how
to vote. Without instructions, your shares will not be voted. You should
instruct your broker to vote your shares by following the directions provided by
your broker.
8. WHAT VOTES ARE REQUIRED TO COMPLETE THE COMBINATION?
Approval of the Combination Agreement and the Combination requires the
affirmative vote of a majority of the total number of shares of FuelCell common
stock entitled to vote and voting on the proposal in person or by proxy at the
FuelCell Meeting. The Combination also requires the approval of the holders of
at least two-thirds of the Global common shares represented in person or by
proxy at the Global Meeting.
9. WHAT ARE THE OTHER MATERIAL CONDITIONS TO COMPLETION OF THE COMBINATION?
The Combination is subject to the receipt of required governmental and
regulatory approvals, including approval of the Plan of Arrangement giving
effect to the Combination by the Court of Queen's Bench of Alberta (the "Court")
and approvals of both the Nasdaq National Market and the Toronto Stock Exchange
for the listing of the shares of FuelCell common stock and the exchangeable
shares, respectively, to be issued pursuant to the Combination. The Combination
is also subject to other customary conditions.
4
10. WHEN DO YOU EXPECT THE COMBINATION TO BE COMPLETED?
Both companies are working toward completing the Combination as quickly as
possible. We expect that, if approved, the Combination will become effective as
of the close of business on or about November 3, 2003.
11. WHOM DO I CALL IF I HAVE MORE QUESTIONS?
For questions about voting and proxies, FuelCell stockholders may contact:
Steven P. Eschbach, CFA
Director - Investor Relations
FuelCell Energy, Inc.
3 Great Pasture Road
Danbury, Connecticut 06813
Tel: (203) 825-6000
Fax: (203) 825-6100
For questions about voting and proxies, Global shareholders may contact
Computershare Trust Company of Canada at 1-800-564-6253.
For other information, Global shareholders may contact:
Mark Kryzan
Director, Investor Relations
Global Thermoelectric Inc.
4908 - 52nd Street S.E.
Calgary, Alberta T2B 3R2
Tel: (403) 204-6100
Fax: (403) 204-6105
ADDITIONAL QUESTIONS AND ANSWERS FOR FUELCELL STOCKHOLDERS
12. WHAT ARE FUELCELL STOCKHOLDERS BEING ASKED TO VOTE ON?
FuelCell stockholders are being asked to approve the Combination Agreement
and the Combination.
13. WHY IS FUELCELL SEEKING STOCKHOLDER APPROVAL OF THE COMBINATION?
Under the Nasdaq Marketplace Rules, listed companies are required to obtain
stockholder approval prior to issuing securities in connection with the
acquisition of stock of another company if the number of shares to be issued in
the transaction exceeds 20% of the outstanding common stock or voting power
prior to the transaction. Under the terms of the Combination Agreement and the
Plan of Arrangement, each Canadian Global common shareholder (other than a
dissenting shareholder) will receive, at the shareholder's election, either (i)
shares of an indirect wholly-owned Canadian subsidiary of FuelCell exchangeable
for shares of FuelCell common stock or (ii) shares of FuelCell common stock.
Each non-Canadian Global common shareholder (other than a dissenting
shareholder) will receive FuelCell common stock. As a result, Global common
shareholders will own between approximately 17% and 20% of the outstanding
shares of FuelCell common stock, on a fully-diluted basis, immediately following
completion of the Combination. In addition, FuelCell will assume outstanding
Global stock options and the obligation to issue its common stock upon the
conversion of the outstanding Global Series 2 Preferred Shares after completion
of the Combination, which may result in FuelCell issuing additional shares of
its common stock. For a description of the number of shares of FuelCell common
stock that may be issued upon conversion of the Global Series 2 Preferred
Shares, please see "-- Description of the Combination -- Mechanics for
Implementing the Combination and Description of Exchangeable Shares -- Global
Series 2 Preferred Shares." If FuelCell were to complete the Combination without
FuelCell stockholder approval, FuelCell common stock could not remain listed on
the Nasdaq National Market. Approval of the Combination by FuelCell's
stockholders is not required by Delaware law, by the FuelCell charter or by
FuelCell's bylaws.
5
14. WHY IS FUELCELL ENTERING INTO THE COMBINATION?
FuelCell believes that the Combination is a complementary strategic
acquisition that will offer:
- greater financial strength with a stronger balance sheet, better
liquidity and complementary existing revenue streams across established
markets;
- an expanded range of products and technologies with an enhanced ability
to secure government, military and customer funding;
- consolidated operations with opportunities for cost efficiencies by
integrating research and development efforts, combining product
development and commercialization, integrating manufacturing operations
and consolidating general and administrative expenses; and
- an expanded technology and product profile as a provider of distributed
generation solutions.
FuelCell has received the written opinion of Lazard Freres & Co. LLC
("Lazard") that, as of the date of the opinion and based upon and subject to the
matters set forth therein, the exchange ratio was fair to FuelCell from a
financial point of view. Overall, FuelCell believes that the Combination will
provide added value to its stockholders.
15. WHAT WILL HAPPEN IF THE FUELCELL STOCKHOLDERS DO NOT APPROVE THE
COMBINATION OR IF GLOBAL COMMON SHAREHOLDERS OR THE COURT DO NOT APPROVE
THE PLAN OF ARRANGEMENT?
Approval of the Combination Agreement and the transactions contemplated
thereby requires the affirmative vote of a majority of shares of FuelCell common
stock entitled to vote and voting in person or by proxy at the FuelCell Meeting.
The Combination is conditional on FuelCell stockholders approving the
Combination. If FuelCell stockholders do not approve the FuelCell proposal, then
the proposal will not be implemented and the Combination will not proceed. In
that event, FuelCell will be required to pay Global a fee for reimbursement of
expenses. For a description of the fees that may apply, please see
"-- Description of the Combination -- The Combination Agreement -- Termination
and Expense Reimbursement Fees."
In addition, the Combination is conditional on the approval of the Plan of
Arrangement implementing the Combination by Global common shareholders and the
Court. If the Plan of Arrangement is not approved by Global common shareholders
and by the Court, then the Combination will not be implemented.
16. HOW WILL THE COMBINATION AFFECT MY FUELCELL COMMON STOCK?
Your rights as a FuelCell common stockholder will not be affected by the
Combination. FuelCell stockholders will not receive any additional shares by
virtue of their holdings in FuelCell. However, the ownership of FuelCell will be
significantly different upon consummation of the Combination, as Global common
shareholders will own between approximately 17% and 20% of the fully-diluted
shares of outstanding FuelCell common stock. In addition, your current
percentage ownership of FuelCell will be affected by the future issuance of
FuelCell common stock upon the exercise, if any, of the Global stock options
being assumed by FuelCell and the possible conversion of the Global Series 2
Preferred Shares into FuelCell common stock. For more information, please see
"-- Risk Factors -- Future sales of substantial amounts of FuelCell common stock
or exchangeable shares could affect their market price and the dilution
associated with the Combination could affect the market price of FuelCell's
common stock." and "-- The rights of the Global Series 2 Preferred Shares could
negatively impact the combined company." Assuming an exchange ratio of 0.342,
FuelCell may be required to issue approximately 463,550 additional shares of its
common stock upon exercise of vested Global stock options (as of September 24,
2003) and upon an assumed immediate conversion of all outstanding Global Series
2 Preferred Shares. For more information regarding the treatment of Global stock
options and the Global Series 2 Preferred Shares, please see the sections
entitled "Global Stock Options" and "Global Series 2 Preferred Shares" within
"-- Description of the Combination -- Mechanics for Implementing the Combination
and Description of Exchangeable Shares."
6
17. HAS FUELCELL'S BOARD OF DIRECTORS MADE ANY RECOMMENDATION TO FUELCELL
STOCKHOLDERS REGARDING THE COMBINATION?
FuelCell's board of directors has carefully considered and has unanimously
approved the Combination Agreement and the Combination and recommends that the
FuelCell stockholders approve the Combination Agreement and the Combination.
ADDITIONAL QUESTIONS AND ANSWERS FOR GLOBAL COMMON SHAREHOLDERS
18. WHAT ARE THE GLOBAL COMMON SHAREHOLDERS BEING ASKED TO VOTE ON?
Global common shareholders are being asked to approve a share exchange
pursuant to an arrangement under the Business Corporations Act (Alberta). The
Court must also approve the implementation of the Plan of Arrangement.
If the proposed Plan of Arrangement is approved by the Global common
shareholders and the Court, and the other conditions to the Plan of Arrangement
are satisfied or waived, then:
- each Canadian Global common shareholder (other than a dissenting
shareholder) will receive, at the shareholder's election, for each Global
common share held by the shareholder, either exchangeable shares of
ExchangeCo or shares of FuelCell common stock, in an amount to be
determined in accordance with the exchange ratio;
- each non-Canadian Global common shareholder (other than a dissenting
shareholder) will receive, for each Global common share held by the
shareholder, shares of FuelCell common stock, in an amount to be
determined in accordance with the exchange ratio;
- each exchangeable share will have economic and voting rights equivalent
to one share of FuelCell common stock and will be exchangeable, at the
option of the holder, for one share of FuelCell common stock;
- Global common shareholders will own between approximately 17% and 20% of
the outstanding shares of FuelCell common stock, on a fully-diluted
basis, immediately following completion of the Combination;
- outstanding Global stock options will be assumed by FuelCell and will be
exercisable for shares of FuelCell common stock in accordance with their
terms and based on the exchange ratio;
- Global Series 2 Preferred Shares will remain outstanding and will be
convertible into shares of FuelCell common stock in accordance with their
terms and based on the exchange ratio; and
- all of the Global common shares will be owned, directly or indirectly, by
FuelCell.
19. WHY HAS GLOBAL ENTERED INTO THE COMBINATION AGREEMENT?
The Global board of directors determined in the fall of 2000 that it would
be in the best interests of Global to seek a significant alliance partner to
assist with Global's commercialization of solid oxide fuel cell products. North
American equity markets experienced prolonged weakness from 2000 to 2002 and,
over that period of time, Global's common shares traded at a significant
discount to those of its peers. In late 2002, the Global board of directors
determined that its plan to use equity financing as a source of long-term
funding for Global's current development focus and planned expenditures on
larger power applications would not succeed, particularly in light of Global's
inability to attract a significant strategic relationship partner. In November
2002, Global retained Citigroup Global Markets Inc. ("Citigroup," formerly
Salomon Smith Barney Inc.) to review strategic alternatives and to solicit
proposals from interested third parties on behalf of the board of directors of
Global. Global, through a worldwide process, with the assistance of Citigroup,
solicited potential interest in respect of a variety of alliance structures from
a lengthy list of potential partners across a broad spectrum of industries.
Global's board of directors identified a prospective transaction with Quantum
Fuel Systems Technologies Worldwide, Inc. ("Quantum") as the leading potential
strategic alternative resulting
7
from this process. Global entered into a combination agreement with Quantum on
April 8, 2003, which was amended on June 27, 2003 (the "Quantum Combination
Agreement").
On July 11, 2003, Global received an unsolicited bona fide acquisition
proposal from FuelCell, which the Global board of directors subsequently
determined constituted a "superior proposal" under the terms of the Quantum
Combination Agreement. In accordance with the terms of the Quantum Combination
Agreement, following the execution of a confidentiality agreement, Global
furnished information to, and entered into discussions and negotiations with,
FuelCell. Upon completion of confirmatory due diligence and after receiving the
opinion of Citigroup, the Combination Agreement was executed on August 4, 2003.
Also on August 4, 2003 and immediately prior to execution of the Combination
Agreement, Global terminated the Quantum Combination Agreement in accordance
with its terms and paid a $2 million termination fee to Quantum. The Global
board of directors has unanimously approved the terms and conditions of the
Combination Agreement, determined unanimously that the Combination is fair to
its holders of common shares and preferred shares and is in the best interests
of Global.
BASED ON THE FACTORS CONSIDERED BY THE GLOBAL BOARD OF DIRECTORS, THE BOARD
UNANIMOUSLY RECOMMENDS THAT GLOBAL COMMON SHAREHOLDERS VOTE "FOR" THE SPECIAL
RESOLUTION TO APPROVE THE COMBINATION ATTACHED TO THIS JOINT PROXY STATEMENT AS
ANNEX A. In reaching this decision, the Global board of directors considered,
among other things, the unanimous recommendation of the Special Committee of the
Global board of directors (the "Global Special Committee") and the opinion of
Citigroup, subject to the considerations and limitations set forth therein. See
"Description of the Combination -- Background" and "Description of the
Combination -- Reasons for the Combination -- Global."
Global received the written opinion of Citigroup to the effect that, as of
the date of the opinion and based upon and subject to the considerations and
limitations set forth therein, the exchange ratio was fair, from a financial
point of view, to the holders of Global common shares. In addition, the Plan of
Arrangement:
- is subject to the affirmative approval of at least 66 2/3% of the holders
of Global common shares voting in person or by proxy at the Global
Meeting;
- provides a tax deferral opportunity for most Global common shareholders
resident in Canada through the use of exchangeable shares;
- provides for the assumption by FuelCell of all outstanding Global options
and the assumption by FuelCell of the obligation to issue FuelCell common
stock upon conversion of the Global Series 2 Preferred Shares;
- requires the submission of the Plan of Arrangement to the Court for a
determination of fairness; and
- provides for the right of holders of common shares to dissent under the
Business Corporations Act (Alberta), as modified by the interim order of
the Court.
20. WILL THE SHARES OF FUELCELL COMMON STOCK ISSUED PURSUANT TO THE COMBINATION
BE LISTED ON THE NASDAQ NATIONAL MARKET?
Yes. FuelCell's common stock currently trades on the Nasdaq National Market
under the symbol "FCEL". FuelCell has applied to list the shares of FuelCell
common stock to be issued to Global common shareholders pursuant to the
Combination on the Nasdaq National Market. Global common shares will be delisted
from the Toronto Stock Exchange upon completion of the Combination.
8
21. WHAT ARE THE EXCHANGEABLE SHARES?
The exchangeable shares are shares of ExchangeCo, an indirect wholly-owned
Canadian subsidiary of FuelCell. Each exchangeable share has economic and voting
rights equivalent to one share of FuelCell common stock. Holders of exchangeable
shares will be entitled to:
- exchange their shares for FuelCell common stock at any time on a
one-for-one basis;
- vote indirectly through a voting trust arrangement at meetings of
FuelCell stockholders; and
- receive dividends, if any, on the same basis as FuelCell stockholders.
22. WILL THE EXCHANGEABLE SHARES BE LISTED ON A STOCK EXCHANGE?
Yes. On September 18, 2003, the Toronto Stock Exchange conditionally
approved the listing of the exchangeable shares subject to the satisfaction of
its customary requirements, including the distribution of exchangeable shares to
a minimum number of public shareholders.
23. WHY WOULD I CONTINUE TO HOLD EXCHANGEABLE SHARES?
We have implemented the optional exchangeable share structure to provide
tax deferral opportunities for most Canadian resident Global common
shareholders. The tax deferral continues for so long as the exchangeable shares
are held, provided the shareholder executes a joint election with ExchangeCo
pursuant to Section 85 of the Income Tax Act (Canada). As long as the
exchangeable shares remain listed on a prescribed stock exchange, they will be a
qualified investment for trusts governed by RRSPs, RRIFs, DPSPs, and RESPs and,
so long as ExchangeCo maintains a substantial presence in Canada, will also not
be foreign property for such plans or funds and for certain other persons
subject to Part XI of the Income Tax Act (Canada).
24. WHY ARE ONLY GLOBAL SHAREHOLDERS WHO ARE RESIDENTS OF CANADA ENTITLED TO
ELECT TO RECEIVE EXCHANGEABLE SHARES?
U.S. tax counsel for Global and FuelCell are of the opinion that the
exchangeable share structure is not likely to provide tax deferral opportunities
for Global common shareholders who are not Canadian residents. Accordingly,
non-Canadian Global common shareholders may not elect to receive exchangeable
shares and will instead receive only shares of FuelCell common stock.
25. HOW DO I EXCHANGE MY GLOBAL COMMON SHARES FOR EXCHANGEABLE SHARES OR
FUELCELL COMMON STOCK IF THE COMBINATION IS APPROVED?
Accompanying this booklet is a letter of transmittal that will allow Global
common shareholders who are residents of Canada for purposes of the Income Tax
Act (Canada) to elect to receive exchangeable shares or shares of FuelCell
common stock, which election must be received by Computershare Trust Company of
Canada by the close of business on the last business day before the closing of
the Combination. If the closing occurs as expected on November 3, 2003, your
letter of transmittal must be received by the close of business on October 31,
2003. You will be asked to make a declaration of residency in the letter of
transmittal. If you do not make an election, or if you are not a resident of
Canada for purposes of the Income Tax Act (Canada), you will receive shares of
FuelCell common stock. All Global common shareholders, whether or not residents
of Canada, must return their Global common share certificates, together with a
fully-executed letter of transmittal, in order to receive certificates for
exchangeable shares or shares of FuelCell common stock by the time specified
above. If your common shares are registered in the name of a broker, bank or
nominee, your broker will assist you with the exchange.
26. HOW DO I EXCHANGE MY EXCHANGEABLE SHARES FOR FUELCELL COMMON STOCK?
If you choose to receive certificates representing exchangeable shares and
wish to exchange them for FuelCell common stock at a later date, you must
endorse and deposit your exchangeable share certificate at that time with
Computershare Trust Company of Canada, along with other required documents. If
your
9
exchangeable shares are registered in the name of your broker, bank or nominee,
your broker will assist you with the exchange.
27. WILL I BE ABLE TO HOLD MY EXCHANGEABLE SHARES INDEFINITELY?
No. At any time after the earlier of (i) the five-year anniversary of the
completion of the Combination or (ii) if, at any time following the date that is
15 calendar months after the effective date of the Combination, there are fewer
than one million exchangeable shares outstanding, ExchangeCo may redeem each
outstanding exchangeable share in exchange for a share of FuelCell common stock.
See "-- Description of the Combination -- Description of the Exchangeable
Shares -- Retraction, Redemption and Call Rights Applicable to Exchangeable
Shares -- Early Redemption."
28. IF AND WHEN I EXCHANGE MY EXCHANGEABLE SHARES, HOW LONG WILL IT TAKE TO
RECEIVE FUELCELL COMMON STOCK?
It will take approximately ten business days to receive your certificate
representing FuelCell common stock following deposit of your exchangeable share
certificate, duly endorsed, with Computershare Trust Company of Canada.
29. WHAT WILL HAPPEN IF THE GLOBAL COMMON SHAREHOLDERS DO NOT APPROVE THE
COMBINATION?
In order to be effective under applicable law, the special resolution
approving the Combination requires approval by at least 66 2/3% of the votes
cast by Global common shareholders present in person or represented by proxy at
the Global Meeting and entitled to vote.
If the required vote of Global common shareholders is not obtained, the
special resolution will not be approved and the Combination will not proceed. In
that event, Global will be required to pay FuelCell a fee of $900,000 for
reimbursement of FuelCell's expenses. For a description of fees that may apply
upon termination of the Combination Agreement, please see "-- Description of the
Combination -- The Combination Agreement -- Termination and Expense
Reimbursement Fees."
10
SUMMARY
The following is a summary of certain information contained in this Joint
Proxy Statement and may not contain all of the information that is important to
you. The summary is not intended to be complete and is qualified in its entirety
by the more detailed information and financial statements, including the notes
thereto, contained elsewhere in this Joint Proxy Statement and the attached
annexes, all of which are important and should be reviewed carefully. You should
carefully read the entire document and the other documents we refer you to for a
more complete understanding of the Combination. Unless otherwise indicated in
this Joint Proxy Statement, share amounts set forth herein assume no exercise of
outstanding options to purchase Global common shares or FuelCell common stock
and no conversion of the Global Series 2 Preferred Shares. UNLESS OTHERWISE
INDICATED, DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS AND ASSUME A CURRENCY
EXCHANGE RATE OF CDN.$1.4048 TO U.S.$1.00, WHICH WAS THE APPROXIMATE EXCHANGE
RATE ON AUGUST 1, 2003, THE LAST TRADING DAY PRIOR TO THE EXECUTION OF THE
COMBINATION AGREEMENT.
OVERVIEW OF THE COMBINATION
On August 4, 2003, Global and FuelCell entered into the Combination
Agreement to combine Global with FuelCell in a share-for-share exchange pursuant
to a Plan of Arrangement to be submitted for approval by the Court of Queen's
Bench of Alberta (the "Court"). If all approvals are received and the
Combination closes, upon receipt of Global share certificates and properly
completed letters of transmittal, (i) each Canadian Global common shareholder
(other than dissenting shareholders) will receive, at the shareholder's
election, either exchangeable shares or shares of FuelCell common stock for each
Global common share held by that shareholder at the effective time of the
Combination determined in accordance with the exchange ratio, and (ii) each
non-Canadian Global common shareholder (other than dissenting shareholders) will
receive shares of FuelCell common stock for each Global common share held by
that shareholder at the effective time of the Combination determined in
accordance with the exchange ratio. Each exchangeable share will be exchangeable
for one share of FuelCell common stock. The exchangeable shares will have
economic and voting rights equivalent to shares of FuelCell common stock and
have been conditionally approved for listing on the Toronto Stock Exchange.
Under the terms of the Plan of Arrangement, Global common shareholders
(other than dissenting shareholders) will receive between 0.279 and 0.342
exchangeable shares or shares of FuelCell common stock for each Global common
share outstanding at the time of the Combination, depending on the exchange
ratio in effect at the time the Combination is completed. The exchange ratio
will be determined by dividing $2.72 (approximately Cdn.$3.82) by the 20-day
volume-weighted average FuelCell stock price ending three days prior to the
Global Meeting; however, the exchange ratio will not be greater than 0.342 nor
less than 0.279. Accordingly, if FuelCell's 20-day volume-weighted average stock
price is:
- greater than $9.74, the exchange ratio will be 0.279;
- less than $7.96 the exchange ratio will be 0.342; and
- between $7.96 and $9.74, Global common shareholders will receive
approximately $2.72 (approximately Cdn.$3.82) of FuelCell common stock
for each Global common share.
Upon completion of the proposed Combination:
- all Global common shareholders will cease to be shareholders of Global;
- each Canadian Global common shareholder (other than dissenting
shareholders) will receive, at the shareholder's election, either
exchangeable shares or shares of FuelCell common stock for each Global
common share held by that shareholder at the effective time of the
Combination determined in accordance with the exchange ratio;
- each non-Canadian Global common shareholder (other than dissenting
shareholders) will receive shares of FuelCell common stock for each
Global common share held by that shareholder at the effective time of the
Combination determined in accordance with the exchange ratio;
11
- each outstanding option to purchase Global common shares will be assumed
by FuelCell and will represent an option to purchase FuelCell common
stock in accordance with the option's terms based on the exchange ratio;
- the Global Series 2 Preferred Shares will remain preferred shares of
Global, as a consolidated subsidiary of FuelCell, and FuelCell will
assume the obligation to issue FuelCell common stock upon conversion
thereof; and
- Global will become a consolidated subsidiary of FuelCell.
THE COMPANIES
FUELCELL
FuelCell is a world leader in the development and manufacture of carbonate
fuel cell power plants for distributed power generation. FuelCell has designed
and is developing standard fuel cell power plants that offer significant
advantages compared to existing power generation technology. These advantages
include higher fuel efficiency than existing distributed generation equipment,
significantly lower emissions, quieter operation, lower vibration, flexible
siting and permitting requirements, scalability and potentially lower operating,
maintenance and generation costs. FuelCell is currently conducting, and has
successfully concluded, field trials of fuel cell power plants ranging from 250
kW to 2 MW. In fiscal year 2002, FuelCell had $41 million in sales revenue from
sales of its Direct FuelCell products and revenue from research and development
contracts.
FuelCell's carbonate fuel cell, known as the Direct FuelCell or DFC, 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 to produce
hydrogen. FuelCell believes that this "one-step" 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 proton
exchange membrane and phosphoric acid, generally use complex, external fuel
processing equipment to convert the fuel into hydrogen. This external equipment
increases capital cost and reduces electrical efficiency.
FuelCell's Direct FuelCell has been demonstrated using a variety of
hydrocarbon fuels, including natural gas, methanol, diesel, biogas, coal gas,
coal mine methane and propane. FuelCell expects that commercial DFC power plant
products will achieve an electrical efficiency of between 45% and 57%. Depending
on location, application and load size, FuelCell expects that a co-generation
configuration will reach an overall energy efficiency of between 70% and 80%.
FuelCell's principal executive offices are located at:
3 Great Pasture Road
Danbury, Connecticut 06813
Tel: (203) 825-6000
Fax: (203) 825-6100
www.fce.com (The contents of FuelCell's web site are not part of this Joint
Proxy Statement.)
GLOBAL
Global focuses on the development, manufacture and distribution of two
stationary power technologies. Specifically, Global is in the process of
commercializing natural gas and propane compatible solid oxide fuel cell
products intended for residential, small commercial and light industrial
markets, and also manufactures and distributes thermoelectric stationary power
generators for use in remote industrial power markets.
Global launched its solid oxide fuel cell development program in 1998.
Since that time, Global has developed and tested a proprietary fuel cell
membrane, the key enabling technological component for Global's solid oxide fuel
cell products. Global has developed a pilot volume production plant and
methodology incorporating conventional manufacturing processes for the
manufacture of these membranes. Cell membrane technology, combined with advanced
stack technology, is now being tested by Global in system applications. Global's
focus is on the development of stationary natural gas-fueled prototype systems.
12
In fiscal year 2002, Global had Cdn.$21.8 million in sales revenue from the
supply of generators and related services. Thermoelectric generator systems have
been manufactured and distributed by Global since 1975 and are widely used in
remote applications by the oil and gas and other industries. To date, these
generator systems have operated in 47 countries worldwide, supplying power for
applications ranging from five to 5,000 watts.
Global's principal executive offices are located at:
4908-52nd Street S.E.
Calgary, Alberta T2B 3R2
Tel: (403) 204-6100
Fax: (403) 204-6105
www.globalte.com (The contents of Global's web site are not part of this
Joint Proxy Statement.)
GLOBAL RECENT DEVELOPMENTS
TERMINATION OF QUANTUM COMBINATION AGREEMENT. Prior to the execution of
the Combination Agreement, on August 4, 2003 Global terminated the Quantum
Combination Agreement in accordance with its terms. Pursuant to the terms of the
Quantum Combination Agreement, Global paid Quantum a $2 million termination fee.
The termination of the Quantum Combination Agreement and payment of the $2
million termination fee were required for Global to pursue the Combination with
FuelCell and enter into the Combination Agreement.
THE COMBINED COMPANY (SEE PAGE 105)
The combined company will retain the name "FuelCell Energy, Inc." and will
be headquartered in Danbury, Connecticut. Global will be operated as a
consolidated subsidiary of FuelCell. Prior to the effective time of the
Combination, the board of directors of FuelCell will be increased to a maximum
of thirteen members, which will include at least one and a maximum of two
designees of Global. Jerry D. Leitman, FuelCell's Chairman, President and Chief
Executive Officer, and Joseph G. Mahler, FuelCell's Senior Vice President and
Chief Financial Officer, will lead the combined company in their respective
roles. The combined company will maintain a concentrated focus on the continued
commercialization of its Direct FuelCell products, while seeking to develop
Global's SOFC technology to a point where it can be commercialized and provide
increased breadth to FuelCell's range of distributed generation products.
FuelCell is continuing to evaluate Global's generator business to determine its
strategic fit within the combined company and has not made a determination
whether to retain or sell that business.
The combined company's fiscal year end will be October 31.
At July 31, 2003, on a pro forma combined basis, the combined company had:
- total assets of $330 million;
- total cash and cash equivalents, and investments of $228 million;
- total stockholders' equity of $293 million;
- long-term debt and capital leases of $2 million;
- preferred shares of subsidiary of $8.4 million, representing the Global
Series 2 Preferred Shares remaining outstanding after the Combination;
and
- approximately 48,846,909 outstanding shares of common stock (assuming an
exchange ratio of 0.325 and excluding FuelCell common stock issuable upon
the exercise of options and warrants and conversion of Global Series 2
Preferred Shares).
13
For the nine months ended July 31, 2003, on a pro forma combined basis, the
combined company had:
- revenue of $38 million;
- net losses of $68 million; and
- basic and diluted loss per share of $(1.39).
Please see "Chapter Two -- Certain Financial and Other Information About the
Companies -- Unaudited Pro Forma Condensed Combined Financial Statements" for a
discussion of the assumptions underlying this pro forma combined financial
information.
REASONS FOR THE COMBINATION (SEE PAGE 51)
FUELCELL
FuelCell believes that the Combination will result in a diversified company
with complementary revenue streams, technologies, customers and alliances that,
on a combined basis, is well-positioned to address opportunities in the fuel
cell power generation markets. FuelCell believes that the Combination is a
complementary strategic combination that will:
- create a company with both leading high temperature carbonate Direct
FuelCell and SOFC technology;
- strengthen FuelCell's position throughout the first phase of the SECA
program to develop SOFC products and increase the chances that FuelCell
will be able to successfully compete for advancement through the next two
phases of the 10-year $139 million SECA program;
- increase FuelCell's and Global's technology base in a market where there
is significant growing interest from governmental and strategic partners;
- create a combined company with a strong balance sheet with an expected
cash balance of over $200 million;
- benefit shareholders of both companies by creating a stronger, more
diversified company and increased stock liquidity;
- consolidate operations with opportunities for cost efficiencies by
integrating research and development efforts, combining product
development and commercialization, integrating manufacturing operations
and consolidating general and administrative expenses; and
- result in an expanded technology and product profile as a provider of
fuel cell distributed generation solutions.
In considering the Combination, the FuelCell board of directors recognized
that there are risks associated with the acquisition of Global, including that
some of the potential benefits described above may not be realized, that there
may be significant costs associated with realizing these benefits, the risks set
forth under "Risk Factors" and the disadvantages that the FuelCell board of
directors identified in "-- Description of the Combination -- Recommendation of
the FuelCell Board of Directors."
GLOBAL
The Global board of directors determined in the fall of 2000 that it would
be in the best interests of Global to seek a significant alliance partner to
assist with Global's commercialization of solid oxide fuel cell products. North
American equity markets experienced prolonged weakness from 2000 to 2002 and,
over that period of time, Global's common shares traded at a significant
discount to those of its peers. In late 2002, the Global board of directors
determined that its plan to use equity financing as a source of long-term
funding for Global's current development focus and planned expenditures on
larger power applications would not succeed, particularly in light of Global's
inability to attract a significant strategic relationship partner. Global,
through a worldwide process initiated in the winter of 2002, with the assistance
of Citigroup, solicited potential interest
14
in respect of a variety of alliance structures from a lengthy list of potential
partners across a broad spectrum of industries. Global's board of directors
identified a prospective transaction with Quantum as the leading potential
strategic alternative resulting from this process. Global entered into the
Quantum Combination Agreement on April 8, 2003. On July 11, 2003, Global
received an unsolicited bona fide acquisition proposal from FuelCell, which the
Global board of directors determined was a "superior proposal" under the Quantum
Combination Agreement. In accordance with the provisions of the Quantum
Combination Agreement, Global furnished information to and entered into
discussions and negotiations with FuelCell which culminated in the execution of
the Combination Agreement on August 4, 2003. The Quantum Combination Agreement
was terminated in accordance with its terms and a $2 million termination fee was
paid to Quantum on August 4, 2003.
The Global board of directors unanimously (i) approved the terms and
conditions of the Combination Agreement, (ii) determined that the Combination is
fair to its holders of common shares and preferred shares and is in the best
interests of Global and (iii) recommends that Global common shareholders vote in
favor of the special resolution to approve the Combination attached to this
Joint Proxy Statement as Annex A. In reaching this decision, the Global board of
directors considered, among other things, the unanimous recommendation of the
Global Special Committee and the fairness opinion of Citigroup. For additional
information, please see "-- Description of the Combination -- Background" and
"-- Description of the Combination -- Opinion of Citigroup." The Global board of
directors also considered the elements of fairness associated with the
Combination, including that it:
- is subject to the affirmative approval of at least 66 2/3% of the holders
of Global common shares voting in person or by proxy at the Global
Meeting;
- provides a tax deferral opportunity for most Global common shareholders
resident in Canada through the use of exchangeable shares;
- provides for the assumption by FuelCell of all outstanding Global options
and the assumption by FuelCell of the obligation to issue FuelCell common
stock upon conversion of the Global Series 2 Preferred Shares;
- requires the submission of the Plan of Arrangement to the Court for a
determination of fairness; and
- provides for the right of holders of Global common shares to dissent
under the Business Corporations Act (Alberta), as modified by the interim
order of the Court.
The Global board of directors also considered potential advantages and
disadvantages of the Combination. For additional information regarding the
foregoing, please see "-- Description of the Combination -- Reasons for the
Combination -- Global" and "-- Risk Factors."
RECOMMENDATION TO FUELCELL STOCKHOLDERS (SEE PAGE 54)
The FuelCell board of directors has unanimously determined that the
Combination and the transactions contemplated thereby are fair to FuelCell's
stockholders and in the best interests of FuelCell and has approved the
Combination Agreement and the Combination. In reaching this conclusion,
FuelCell's board of directors considered, among other things, the opinion dated
August 1, 2003, of Lazard that, as of such date and based on and subject to the
assumptions set forth therein, the exchange ratio set forth in the Combination
Agreement is fair, from a financial point of view, to FuelCell. A copy of
Lazard's opinion, including the assumptions, qualifications, and other matters
contained in it, is included in this Joint Proxy Statement as Annex E. For
additional information regarding Lazard opinion, please see "-- Description of
the Combination -- Opinion of Lazard" on page 57.
ACCORDINGLY, THE FUELCELL BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
FUELCELL'S STOCKHOLDERS VOTE "FOR" APPROVAL OF THE COMBINATION AGREEMENT AND THE
COMBINATION.
15
RECOMMENDATION TO GLOBAL COMMON SHAREHOLDERS (SEE PAGE 62)
Global's board of directors has carefully considered and has unanimously
approved the terms and conditions of the Combination Agreement and the
Combination, has determined that the Combination is fair to holders of Global
common shares and preferred shares and is in the best interests of Global. In
reaching this conclusion, the Global board of directors considered, among other
things, the opinion dated August 4, 2003 of Citigroup to the effect that, as of
such date and based upon and subject to the considerations and limitations set
forth therein, the exchange ratio set forth in the Combination Agreement was
fair, from a financial point of view, to Global common shareholders. A copy of
the Citigroup opinion, including the assumptions, qualifications and other
matters contained therein, is included in this Joint Proxy Statement as Annex F.
For additional information regarding Citigroup's opinion, please see
"-- Description of the Combination -- Opinion of Citigroup" on page 63.
BASED ON THE FACTORS CONSIDERED BY THE GLOBAL BOARD OF DIRECTORS, THE BOARD
UNANIMOUSLY RECOMMENDS THAT GLOBAL'S COMMON SHAREHOLDERS VOTE "FOR" THE SPECIAL
RESOLUTION TO APPROVE THE COMBINATION ATTACHED TO THIS JOINT PROXY STATEMENT AS
ANNEX A.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 57 AND 63)
In deciding to approve the Combination, each board of directors considered
the opinion of its financial advisor. These opinions are attached as Annexes E
and F to this Joint Proxy Statement. We encourage you to read these opinions
carefully in their entirety for descriptions of the assumptions made, matters
considered and limitations on the review undertaken by the financial advisors.
FUELCELL
Lazard has delivered its written opinion to FuelCell's board of directors
that, as of August 1, 2003, the exchange ratio pursuant to the Combination
Agreement was fair, from a financial point of view, to FuelCell. FuelCell has
attached the full text of the written opinion of Lazard as Annex E to this Joint
Proxy Statement. THE OPINION OF LAZARD IS ADDRESSED TO THE FUELCELL BOARD OF
DIRECTORS AND RELATES ONLY TO THE FAIRNESS, AS OF THE DATE OF THE OPINION AND
FROM A FINANCIAL POINT OF VIEW, OF THE EXCHANGE RATIO TO FUELCELL. THE OPINION
DOES NOT ADDRESS ANY OTHER ASPECTS OF THE COMBINATION AND DOES NOT CONSTITUTE A
RECOMMENDATION OF THE COMBINATION TO THE FUELCELL BOARD OF DIRECTORS. LAZARD
MAKES NO RECOMMENDATION TO ANY STOCKHOLDER REGARDING HOW THE STOCKHOLDER SHOULD
VOTE WITH RESPECT TO THE PROPOSED COMBINATION. FOR ADDITIONAL INFORMATION
REGARDING LAZARD'S OPINION, PLEASE SEE "DESCRIPTION OF THE
COMBINATION -- OPINION OF LAZARD" ON PAGE 57.
GLOBAL
Citigroup Global Markets Inc. ("Citigroup," formerly Salomon Smith Barney
Inc.) has delivered its written opinion to Global's board of directors to the
effect that, as of August 4, 2003, the exchange ratio set forth in the
Combination Agreement was fair, from a financial point of view, to the holders
of Global common shares. Global has attached the full text of the written
opinion of Citigroup as Annex F to this Joint Proxy Statement. CITIGROUP'S
OPINION WAS LIMITED SOLELY TO THE FAIRNESS OF THE EXCHANGE RATIO, FROM A
FINANCIAL POINT OF VIEW, AS OF THE DATE OF THE OPINION. NEITHER CITIGROUP'S
OPINION NOR ITS RELATED ANALYSIS CONSTITUTED A RECOMMENDATION OF THE PROPOSED
COMBINATION TO THE GLOBAL BOARD OF DIRECTORS. CITIGROUP MAKES NO RECOMMENDATION
TO ANY SHAREHOLDER REGARDING HOW THE SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE
PROPOSED COMBINATION. FOR ADDITIONAL INFORMATION REGARDING CITIGROUP'S OPINION,
PLEASE SEE "DESCRIPTION OF THE COMBINATION -- OPINION OF CITIGROUP" ON PAGE 63.
WHAT GLOBAL COMMON SHAREHOLDERS WILL RECEIVE IN THE TRANSACTION
Pursuant to the Combination Agreement and the Plan of Arrangement: (i)
Canadian Global common shareholders (other than dissenting shareholders) will
receive, at their election, for the Global common shares held by them at the
effective time of the Combination, between 0.279 and 0.342 of an exchangeable
share of ExchangeCo or a share of FuelCell common stock; and (ii) non-Canadian
Global common shareholders
16
(other than dissenting shareholders) will receive for the Global common shares
held by them at the effective time of the Combination, between 0.279 and 0.342
of a share of FuelCell common stock. The election to receive exchangeable shares
must be received by Computershare Trust Company of Canada by the close of
business on the last business day before the effective time of the Combination.
If the closing occurs as expected on November 3, 2003, your letter of
transmittal must be received by the close of business on October 31, 2003. You
may make the election by checking the appropriate box on the letter of
transmittal, completing the declaration of residency contained therein and
returning it, along with your share certificate or certificates, to
Computershare Trust Company of Canada at the address specified in the letter of
transmittal. We structured the exchangeable shares to be the economic equivalent
of FuelCell common stock, and the holders of exchangeable shares will have the
following principal rights:
- the right to exchange the exchangeable shares for shares of FuelCell
common stock on a one-for-one basis at any time;
- the right to receive dividends, if any, on a per share equivalent basis,
in amounts (or property in the case of non-cash dividends) which are the
same, and which are payable at the same time, as dividends declared on
FuelCell common stock;
- the right to vote, indirectly through a trust arrangement, on a per share
equivalent basis, at all stockholder meetings at which holders of shares
of FuelCell common stock are entitled to vote; and
- the right to participate, on a pro rata basis with the holders of
FuelCell common stock, in the distribution of assets of FuelCell through
the mandatory exchange of exchangeable shares for shares of FuelCell
common stock.
The exchangeable shares will, in effect, have no separate economic or
voting rights in respect of ExchangeCo (other than limited class voting rights
under the Business Corporations Act (Alberta)) and the right to vote on any
change in the fundamental terms of the exchangeable shares themselves or the
related terms in the support agreement and the voting and exchange trust
agreement described elsewhere in this Joint Proxy Statement, in which cases the
exchangeable shares may be subject to automatic redemption). Global common
shareholders will generally be able to maintain any deferral of recognition of
gain or loss on their exchangeable shares for Canadian federal income tax
purposes if they file a valid joint tax election with ExchangeCo under Section
85 of the Income Tax Act (Canada) and only for as long as they hold exchangeable
shares. A redemption of the exchangeable shares may occur following the fifth
anniversary of the consummation of the Combination and may, under specified
circumstances, occur earlier. See "-- Description of the
Combination -- Description of the Exchangeable Shares -- Retraction, Redemption
and Call Rights Applicable to Exchangeable Shares" on page 72 and "Chapter
Four -- Information About Tax Considerations -- Canadian Federal Income Tax
Considerations" on page 133.
MARKET PRICE DATA (SEE PAGE 107)
Global common shares are listed on the Toronto Stock Exchange. Shares of
FuelCell common stock are listed on the Nasdaq National Market. On the last
trading day before the public announcement by Global and FuelCell of the
Combination, which last trading day was August 1, 2003 for Global and August 4,
2003 for FuelCell, Global common shares closed at Cdn.$3.45 (approximately
U.S.$2.46 based on the exchange rate on such date) on the Toronto Stock Exchange
and shares of FuelCell common stock closed at $7.47 on the Nasdaq National
Market. The 20-day volume-weighted average trading price ending on August 4,
2003 for shares of FuelCell common stock was approximately $8.3639 on the Nasdaq
National Market. On September 24, 2003, the closing price of the Global common
shares was Cdn.$4.80 (approximately U.S.$3.54, based on the exchange rate at
that date) on the Toronto Stock Exchange and the closing price of the shares of
FuelCell common stock was $13.28 on the Nasdaq National Market.
STOCK EXCHANGE LISTINGS (SEE PAGE 91)
FuelCell has applied to Nasdaq for approval of the listing of the FuelCell
common stock to be issued in connection with the Combination on the Nasdaq
National Market. ExchangeCo has applied to list the exchangeable shares on the
Toronto Stock Exchange. On September 18, 2003, the Toronto Stock Exchange
17
conditionally approved the listing of the exchangeable shares, subject to the
satisfaction of its customary requirements.
WHO CAN VOTE AT THE MEETINGS (SEE PAGES 146 AND 148)
FUELCELL
Only record holders of FuelCell common stock at the close of business on
September 16, 2003 are entitled to notice of and to vote at the FuelCell
Meeting. On September 16, there were 39,374,633 outstanding shares of FuelCell
common stock, and there were approximately 705 holders of record. Each share of
FuelCell common stock entitles the holder thereof to one vote on each matter
presented at the FuelCell Meeting.
GLOBAL
Only registered holders of Global common shares at the close of business on
October 1, 2003 are entitled to notice of and to vote at the Global Meeting.
Transferees of Global common shares after that date who comply with the
procedures described in the Notice of Special Meeting of Common Shareholders
accompanying this Joint Proxy Statement are also entitled to vote. On September
24, 2003, 29,201,450 Global common shares were outstanding and there were
approximately 154 holders of record. Each Global common share entitles the
holder thereof to one vote on each matter presented at the Global Meeting.
SHAREHOLDER VOTES REQUIRED (SEE PAGES 148 AND 149)
FUELCELL
Approval of the Combination Agreement and the Combination requires the
affirmative vote of a majority of the total shares of FuelCell common stock
entitled to vote and voting on the proposal in person or by proxy at the
FuelCell Meeting.
GLOBAL
Approval of the Combination requires at least two-thirds of the votes cast
by holders of Global common shares voting in person or by proxy at the Global
Meeting.
DISSENT RIGHTS (SEE PAGE 88)
Pursuant to the interim order of the Court (the "Interim Order"), a copy of
which is attached as Annex C to this Joint Proxy Statement, the holders of
Global common shares have rights to dissent and be paid the judicially
determined fair value of their common shares in connection with the Combination.
RISK FACTORS (SEE PAGE 27)
There are certain risks that should be considered by FuelCell stockholders
and Global common shareholders in evaluating whether to approve the Combination.
Some of these risks relate directly to the Combination while others relate to
the business of each of FuelCell and Global.
REGULATORY APPROVALS
The Plan of Arrangement requires approval by the Court, approval of Nasdaq
for listing the shares of FuelCell common stock and approval of the Toronto
Stock Exchange for listing the exchangeable shares to be issued in connection
with the Combination.
COVENANTS OF FUELCELL AND GLOBAL (SEE PAGE 83)
FuelCell and Global each have agreed to covenants pursuant to the terms of
the Combination Agreement, including, among others, to operate their respective
businesses only in the usual, regular and ordinary manner, to maintain all of
their respective properties and assets in customary repair, order and condition
and not to incur certain borrowings.
18
CONDITIONS TO THE COMPLETION OF THE COMBINATION (SEE PAGE 82)
The obligations of FuelCell and Global to complete the Combination are
subject to the satisfaction or waiver, where permissible, of conditions set
forth in the Combination Agreement, including, among others, obtaining the
approval of the Global common shareholders of the Combination at the Global
Meeting, obtaining the approval of the FuelCell stockholders of the Combination
Agreement and the Combination at the FuelCell Meeting and obtaining the
necessary court and regulatory approvals, including the approval of Nasdaq and
the Toronto Stock Exchange for the listing of the shares of FuelCell common
stock and the exchangeable shares, respectively, to be issued in connection with
the Combination.
TERMINATION OF THE COMBINATION AGREEMENT (SEE PAGE 85)
The Combination Agreement may be terminated at any time prior to the
effective time of the Combination, whether before or after approval of the
Combination by the securityholders of FuelCell or Global, as summarized below.
MUTUAL TERMINATION RIGHTS
Either Global or FuelCell may terminate the Combination Agreement upon the
occurrence of certain events, including, among others, if both parties agree to
the termination; if all conditions for closing the Combination have not been
satisfied or waived by 5:00 p.m. (Calgary time) on December 31, 2003, other than
as a result of a breach by the party terminating the Combination Agreement; or
if either party has failed to obtain the requisite approval of its
securityholders regarding the Combination.
FUELCELL'S TERMINATION RIGHTS
FuelCell may terminate the Combination Agreement upon the occurrence of
certain events, including among others, if there has been a breach by Global of
any representation, warranty, covenant or agreement in the Combination Agreement
or if the Global board of directors withdraws or modifies in any adverse manner
its approval or recommendation in respect of the Combination.
GLOBAL'S TERMINATION RIGHTS
Global may terminate the Combination Agreement upon the occurrence of
certain events, including among others, if there has been a breach by FuelCell
of any representation, warranty, covenant or agreement in the Combination
Agreement, if the FuelCell board of directors withdraws or modifies in any
adverse manner its approval or recommendation in respect of the Combination, if
the Global board of directors accepts, recommends, approves or implements a
superior proposal, or if FuelCell announces an acquisition with a purchase price
of greater than $10 million. Global may also terminate the Combination Agreement
without payment of an expense reimbursement or termination fee if the daily
volume-weighted average of FuelCell's stock price, calculated in accordance with
the Combination Agreement, is less than $6.65, calculated on a rolling basis for
each trading day during any 15 consecutive trading days after the date of the
Combination Agreement until the effective date of the Combination. For more
information regarding this termination provision, please see "-- Description of
the Combination -- The Combination Agreement -- Termination." As of September
24, 2003, FuelCell's 15-day volume-weighted average stock price was
approximately $11.53.
TERMINATION AND EXPENSE REIMBURSEMENT FEES (SEE PAGE 87)
Upon the termination of the Combination Agreement, depending on the
termination event, FuelCell may be required to pay Global a termination fee of
either $2 million or $900,000 as a reimbursement of Global's out-of-pocket
expenses incurred in connection with the Combination Agreement, or Global may be
required to pay FuelCell a termination fee of either $2 million or $900,000 as a
reimbursement of FuelCell's out-of-pocket expenses incurred in connection with
the Combination Agreement, or there may be no termination fee payable by either
party.
19
INTERESTS OF CERTAIN PERSONS (SEE PAGE 94)
Members of the management and board of directors of Global have certain
interests in connection with the Combination that may present them with actual
or potential conflicts of interest in connection with the Combination.
NO SOLICITATION (SEE PAGE 84)
Global and FuelCell have each agreed that they will not solicit or
encourage any competing acquisition proposals. However, in certain
circumstances, the board of directors of Global or FuelCell, as the case may be,
may enter into discussions and negotiations with, and provide information to,
the party making an acquisition proposal. FuelCell has the right to match any
superior proposal made to Global.
TRANSACTION DOCUMENTS
We have included the Combination Agreement and the Plan of Arrangement as
Annexes B and D to this Joint Proxy Statement. We encourage you to read these
agreements as they are the principal legal documents that govern the
Combination.
TAX CONSEQUENCES OF THE COMBINATION (SEE PAGE 133)
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Bennett Jones LLP, Global's Canadian counsel, the
Combination provides Canadian tax deferral opportunities for most Canadian
resident holders of Global common shares through the exchange of Global common
shares for exchangeable shares, provided that the holder elects to receive
exchangeable shares and executes and files a valid joint tax election with
ExchangeCo under section 85 of the Income Tax Act (Canada) and the corresponding
provision of any applicable provincial tax legislation. This tax deferral will
continue as long as the holder continues to hold the exchangeable shares. It
should be noted that FuelCell can require the exchange of the exchangeable
shares for shares of FuelCell common stock after five years or, under specified
circumstances, sooner, which would end the tax deferral. In addition, so long as
the exchangeable shares are listed on a prescribed stock exchange (which
currently includes the Toronto Stock Exchange), they will be a qualified
investment for trusts governed by RRSPs, RRIFs, RESPs and DPSPs and, provided
ExchangeCo maintains a substantial presence in Canada, will not be foreign
property for such plans or funds and for certain other persons subject to Part
XI of the Income Tax Act (Canada). The shares of FuelCell common stock will
similarly be qualified investments for trusts governed by RRSPs, RRIFs, RESPs
and DPSPs, provided that those shares remain listed on a prescribed stock
exchange (which currently includes the Nasdaq National Market), but the shares
will constitute foreign property for the purposes of Part XI of the Income Tax
Act (Canada). Please carefully review "Chapter Four -- Information About Tax
Considerations -- Canadian Federal Income Tax Considerations to Shareholders"
for additional detail regarding the tax consequences of the Combination and of
owning and disposing of FuelCell common stock following the Combination.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Robinson & Cole LLP, FuelCell's U.S. tax counsel, and
Dorsey & Whitney LLP, Global's U.S. tax counsel, U.S. holders of Global common
shares who exchange their Global common shares for shares of FuelCell common
stock will recognize a gain or loss on the exchange for U.S. federal income tax
purposes, assuming that the holder of the Global Series 2 Preferred Shares will
not exercise its right to convert all or part of such shares into Global common
shares prior to the Combination or into exchangeable shares or shares of
FuelCell common stock in connection with the Combination. Tax matters, and in
particular the treatment of U.S. shareholders in a "passive foreign investment
company," can be very complicated. Please carefully review "Chapter
Four -- Information About Tax Considerations -- United States Federal Tax
Considerations to Shareholders" for additional detail regarding the tax
consequences of the Combination and of owning and disposing of FuelCell common
stock following the Combination.
20
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per common share data for
Global and FuelCell and unaudited pro forma combined per common share data after
giving effect to the Combination at an assumed exchange ratio of 0.325 shares of
FuelCell common stock or exchangeable shares for each Global common share (the
actual exchange ratio will not be determined until shortly before the Global
Meeting).
The data should be read in conjunction with the summary historical
financial data and the unaudited pro forma combined financial statements
included in this Joint Proxy Statement and the historical financial statements
of FuelCell, including the notes thereto, included in Annex H to this Joint
Proxy Statement, and the historical consolidated financial statements of Global,
including the notes thereto, included in Annex I to this Joint Proxy Statement.
The unaudited pro forma combined data reflect adjustments to conform Global's
data to U.S. GAAP on a measurement basis. The unaudited pro forma combined
financial data are not necessarily indicative of the operating results or
financial position that would have occurred had the Combination been completed
at the beginning of the earliest period presented and should not be construed as
indicative of future operations.
FOR THE NINE
FOR THE YEARS ENDED MONTH PERIODS
OCTOBER 31, ENDED JULY 31,
------------------------ ---------------
2000 2001 2002 2002 2003
------ ------ ------ ------ ------
(U.S.$)
HISTORICAL -- FUELCELL
Basic loss per common share(1).................. $(0.16) $(0.45) $(1.25) $(0.72) $(1.32)
Diluted loss per common share(1)................ (0.16) (0.45) (1.25) (0.72) (1.32)
Book value per common share at end of
period(2).................................... 2.65 8.20 6.93 5.59 7.45
FOR THE SIX
FOR THE PERIODS ENDED DECEMBER 31, MONTH PERIODS
-------------------------------------- ENDED JUNE 30,
2000 2001 2002 ----------------
(9 MONTHS) (12 MONTHS) (12 MONTHS) 2002 2003
---------- ----------- ----------- ------ ------
(CDN.$)
HISTORICAL -- GLOBAL
Basic loss per common share(1)......... $(0.10) $(0.45) $(0.88) $(0.47) $(0.51)
Diluted loss per common share(1)....... (0.10) (0.45) (0.88) (0.47) (0.51)
Book value per common share at end of
period(3)........................... 4.40 3.94 3.04 3.45 2.53
YEAR ENDED NINE MONTH PERIOD
OCTOBER 31, ENDED JULY 31,
2002 2003
----------- -----------------
(U.S.$) (U.S.$)
PRO FORMA COMBINED PER COMMON SHARE DATA
Basic loss per common share(4)............................ $(1.37) $(1.39)
Diluted loss per common share(4).......................... (1.37) (1.39)
Book value per common share at end of period(5)........... 6.00
---------------
(1) The historical basic loss per common share is based upon the weighted
average number of common shares of FuelCell and Global outstanding for each
period. The historical diluted loss per common share is based upon the
weighted average number of common shares outstanding for each period.
(2) The historical book value per common share is computed by dividing
stockholders' equity by the number of shares of common stock outstanding at
the end of the period.
(3) The historical book value per common share is computed by dividing
stockholders' equity, less the Global Series 2 Preferred Share capital and
the cumulative but unpaid dividends thereon, by the number of common shares
outstanding at the end of the period.
21
(4) The unaudited pro forma loss per common share is based upon the weighted
average number of common shares outstanding of FuelCell and Global for each
period at an assumed exchange ratio of 0.325 shares of FuelCell common stock
or exchangeable shares for each Global common share (the actual exchange
ratio will not be determined until shortly before the Global Meeting). The
assumed exchange ratio is based on the 20-day volume-weighted average
trading price of the shares of FuelCell common stock ended August 4, 2003.
(5) The unaudited pro forma book value per share is computed by dividing the pro
forma stockholders' equity by the sum of the total shares of common stock
outstanding for FuelCell at July 31, 2003 and the total common shares of
Global at June 30, 2003 at an assumed exchange ratio of 0.325 shares of
FuelCell common stock or exchangeable shares for each Global common share
(the actual exchange ratio will not be determined until shortly before the
Global Meeting).
22
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
THE FOLLOWING TABLE SETS FORTH SUMMARY UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL DATA WHICH ARE PRESENTED TO GIVE EFFECT TO THE ACQUISITION OF
GLOBAL BY FUELCELL IN ACCORDANCE WITH U.S. GAAP. The unaudited pro forma
condensed combined financial statements have been prepared from the historical
financial statements of FuelCell and Global. Due to different fiscal periods,
the unaudited pro forma condensed combined financial information of FuelCell and
Global for the year ended October 31, 2002 combines the historical results of
FuelCell for the year ended October 31, 2002 and the historical results of
Global for the year ended December 31, 2002. The unaudited pro forma condensed
combined financial information of FuelCell and Global for the nine-month period
ended July 31, 2003 combines the nine-month period ended July 31, 2003 of
FuelCell with the nine-month period ended June 30, 2003, of Global.
The unaudited pro forma condensed combined financial data do not reflect
any cost savings or other synergies which may result from the Combination and
are not necessarily indicative of future results of operations or financial
position. THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA ARE
PRESENTED IN ACCORDANCE WITH U.S. GAAP IN U.S. DOLLARS. Accounting policies used
in the preparation of the pro forma combined financial statements are in
accordance with those used in the preparation of the historical financial
statements of FuelCell at October 31, 2002 and for the year then ended. The
unaudited pro forma condensed combined financial statements should be read in
conjunction with the summary historical financial data and the unaudited pro
forma condensed combined financial statements included in this Joint Proxy
Statement and the historical consolidated financial statements of FuelCell and
Global, including the notes thereto, in Annex H and Annex I to this Joint Proxy
Statement, respectively.
FOR THE NINE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
OCTOBER 31, 2002 JULY 31, 2003
------------------------- -------------------------
(THOUSANDS OF U.S.$, (THOUSANDS OF U.S.$,
EXCEPT PER SHARE AMOUNTS) EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA
Net revenue..................................... $ 55,499 $ 37,958
Loss from continuing operations................. (66,685) (67,901)
Net loss applicable to common stock............. (66,597) (67,813)
Basic and diluted loss per common share......... (1.37) (1.39)
AS AT
JULY 31, 2003
-------------
(THOUSANDS OF
U.S.$)
BALANCE SHEET DATA
Total assets.......................................... 33$0,247 ...
Long-term obligations................................. 2,063 ....
Preferred shares of subsidiary........................ 8,400 ....
Stockholders' equity.................................. 292,998 ...
23
SUMMARY HISTORICAL FINANCIAL DATA OF FUELCELL
The following table sets forth summary historical financial data for
FuelCell for each of the three years ended October 31, 2002 and for the
nine-month periods ended July 31, 2002 and 2003. The summary historical
financial data are presented in accordance with U.S. GAAP in U.S. dollars. The
data set forth below should be read in conjunction with the historical financial
statements of FuelCell, including the notes thereto, included elsewhere in this
Joint Proxy Statement.
FOR THE
NINE-MONTH PERIODS
FOR THE YEARS ENDED OCTOBER 31, ENDED JULY 31,
-------------------------------- -------------------
2000 2001 2002 2002 2003
-------- --------- --------- -------- --------
(THOUSANDS OF U.S.$, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA
Revenue................................ $20,715 $ 26,179 $ 41,231 $ 27,528 $ 26,469
Operating loss......................... (6,733) (21,276) (53,819) (32,066) (55,768)
Net loss............................... (4,459) (15,438) (48,840) (28,094) (52,034)
Basic and diluted loss per common
share............................... (0.16) (0.45) (1.25) (0.72) (1.32)
AS AT OCTOBER 31,
--------------------------------------- AS AT
2000 2001 2002 JULY 31, 2003
----------- ----------- ----------- ---------------
(THOUSANDS OF U.S.$, EXCEPT SHARE AMOUNTS)
BALANCE SHEET DATA
Total assets.......................... $ 91,028 $ 334,020 $ 289,803 $ 236,127
Long-term debt........................ -- 1,252 1,696 1,562
Stockholders' equity.................. 83,251 319,716 271,702 219,971
Common shares outstanding............. 31,461,420 38,998,788 39,228,828 39,356,633
ANTICIPATED ACCOUNTING TREATMENT
FuelCell, as the accounting acquirer, will account for the Combination with
Global using the purchase method of accounting under U.S. GAAP.
U.S.-CANADIAN GAAP RECONCILIATION
The financial statements of FuelCell included in this Joint Proxy Statement
have been prepared in accordance with U.S. GAAP, which differs in certain
respects from Canadian GAAP. FuelCell and Global have received an order dated
September 30, 2003 from certain provincial regulatory authorities exempting them
from the requirement to provide a Canadian GAAP reconciliation of FuelCell's
financial statements.
24
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF GLOBAL UNDER CANADIAN GAAP
The following table sets forth summary historical consolidated financial
data for Global for each of the three periods ended December 31, 2000, 2001 and
2002 and the six months ended June 30, 2002 and 2003 and as at December 31,
2000, 2001 and 2002 and June 30, 2003. Global's historical consolidated
financial statements are prepared in accordance with Canadian GAAP, which
differs in certain respects from U.S. GAAP. Note 18 to Global's December 31,
2002 audited consolidated financial statements (in Global's Annual Information
Form for the year ended December 31, 2002 included in Annex I) provides a
reconciliation of the measurement differences between Global's financial
statements and U.S. GAAP.
The data set forth below should be read in conjunction with the historical
consolidated financial statements of Global, including the notes thereto,
included in Global's Annual Information Form for the year ended December 31,
2002 in Annex I to this Joint Proxy Statement and Global's Interim Report for
the quarter ended June 30, 2003 in Annex I to this Joint Proxy Statement.
FOR THE SIX-MONTH
FOR THE PERIODS ENDED DECEMBER 31, PERIODS ENDED JUNE 30,
-------------------------------------- -----------------------
2000 2001 2002 2002 2003
---------- ----------- ----------- ---------- ----------
(9 MONTHS) (12 MONTHS) (12 MONTHS)
(THOUSANDS OF CDN.$, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA
Revenue from continuing
operations...................... $14,649 $ 15,357 $ 21,770 $ 9,906 $ 10,845
Revenue -- fuel cell contract
research........................ -- -- 541 -- 203
Investment income.................. 3,605 5,911 2,899 1,418 1,338
Net loss from continuing
operations...................... (1,967) (12,968) (24,543) (12,923) (14,081)
Discontinued operations, net of
income tax...................... (372) 1,177 137 -- --
Net loss........................... (2,339) (11,791) (24,406) (12,923) (14,081)
Basic and diluted loss per common
share from continuing
operations...................... (0.09) (0.49) (0.89) (0.47) (0.51)
Basic and diluted net (loss)
earnings per common share from
discontinued operations......... (0.01) 0.04 0.01 -- --
Basic and diluted loss per common
share........................... (0.10) (0.45) (0.88) (0.47) (0.51)
AS AT DECEMBER 31,
------------------------------ AS AT
2000 2001 2002 JUNE 30, 2003
-------- -------- -------- --------------
(THOUSANDS OF CDN.$, EXCEPT SHARE AMOUNTS)
BALANCE SHEET DATA
Total assets................................. $160,675 $146,849 $122,403 $108,754
Long-term obligations........................ 630 407 486 751
Shareholders' equity......................... 151,467 139,272 114,465 99,918
Common shares outstanding (in thousands)..... 28,923 29,005 29,172 29,201
25
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement (including the documents attached as annexes to
this Joint Proxy Statement) contains forward-looking statements that are subject
to risks and uncertainties. All statements other than statements of historical
fact contained in this Joint Proxy Statement and the materials accompanying this
Joint Proxy Statement are forward-looking statements, including, without
limitation, statements regarding:
- asset portfolios - cost savings - budgets
- the timing for closing the - future earnings and financial - litigation
Combination position - plans and objectives of
- synergies and efficiencies - capital productivity management for future operations
from the Combination - business strategy - product development
- capital requirements and - the market for fuel cell - expected dates of production
spending technologies for products
- impact of Global's workforce - potential acquisitions - expected product performance
reduction - revenue enhancements
The forward-looking statements are based on the beliefs of management of
each of Global and FuelCell, as well as assumptions made by and information
currently available to management of each of Global and FuelCell. Frequently,
but not always, forward-looking statements are identified by the use of the
future tense and by words such as "believes," "expects," "anticipates,"
"intends," "will," "projects," "continues," "estimates" or similar expressions.
Forward-looking statements are not guarantees of future performance and actual
results could differ materially from those indicated by the forward-looking
statements. Forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause Global's, FuelCell's or their
respective industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements.
The forward-looking statements contained in this Joint Proxy Statement and
the materials accompanying this Joint Proxy Statement are forward-looking
statements within the meaning of Section 27A of the United States Securities Act
of 1933 and Section 21E of the United States Securities Exchange Act of 1934 and
are subject to the safe harbor created by the United States Private Securities
Litigation Reform Act of 1995. These statements include declarations regarding
Global's, FuelCell's or their respective management's plans, intentions, beliefs
or current expectations.
Among the important factors that could cause actual results to differ
materially from those indicated by forward-looking statements are the risks and
uncertainties described under "-- Risk Factors" and elsewhere in this Joint
Proxy Statement, in Global's other filings with Canadian securities
administrators and in FuelCell's other filings with the U.S. Securities and
Exchange Commission.
Neither Global nor FuelCell can provide any assurance that the plans,
intentions or expectations upon which forward-looking statements are based will
occur. Forward-looking statements are subject to risks, uncertainties and
assumptions, including those discussed elsewhere in this Joint Proxy Statement
and the documents that are attached as annexes to this Joint Proxy Statement.
Although Global and FuelCell believe that the expectations represented in
forward-looking statements are reasonable, neither Global nor FuelCell can
assure that these expectations will prove to be correct.
Forward-looking statements are expressly qualified in their entirety by
this cautionary statement. The forward-looking statements included in this Joint
Proxy Statement are made as of the date of this Joint Proxy Statement and
neither Global nor FuelCell undertakes any obligation to publicly update
forward-looking statements to reflect new information, subsequent events or
otherwise.
26
RISK FACTORS
THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN
THIS JOINT PROXY STATEMENT, INCLUDING THE ANNEXES ATTACHED HERETO, SHOULD BE
CAREFULLY CONSIDERED BY FUELCELL STOCKHOLDERS AND GLOBAL COMMON SHAREHOLDERS IN
EVALUATING WHETHER TO APPROVE THE COMBINATION. SOME OF THESE RISK FACTORS RELATE
DIRECTLY TO THE COMBINATION WHILE OTHERS RELATE TO THE BUSINESS OF EACH OF
FUELCELL AND GLOBAL INDEPENDENT OF THE COMBINATION, AS WELL AS TO THE
ANTICIPATED BUSINESS OF THE COMBINED COMPANY. BY VOTING IN FAVOR OF THE
COMBINATION, GLOBAL COMMON SHAREHOLDERS WILL BE CHOOSING TO INVEST IN FUELCELL
COMMON STOCK OR IN THE EXCHANGEABLE SHARES, WHICH ARE ULTIMATELY EXCHANGEABLE
FOR FUELCELL COMMON STOCK. BY VOTING IN FAVOR OF THE COMBINATION AGREEMENT AND
THE COMBINATION, FUELCELL STOCKHOLDERS WILL BE CHOOSING TO COMBINE GLOBAL'S
OPERATIONS WITH FUELCELL'S OPERATIONS. AN INVESTMENT IN FUELCELL COMMON STOCK,
WHICH AFTER THE COMBINATION WILL BE THE COMMON STOCK OF THE COMBINED COMPANY, OR
IN EXCHANGEABLE SHARES, INVOLVES A HIGH DEGREE OF RISK. ALL REFERENCES TO "WE",
"OUR", "US" AND THE "COMBINED COMPANY" REFER TO THE COMBINED OPERATIONS OF
FUELCELL AND GLOBAL ASSUMING COMPLETION OF THE COMBINATION, WITH GLOBAL
OPERATING AS A SUBSIDIARY OF FUELCELL.
RISKS RELATED TO THE COMBINATION
THE COMBINATION IS EXPECTED TO RESULT IN BENEFITS TO THE COMBINED COMPANY, BUT
THE COMBINED COMPANY MAY NOT REALIZE THOSE BENEFITS DUE TO CHALLENGES
ASSOCIATED WITH INTEGRATING THE COMPANIES.
The success of the Combination will be dependent in large part on the
success of the management of the combined company in integrating the operations,
technologies and personnel of the two companies following the effective time of
the Combination. The failure of the combined company to meet the challenges
involved in successfully integrating the operations of FuelCell and Global or
otherwise to realize any of the anticipated benefits of the Combination,
including anticipated cost savings described in this Joint Proxy Statement,
could seriously harm the results of operations of the combined company. In
addition, the overall integration of the two companies may result in
unanticipated operations problems, expenses and liabilities and diversion of
management's attention. The challenges involved in this integration include the
following:
- integrating successfully each company's operations, technologies,
products and services;
- coordinating sales and marketing efforts to effectively communicate the
capabilities of the combined company;
- demonstrating to the customers of FuelCell and Global that the
Combination will not result in adverse changes in business focus;
- coordinating and rationalizing research and development activities to
enhance introduction of new products and technologies with reduced cost;
- preserving distribution, marketing or other important relationships of
both FuelCell and Global and resolving potential conflicts that may
arise;
- assimilating the personnel of both companies and persuading employees
that the business cultures of both companies are compatible;
- maintaining employee morale and motivation, particularly given recent
cost reduction initiatives undertaken by both companies, and retaining
key employees; and
- reducing the costs associated with each company's operations.
FuelCell and Global may not be able to successfully integrate their
operations in a timely manner, or at all, and the combined company may not
realize the anticipated benefits or synergies of the Combination to the extent
or in the timeframe anticipated. The anticipated benefits and synergies include
cost savings associated with anticipated restructuring efforts and other
operational efficiencies, greater economies of scale and revenue enhancement
opportunities. In addition, FuelCell anticipates that Global's cash reserves
will provide the combined company with an increased ability to fund development
and operations. However, these anticipated benefits and synergies are based on
assumptions, not actual experience, and assume a successful integration. Also,
upon completion of the Combination, Global's cash reserves may be significantly
less than anticipated,
27
due to, among other things, the exercise of dissent rights by Global common
shareholders. The combined company's ability to realize these benefits and
synergies could be adversely impacted to the extent that FuelCell's or Global's
relationships with existing or potential customers, suppliers or strategic
partners is adversely affected as a consequence of the Combination, or by
practical or legal constraints on its ability to combine operations or implement
workforce reductions.
FUELCELL'S OPERATING RESULTS MAY SUFFER AS A RESULT OF PURCHASE ACCOUNTING
TREATMENT AND THE IMPACT OF AMORTIZATION OF INTANGIBLE ASSETS RELATING TO THE
COMBINATION.
FuelCell will account for the Combination using the purchase method of
accounting under U.S. GAAP. Under purchase accounting, FuelCell will record the
market value of its common stock issued in connection with the Combination, the
fair value of the outstanding options for Global common shares and outstanding
Global Series 2 Preferred Shares and the amount of direct transaction costs as
the cost of acquiring the business of Global. FuelCell will allocate that cost
to the individual assets acquired and liabilities assumed, including various
identifiable finite life intangible assets such as acquired backlog and customer
relationships based on their respective fair values. Intangible assets will be
amortized over the useful life of the asset, as determined by management. As a
result, purchase accounting treatment of the Combination may increase the net
loss for FuelCell in the foreseeable future, which could have an adverse effect
on the market value of FuelCell common stock following completion of the
Combination.
In addition, FuelCell and Global believe the combined company may incur
charges to operations, which are not currently reasonably estimable, in the
quarter in which the Combination is completed or subsequent quarters, to reflect
costs associated with integrating the two companies. It is possible that the
combined company will incur additional material charges in subsequent quarters
to reflect additional costs associated with the Combination.
FUELCELL AND GLOBAL EXPECT TO INCUR SIGNIFICANT COSTS ASSOCIATED WITH THE
COMBINATION.
FuelCell and Global estimate they could collectively incur direct
transaction costs of approximately $7.8 million in connection with the
Combination, including the $2 million termination fee paid to Quantum, but
excluding, on the part of Global, other expenses incurred in connection with the
Quantum Combination. FuelCell's direct transaction costs will be included as a
part of the total purchase cost for accounting purposes. This amount includes
approximately $1.8 million that FuelCell could incur upon the voluntary or
involuntary termination of certain of Global's executives pursuant to change of
control agreements. For more information about these change in control
agreements, please see "-- Description of the Combination -- Interests of
Certain Persons in the Combination" and "Chapter Seven -- Global Executive
Compensation and Related Information." Actual direct transaction costs incurred
in connection with the Combination may vary. In addition, FuelCell will incur
additional costs to the extent that any holders of issued and outstanding Global
common shares exercise their right to dissent and receive fair value for their
shares.
IF THE COMBINATION IS NOT COMPLETED, FUELCELL'S AND GLOBAL'S SHARE PRICES AND
FUTURE BUSINESS AND OPERATIONS COULD BE HARMED.
If the current market prices of FuelCell's common stock and Global's common
shares reflect an assumption that the Combination will be completed, the price
of their respective securities may decline if the Combination is not completed.
In addition, if the Combination is not completed, FuelCell may be required to
pay Global, or Global may be required to pay FuelCell, a termination fee of
either $2 million or an expense reimbursement fee of $900,000 for the party's
out-of-pocket expenses incurred in connection with the Combination Agreement.
Moreover, FuelCell's and Global's costs related to the Combination, including
legal, accounting and some of the fees of their financial advisors, must be paid
even if the Combination is not completed. For more information about these
costs, please see "-- Description of the Combination -- The Combination
Agreement -- Business Combination Costs."
28
In addition, if the Combination is not completed, FuelCell and Global may
be subject to a number of additional material risks, including the following:
- either company may forego other opportunities which would have otherwise
been available had the Combination Agreement not been executed,
including, without limitation, opportunities foregone as a result of
affirmative and negative covenants made by each company in the
Combination Agreement, such as covenants affecting the conduct of each
company's business outside the ordinary course of business; and
- either company may be unable to obtain additional sources of financing or
conclude another sale, merger or combination on as favorable terms, in a
timely manner, or at all.
FUTURE SALES OF SUBSTANTIAL AMOUNTS OF FUELCELL COMMON STOCK OR EXCHANGEABLE
SHARES COULD AFFECT THEIR MARKET PRICE AND THE DILUTION ASSOCIATED WITH THE
COMBINATION COULD AFFECT THE MARKET PRICE OF BOTH FUELCELL'S COMMON STOCK AND
EXCHANGEABLE SHARES.
Future sales of substantial amounts of FuelCell's common stock or
exchangeable shares into the public market, including shares of FuelCell common
stock issued upon exercise of options and warrants, could adversely affect the
prevailing market price of FuelCell common stock and exchangeable shares. Sales
of substantial amounts of FuelCell common stock or exchangeable shares into the
public market upon completion of the Combination, or perceptions that those
sales could occur, could adversely affect the prevailing market price and the
combined company's ability to raise capital in the future.
Pursuant to the terms of the Combination Agreement, FuelCell has agreed to:
- issue up to an aggregate of 9,986,896 shares of FuelCell common stock and
exchangeable shares to holders of Global common shares as of September
24, 2003 (assuming an exchange ratio of 0.342), which shares will be
freely tradable unless they are held by affiliates of Global or FuelCell;
- assume all outstanding options to purchase Global common shares; and
- assume the obligation to issue its shares upon the conversion of the
outstanding Global Series 2 Preferred Shares.
The issuance of all or some of these shares of FuelCell common stock could
have a dilutive effect and hence decrease the market price of the shares of
FuelCell common stock.
In addition, as of September 24, 2003, 7,517,482 shares of FuelCell's
common stock were required to be reserved for issuance under its stock option
and other benefit plans and 2,140,000 shares of FuelCell's common stock were
required to be reserved for issuance pursuant to outstanding warrants. As of
September 24, 2003, 5,317,516 options to purchase shares of FuelCell's common
stock were issued and outstanding under its stock option plans at a weighted
average exercise price of $9.94 per share, of which 3,323,015 options to
purchase shares had vested. The outstanding warrants to purchase 2,140,000
shares of FuelCell's common stock have not yet vested.
As of September 24, 2003, the holders of warrants to purchase 2,900,000
shares of FuelCell's common stock had the right, subject to various conditions,
to require FuelCell to file registration statements covering their shares or to
include their shares in registration statements that FuelCell may file for
itself or for other stockholders. By exercising their registration rights and
selling a large number of shares, these holders could cause the price of
FuelCell's common stock or the exchangeable shares to fall.
FLUCTUATIONS IN THE CANADIAN-U.S. EXCHANGE RATE AND IN THE MARKET PRICE OF
FUELCELL COMMON STOCK WILL AFFECT THE NUMBER AND VALUE OF EXCHANGEABLE SHARES
OR SHARES OF FUELCELL COMMON STOCK THAT THE GLOBAL COMMON SHAREHOLDERS WILL
RECEIVE IN THE COMBINATION.
The number and value of exchangeable shares or shares of FuelCell common
stock that Global common shareholders will receive in the Combination depends on
the market price of FuelCell's common stock and, in the case of Global's
Canadian common shareholders, the Canadian-U.S. exchange rate. Pursuant to the
terms
29
of the Combination, Global common shareholders are to receive a number of
exchangeable shares or shares of FuelCell common stock that is based on an
exchange ratio. The exchange ratio will be determined by dividing $2.72 by the
20-day volume-weighted average FuelCell stock price ending three days prior to
the Global Meeting. The exchange ratio will not be less than 0.279 or more than
0.342 of a share of FuelCell common stock.
Since the market price of FuelCell common stock and the Canadian-U.S.
exchange rate between the determination date for the 20-day volume-weighted
average of FuelCell stock price and the effective time of the Combination will
fluctuate and could possibly decline, the value of FuelCell common stock
actually received by Global common shareholders may be more or less than:
- the value actually used in calculating the exchange ratio;
- the 20-day volume-weighted average FuelCell common stock price; or
- the value of the FuelCell common stock at the effective time of the
Combination resulting from the exchange ratio.
FUELCELL'S FUTURE OPERATING RESULTS MAY FLUCTUATE, WHICH COULD RESULT IN A
LOWER PRICE FOR FUELCELL COMMON STOCK AND EXCHANGEABLE SHARES.
Following the completion of the Combination, the market price of FuelCell
common stock and exchangeable shares may decline below currently prevailing
levels. The market price of FuelCell common stock and exchangeable shares may be
adversely affected by numerous factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in financial estimates by securities analysts; and
- general market conditions and other factors.
FuelCell's future operating results may fluctuate significantly depending
upon a number of factors, including general industry conditions.
THE COMPLETION OF THE COMBINATION IS SUBJECT TO THE SATISFACTION OF
CONDITIONS.
The obligations of FuelCell and Global to complete the Combination are
subject to the satisfaction or waiver, where permissible, of certain conditions
set forth in the Combination Agreement. Some of these conditions cannot be
waived, including obtaining the requisite approval of Global's common
shareholders, FuelCell's stockholders, the Court, relevant Canadian and U.S.
securities regulators, Nasdaq National Market and the Toronto Stock Exchange. If
these conditions are not satisfied, the Combination will not be completed. Also,
even if all of these conditions are satisfied, the Combination may not be
completed, as Global has the right to terminate the Combination Agreement if
FuelCell's 15-day volume-weighted average stock price, calculated on a rolling
basis, is less than $6.65, until the completion of the Combination. For more
information regarding this termination provision, please see "-- Description of
the Combination-Combination Agreement -- Termination."
SOME OF THE CONDITIONS TO THE COMBINATION MAY BE WAIVED BY FUELCELL OR GLOBAL
WITHOUT RESOLICITING SHAREHOLDER APPROVAL FOR THE COMBINATION.
Some of the conditions set forth in the Combination Agreement may be waived
by Global or FuelCell, subject to the agreement of the other party in specific
cases. If those conditions are waived, FuelCell and Global will evaluate whether
an amendment to the Joint Proxy Statement and a resolicitation of proxies is
warranted. In the event that the board of directors of FuelCell or Global
determines that resolicitation of proxies is not warranted, the applicable
company will have the discretion to complete the Combination without seeking
further shareholder approval.
30
MEMBERS OF THE MANAGEMENT AND BOARD OF DIRECTORS OF GLOBAL HAVE INTERESTS IN
THE COMBINATION THAT MAY PRESENT THEM WITH ACTUAL OR POTENTIAL CONFLICTS OF
INTEREST IN CONNECTION WITH THE COMBINATION.
In considering whether to approve the Combination, Global's common
shareholders and FuelCell's stockholders should recognize that some of the
members of management and board of directors of Global have interests in the
Combination that differ from, or are in addition to, their interests as Global
common shareholders or FuelCell stockholders. These interests include:
- indemnification of officers and directors of Global against certain
liabilities;
- rights of Global officers and directors to receive termination payments
on a change of control;
- future FuelCell board of directors membership for one and possibly two
designees of Global; and
- the assumption, and continued vesting, of Global stock options.
In addition, two directors of Global are significant shareholders of
Foundation Equity Corporation, which, as of the date of this Joint Proxy
Statement, holds approximately 8.9% of Global's common shares.
These interests are described in "-- Description of the
Combination -- Interests of Certain Persons in the Combination."
RISKS RELATED TO THE OPERATIONS OF THE COMBINED COMPANY
BOTH FUELCELL AND GLOBAL HAVE RECENTLY INCURRED LOSSES AND ANTICIPATE
CONTINUED LOSSES AND NEGATIVE CASH FLOW.
FuelCell is 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, FuelCell has not achieved profitability since
its fiscal year ended October 31, 1997 and expects to continue to incur net
losses and generate negative cash flow until it can produce sufficient revenues
to cover its costs. FuelCell incurred net losses of $48,840,000 for the fiscal
year ended October 31, 2002. Even if FuelCell achieves its objective of bringing
its first commercial product to market in calendar 2003, it anticipates that it
will continue to incur losses and generate negative cash flow until it can
cost-effectively produce and sell its Direct FuelCell products, which it does
not expect to occur for several years. FuelCell may never become profitable. In
addition, Global is several years away from commercializing its SOFC products
and is not expected to operate profitably for some time, if ever. Even if the
combined company does achieve profitability, it may be unable to sustain or
increase its profitability in the future. The combined company may never become
profitable. For the reasons discussed in more detail below, there are
substantial uncertainties associated with the combined company's 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, engineering design and technology (including
projected power output) that, to a large degree, are currently not
ascertainable. A failure by us to achieve a lower cost structure through
economies of scale, improvements in the manufacturing process and engineering
design and technology maturation would have a material adverse effect on our
commercialization plans and, therefore, our business, prospects, results of
operations and financial condition.
We expect the production costs of our initial commercial products to be
higher than their sales prices. 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 and SOFC 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
or SOFC products at competitive prices relative to alternative technologies and
products, our target market customers will be unlikely to buy our fuel cell
products.
31
OUR PRODUCTS WILL COMPETE WITH PRODUCTS USING OTHER ENERGY SOURCES, AND IF THE
PRICES OF THE ALTERNATIVE SOURCES ARE LOWER THAN ENERGY SOURCES USED BY OUR
PRODUCTS, SALES OF OUR PRODUCTS WILL BE ADVERSELY AFFECTED.
FuelCell's Direct FuelCell has been demonstrated using a variety of
hydrocarbon fuels, including natural gas, methanol, diesel, biogas, coal gas,
coal mine methane and propane. Global's fuel cells have been demonstrated using
natural gas. If these fuels are not readily available or if their prices are
such that electricity produced by our products costs more than electricity
provided through other generation sources, our products would be less
economically attractive to potential energy users. In addition, we have no
control over the prices of several types of competitive energy sources such as
oil, gas or coal. Significant decreases in the price of these inputs could also
have a material adverse effect on our business because other generation sources
could be more economically attractive to consumers than our Direct FuelCell
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
demonstration, field trial and field follow projects into long-term
distributor-type relationships that will result in these distributors marketing
our Direct FuelCell and SOFC products directly to energy customers. For example,
MTU is currently field-testing seven 250 kW power plants in Germany that
incorporate the Direct FuelCell as their fuel cell components and FuelCell is
operating seven units in the United States and one unit in Japan. FuelCell
believes that its fuel cell commercialization program is dependent upon
conducting additional commercial field trials and demonstration projects of its
power plants and completing substantial additional research and development.
FuelCell has planned several field trials and demonstration projects for its
sub-megawatt and megawatt class stationary fuel cell power plants. FuelCell has
not yet, however, conducted any field trials of its proposed commercial design
megawatt class products.
Demonstration, field trial and field follow projects may encounter problems
and delays for a number of reasons, including the failure of technology, the
failure of the technology of others (including balance of plant), the failure to
combine these technologies properly (including control system coordination) 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 and SOFC 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 and SOFC
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.
FUELCELL AND GLOBAL CURRENTLY FACE AND WILL CONTINUE TO FACE SIGNIFICANT
COMPETITION.
FuelCell's Direct FuelCell currently faces, and will continue to face,
significant competition, as will any SOFC products introduced in the future.
Technological advances in alternative energy products or 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, our products and technologies.
As our Direct FuelCell and SOFC 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
32
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.
FuelCell believes that it is the only domestic company engaged in
significant manufacturing and commercialization of carbonate fuel cells in the
sub-megawatt and megawatt classes. In Asia, at least three manufacturers have
demonstrated varying levels of 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 Italy, a company engaged in carbonate fuel cell development is a
potential competitor. FuelCell's licensee in Germany, MTU, and its partners have
conducted the most significant activity in Europe.
Other types of fuel cell and alternative energy technologies are being
actively pursued by a number of companies. Customers have not yet identified the
technologies of choice for alternative energy sources. Emerging fuel cell
technologies that may compete with our fuel cell products in the target
distributed generation market include proton exchange membrane fuel cells and
phosphoric acid fuel cells. Competitors using or developing these and other fuel
cell technologies include Ballard Power Systems, Inc., UTC Fuel Cells, Plug
Power, Inc. in the case of proton exchange membrane fuel cells; UTC Fuel Cells
in the case of phosphoric acid fuel cells; and SiemensWestinghouse Electric
Company, Sulzer Hexis, McDermott, GE/Honeywell and Delphi 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.
FuelCell has established product development and commercialization
milestones that it uses to assess its progress toward developing commercially
viable Direct FuelCell 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 products
under actual conditions and will do the same with our SOFC products. If
FuelCell's 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 products and future SOFC 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. Failure to meet publicly announced
milestones might have a material adverse effect on our operations and our stock
price.
FUELCELL HAS LIMITED EXPERIENCE MANUFACTURING ITS DIRECT FUELCELL PRODUCTS ON
A COMMERCIAL BASIS AND GLOBAL HAS NO SUCH EXPERIENCE WITH SOFC PRODUCTS.
To date, FuelCell and Global have focused primarily on research and
development and conducting demonstrations and field trials. FuelCell has limited
experience manufacturing its Direct FuelCell products on a commercial basis and
Global has no such experience with SOFC products. FuelCell has recently
installed additional equipment that will allow it to produce 50 MW per year.
FuelCell expects that it will then increase its manufacturing capacity based on
market demand. FuelCell can expand its manufacturing capacity to 150 MW at its
current facility. FuelCell cannot be sure that it will be able to achieve its
planned increases in production capacity. Also, as FuelCell scales up its
production capacity, it cannot be sure that unplanned failures or other
technical problems relating to the manufacturing process will not occur.
If our business grows more quickly than we anticipate, our existing and
planned manufacturing facilities may become inadequate and we may need to seek
out new or additional space, at considerable cost to us. If our business does
not grow as quickly as we expect, our existing and planned manufacturing
facilities would in part represent excess capacity for which we may not recover
the cost; in that circumstance, our revenues may be inadequate to support our
committed costs and our planned growth, and our gross margins and business
strategy would suffer.
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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 continue 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 (including automation) that will enable us to meet our cost goals
and profitability projections. Our failure to shorten the sales cycle for our
Direct FuelCell 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.
OUR COMMERCIALIZATION PLANS ARE DEPENDENT ON MARKET ACCEPTANCE OF ITS DIRECT
FUELCELL AND SOFC PRODUCTS.
FuelCell's commercialization plans, which include bringing its sub-megawatt
and megawatt class Direct FuelCell products to market in calendar year 2003, are
dependent upon market acceptance of, as well as enhancements to, those 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 and
SOFC products may be affected by many factors that are out of our control,
including:
- the cost competitiveness of our fuel cell products;
- the future costs of natural gas and other fuels used by our fuel cell
products;
- consumer reluctance to try a new product;
- consumer perceptions of the safety of our fuel cell products;
- the pace of utility deregulation nationwide, which could affect the
market for distributed generation;
- local permitting and environmental requirements; and
- the emergence of newer, more competitive technologies and products.
If a sufficient market fails to develop or develops more slowly than we
anticipate, we may be unable to recover the losses we will have incurred in the
development of Direct FuelCell and SOFC products and may never achieve
profitability.
As we continue to commercialize our Direct FuelCell products and work
towards the future commercialization of our SOFC products, we will continue to
develop warranties, production guarantees and other terms and conditions
relating to our products that will be acceptable to the marketplace, continue to
develop a service organization that will aid in servicing our products and
obtain self-regulatory certifications, if available, with respect to our
products. Failure to achieve any of these objectives may also slow the
development of a sufficient market for our products and, therefore, have a
material adverse effect on our results of operations.
WE MUST LOWER THE COST OF OUR SOLID OXIDE FUEL CELL SYSTEMS AND DEMONSTRATE
THEIR RELIABILITY.
Global's solid oxide fuel cell systems are currently in the development
stage. While proof of concept prototypes have been developed and tested in
controlled conditions, these systems have not yet undergone extensive testing,
nor have the designs been refined to the level of a commercial product. The
prototypes incorporate specialty components that are produced in one-off or
small batch quantities. The current prototypes cost significantly more and
perform at a lower level than established competing technologies. Although the
combined company intends to remain committed to commercializing SOFC technology,
if we
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are unable to develop and manufacture fuel cell systems that are competitive
with competing technologies in terms of price, reliability and longevity,
consumers will be unlikely to buy products containing solid oxide fuel cells and
fuel cell systems. The price of fuel cell systems is dependent largely on
material and manufacturing costs and the cost of "balance of plant" components.
We cannot guarantee that we will be able to lower these costs to the level where
we will be able to produce a competitive product or that any product produced
using lower cost materials and manufacturing processes will not suffer from a
reduction in performance, reliability and longevity.
FUELCELL'S GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACTS ARE IMPORTANT TO THE
IMPLEMENTATION OF ITS COMMERCIALIZATION PLANS.
FuelCell's fuel cell revenues have been principally derived from a
long-term cooperative agreement and other contracts with the U.S. Department of
Energy ("DOE"), the U.S. Department of Defense ("DOD"), the U.S. Navy and the
U.S. Environmental Protection Agency ("EPA"). These agreements are important to
the continued development and commercialization of FuelCell's technology and its
products.
Generally, FuelCell's 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.
FuelCell can only receive funds under these contracts ultimately made available
to it annually by Congress as a result of the appropriations process.
Accordingly, FuelCell cannot be sure whether it will receive the full amount
allocated by the DOE under the DOE cooperative agreement or the full amounts
allocated under its other government research and development contracts. Failure
to receive the full amounts allocated under any of FuelCell's government
research and development contracts could materially adversely affect its
commercialization plans and, therefore, its business, prospects, results of
operations and financial condition.
THE UNITED STATES GOVERNMENT HAS CERTAIN RIGHTS RELATING TO FUELCELL'S
INTELLECTUAL PROPERTY.
Many of FuelCell's United States patents relating to its carbonate fuel
cell technology are the result of government-funded research and development
programs, including the DOE cooperative agreement. Four of FuelCell's patents
that were the result of DOE-funded research prior to January 1988 (the date that
FuelCell qualified as a "small business") are owned by the United States
government and have been licensed to FuelCell. This license is revocable only in
the limited circumstances where it has been demonstrated that FuelCell is not
making an effort to commercialize the invention. FuelCell's patents that were
the result of DOE-funded research after January 1988 automatically belong to it
because of its "small business" status. Under current regulations, patents
resulting from research funded by government agencies other than the DOE are
owned by FuelCell, whether or not it is a "small business."
Fourteen United States patents that FuelCell owns have resulted from
government-funded research and are subject to the risk of 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. 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. In addition,
FuelCell's DOE-funded research and development agreements also require it to
agree that it will not provide to a foreign entity any fuel cell technology
subject to that agreement unless the fuel cell technology will be substantially
manufactured in the U.S.
WE MAY NO LONGER QUALIFY AS A "SMALL BUSINESS," WHICH COULD ADVERSELY AFFECT
OUR RIGHTS TO PATENTS UNDER DOE-FUNDED CONTRACTS.
We may no longer qualify as a "small business" under applicable government
regulations because we will have more than 500 employees after the Combination.
That would affect our ability to own outright those
35
patents we may develop under contracts, grants or cooperative agreements funded
by DOE in the future. The failure to qualify as a "small business" would not,
however, affect our existing contracts, grants or cooperative agreements with
the DOE, or our ownership of patents we developed with DOE funds under contracts
entered into while we qualified as a "small business". If we are unable to
certify in future proposals to DOE that we qualify as a "small business", we
would not own patents we develop under contracts, grants or cooperative
agreements funded by DOE based on such proposals, unless we obtain a patent
waiver from DOE. If we do not qualify as a small business, we may attempt to
obtain a waiver from the DOE. We believe we would be able to obtain patent
waivers from the DOE for future contracts, however, we can make no assurances or
guarantees that we will be able to obtain such waivers. Without a waiver, we
would retain only a nonexclusive license to those patents. We will continue to
retain ownership of patents developed with governmental agencies other than the
DOE because non-DOE contracts, grants or cooperative agreements are not affected
by a loss of our "small business" status. Failure to continue to qualify as a
"small business" will also eliminate our eligibility to participate in future
U.S. Small Business Innovation Research program contracts.
WE MAY BE RESTRICTED IN PURSUING CERTAIN ACTIVITY OUTSIDE CANADA OR WITH
CERTAIN PARTNERS IN PARTS OF CANADA.
We will be subject to the contractual terms of Global's existing agreements
that restrict its ability to pursue certain commercial activities. Global has
entered into agreements with the National Research Council of Canada which
require that, until at least March 2004, Global obtain prior written consent in
order to conduct manufacturing using any results from the development of
projects under these agreements outside of Canada or sell, assign, transfer or
otherwise dispose of any rights to intellectual property arising out of such
project to any person or organization outside of Canada, or to any government
other than the Canadian government. Additionally, Global has entered into a
development agreement with Natural Resources Canada/ CANMET whereby Global may
not license the intellectual property developed in performance of the project to
any government other than the Canadian government, or to any person,
corporation, partnership or business for the purpose of manufacturing outside
Canada the products or processes resulting from the project without the prior
consent of the applicable Canadian government agency. Global has also appointed
an exclusive distributor for certain products in areas within Canada, thereby
limiting our future ability to use any other distributors for those products in
those areas.
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 or SOFC 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 and
SOFC 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.
We cannot assure you that we will enter into distributor relationships that
are consistent with, or sufficient to support, our commercialization plans or
our growth strategy or that these relationships will be on terms favorable to
us. Even if we enter into these types of relationships, we cannot assure you
that the distributors with which we form relationships will focus adequate
resources on selling our products or will be successful in selling them. Some of
these distributor arrangements have or will require that we grant exclusive
distribution rights to companies in defined territories. These exclusive
arrangements could result in us being unable to enter into other arrangements at
a time when the distributor with which we form a relationship is not successful
in selling our products or has reduced its commitment to marketing our products.
In addition, two of our current distributor arrangements include, and some
future distributor arrangements may also include, the issuance of equity and
warrants to purchase our equity, which may have an adverse effect on our stock
price. To the extent we enter into distributor relationships, the failure of
these distributors in assisting us with
36
the marketing and distribution of our products may adversely affect our results
of operations and financial condition.
We cannot be sure that MTU will continue to, or original equipment
manufacturers ("OEMs") will, manufacture or package products using our Direct
FuelCell or SOFC components. In this area, our success will largely depend upon
our ability to make our products compatible with the power plant products of
OEMs and the ability of these OEMs to sell their products containing our
products. In addition, some OEMs may need to redesign or modify their existing
power plant products to fully incorporate our products. Accordingly, any
integration, design, manufacturing or marketing problems encountered by MTU or
other OEMs could adversely affect the market for our Direct FuelCell or SOFC
products and, therefore, our business, prospects, results of operations and
financial condition.
WE DEPEND ON THIRD PARTY SUPPLIERS FOR THE DEVELOPMENT AND SUPPLY OF KEY
COMPONENTS FOR DIRECT FUELCELL AND SOFC PRODUCTS.
Both Global and FuelCell purchase several key components of their products
from other companies and rely on third-party suppliers for the balance-of-plant
components in Direct FuelCell products and SOFC products. There are a limited
number of suppliers for some of the key components of Direct FuelCell and SOFC
products. A supplier's failure to develop and supply components in a timely
manner or to supply components that meet our quality, quantity or cost
requirements or technical specifications or our inability to obtain alternative
sources of these components on a timely basis or on terms acceptable to us could
harm our ability to manufacture our Direct FuelCell and SOFC products. In
addition, to the extent the processes that our suppliers use to manufacture
components are proprietary, we may be unable to obtain comparable components
from alternative suppliers.
We do not know when or whether we will secure long-term supply
relationships with any of our suppliers or whether such relationships will be on
terms that will allow us to achieve our objectives. Our business, prospects,
results of operations and financial condition could be harmed if we fail to
secure long-term relationships with entities that will supply the required
components for our Direct FuelCell and SOFC products.
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. FuelCell does not currently conduct freedom to operate analyses. We
rely on patent, trade secret, trademark and copyright law to protect our
intellectual property. The patents that FuelCell has obtained will expire
between 2003 and 2021 and the average remaining life of FuelCell's U.S. patents
is approximately 9.4 years. The patent that Global has obtained will expire in
2019. Some of our intellectual property is not covered by any patent or patent
application and includes trade secrets and other know-how that is not
patentable, particularly as it relates to our manufacturing processes and
engineering design. In addition, some of our intellectual property includes
technologies and processes that may be similar to the patented technologies and
processes of third parties. If we are found to be infringing third-party
patents, we do not know whether we will able to obtain licenses to use such
patents on acceptable terms, if at all. Our patent position is subject to
complex factual and legal issues that may give rise to uncertainty as to the
validity, scope and enforceability of a particular patent. Accordingly, we
cannot assure you that:
- any of the U.S., Canadian or other foreign patents owned by FuelCell or
Global or other patents that third parties license to us will not be
invalidated, circumvented, challenged, rendered unenforceable or licensed
to others; or
- any of our pending or future patent applications will be issued with the
breadth of claim coverage sought by us, if issued at all.
37
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 subcontractors, vendors, suppliers, consultants, strategic partners and
employees. We cannot assure you that these agreements will not be breached, that
we will have adequate remedies for any breach or that such persons or
institutions will not assert rights to intellectual property arising out of
these relationships. Certain of our intellectual property has been licensed to
us on a non-exclusive basis from third parties that 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 that 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 that litigation is resolved in our favor.
THERE MAY BE LIMITATIONS ON OUR RIGHT TO EXPLOIT TECHNOLOGY JOINTLY DEVELOPED
BETWEEN GLOBAL AND STRATEGIC PARTNERS.
The extent to which we will own or otherwise have the right to commercially
exploit technology developed in connection with certain of Global's strategic
alliances is not clear. Due to ambiguities under some of Global's applicable
joint development agreements, it is unclear whether we will have the right to
exploit technology arising from these alliances (exclusively or otherwise) or
whether we can stop competitors from exploiting the technology. In the event
that a strategic partner of Global challenges our use of certain technology, we
could incur substantial litigation costs, be forced to make expensive products,
pay substantial damages or royalties or even be forced to cease operations.
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, Joseph Mahler, our
Chief Financial Officer, and Dr. Hansraj Maru and Christopher Bentley, Executive
Vice Presidents. The loss of the services of any executive officer, including
Mr. Leitman, Mr. Mahler, 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 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.
38
OUR MANAGEMENT MAY BE UNABLE TO MANAGE RAPID GROWTH EFFECTIVELY.
We expect to rapidly 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 MAY BE AFFECTED BY ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION.
As we begin to commercialize our Direct FuelCell and SOFC products, we will
be subject to federal, state, provincial or local regulation with respect to,
among other things, emissions and siting. Assuming no co-generation applications
are used in conjunction with our larger plants, they will discharge humid flue
gas at temperatures of approximately 700-800(LOGO) F, water at temperatures of
approximately 10-20(LOGO)F above ambient air temperatures and carbon dioxide.
These emissions will require permits that we expect (but cannot ensure) will be
similar to those applicable to generating units.
In addition, it is possible that industry-specific laws and regulations
will be adopted covering matters such as transmission scheduling, distribution
and the characteristics and quality of our products, including installation and
servicing. This regulation could limit the growth in the use of carbonate and
SOFC products, decrease the acceptance of fuel cells as a commercial product and
increase our costs and, therefore, the price of our Direct FuelCell and SOFC
products. Accordingly, compliance with existing or future laws and regulations
as we begin to commercialize and site our products could have a material adverse
effect on our business, prospects, results of operations and financial
condition.
DOE APPROVAL TO USE GLOBAL IN THE SECA PROGRAM IS UNCERTAIN.
Although the DOE has selected FuelCell for the SECA project, the DOE could
restructure its grant based on the Combination. If the DOE did restructure its
grant, FuelCell could lose the opportunity to be awarded some or all of the
funding for the SECA project. In addition, FuelCell is not guaranteed to receive
any payments from the SECA project.
UTILITY COMPANIES COULD IMPOSE CUSTOMER FEES OR INTERCONNECTION REQUIREMENTS
TO OUR CUSTOMERS THAT COULD MAKE OUR PRODUCTS LESS DESIRABLE.
Utility companies commonly charge fees to larger, industrial 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 and SOFC products and could make
our products less desirable, thereby harming our business, prospects, results of
operations and financial condition.
Several states (Texas, New York, California and others) have created and
adopted or are in the process of creating their own interconnection regulations
covering both technical and financial requirements for interconnection to
utility grids. Depending on the complexities of the requirements, installation
of our systems may become burdened with additional costs that might have a
negative impact on our ability to sell systems. There is also a burden in having
to track the requirements of individual states and design equipment to comply
with the varying standards. The Institute of Electrical and Electronics
Engineers has been working to create an interconnection standard addressing the
technical requirements for distributed generation to interconnect to utility
grids. Many parties are hopeful that this standard will be adopted nationally
when it is completed to help reduce the barriers to deployment of distributed
generation such as fuel cells, however enaction of this standard may be delayed
or never completed thereby limiting the commercial prospects and profitability
of our fuel cell systems.
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CHANGES IN GOVERNMENT REGULATIONS AND ELECTRIC UTILITY INDUSTRY RESTRUCTURING
MAY AFFECT DEMAND FOR OUR DIRECT FUELCELL AND SOFC 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. Many states have recently delayed the implementation of
deregulation as a result of power disturbances in California several summers
ago. Changes in government and public policy over time could further delay or
otherwise affect deregulation and, therefore, adversely affect our prospects for
commercializing our Direct FuelCell and SOFC 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 and SOFC
products.
WE COULD BE LIABLE FOR ENVIRONMENTAL DAMAGES RESULTING FROM OUR RESEARCH,
DEVELOPMENT OR MANUFACTURING OPERATIONS.
Our business exposes us to the risk of harmful substances escaping into the
environment, resulting in personal injury or loss of life, damage to or
destruction of property, and natural resource damage. Depending on the nature of
the claim, our current insurance policies may not adequately reimburse us for
costs incurred in settling environmental damage claims, and in some instances,
we may not be reimbursed at all. Our business is subject to numerous federal,
state and local laws and regulations that govern environmental protection and
human health and safety. These laws and regulations have changed frequently in
the past and it is reasonable to expect additional and more stringent changes in
the future. Our operations may not comply with future laws and regulations and
we may be required to make significant unanticipated capital and operating
expenditures. If we fail to comply with applicable environmental laws and
regulations, governmental authorities may seek to impose fines and penalties on
us or to revoke or deny the issuance or renewal of operating permits and private
parties may seek damages from us. Under those circumstances, we might be
required to curtail or cease operations, conduct site remediation or other
corrective action, or pay substantial damage claims.
WE MAY BE REQUIRED TO CONDUCT ENVIRONMENTAL REMEDIATION ACTIVITIES, WHICH
COULD BE EXPENSIVE.
We are subject to a number of environmental laws and regulations, including
those concerning the handling, treatment, storage and disposal of hazardous
materials. These environmental laws generally impose liability on present and
former owners and operators, transporters and generators for remediation of
contaminated properties. Except as set forth below, we believe that our
businesses are operating in compliance in all material respects with applicable
environmental laws, many of which provide for substantial penalties for
violations. We cannot assure you that future changes in such laws,
interpretations of existing regulations or the discovery of currently unknown
problems or conditions will not require substantial additional expenditures. Any
noncompliance with these laws and regulations could subject us to material
administrative, civil or criminal penalties or other liabilities. In addition,
we may be required to incur substantial costs to comply with current or future
environmental and safety laws and regulations.
In late 2002, a site inspection at Global's manufacturing facility in
Bassano, Alberta, Canada detected soil and groundwater contamination. The
primary contaminants detected at this facility and adjacent property are
components of a common degreasing agent used in the 1980s. Pursuant to the
Environmental Protection and Enhancement Act (Alberta), the party responsible
for contamination has a statutory obligation to take all reasonable measures to
remediate a release of hazardous substances that may cause an adverse effect on
human health, safety or the environment. Alberta Environment, the regulatory
agency with jurisdiction over these matters in Alberta, has confirmed that a
remediation strategy is required. Global has engaged a third party international
environmental consulting firm to further evaluate the extent of the
contamination and assist Global and Alberta Environment in developing a
remediation strategy.
Based on the data available as of July 2003, Global's environmental
consultant proposed a remediation strategy to prevent further offsite
contaminant migration and to capture and remediate existing soil and
40
groundwater contamination. Based on this strategy, Global has proposed a
remediation program to Alberta Environment regarding the Bassano site and
currently estimates that total costs for implementing and operating the
remediation system for a period of ten years to be approximately Cdn.$1.2
million to Cdn.$1.4 million.
Global's consultant acknowledges that there are a number of uncertainties
associated with the contamination at the Bassano facility, and the cost
estimates are based on a number of key assumptions. If Alberta Environment
promulgates remedial standards or guidelines for the suspected environmental
contaminants in the future, Alberta Environment may require Global to remediate
to such standards or guidelines (which could be more difficult and expensive).
The proposed remedial system may not be accepted by Alberta Environment or other
parties, and/or remediation may be required for more than ten years, both of
which could significantly increase the cost of the remediation.
The remediation cost estimate provided above does not include costs that
Global may incur for legal fees or for administrative expenses in connection
with the remediation activities. As noted above, there are numerous
uncertainties associated with environmental liabilities and no assurances can be
given that Global's consultant's estimate of any environmental liability will
not increase or decrease in the future. The uncertainties relate to the
difficulty of estimating the ultimate cost of any remediation that may be
undertaken, including the lateral and vertical extent of the contamination, any
additional operating costs associated with remedial measures, the duration of
any remediation required, the amount of consultants' or legal fees that may be
incurred and any regulatory requirements that may be imposed by Alberta
Environment.
In addition, Global has represented that no environmental condition exists
(including the presence or release of hazardous substances) on or at any
property currently or formerly operated by Global which could reasonably be
expected to result in a loss or liability under applicable environmental laws of
greater than Cdn.$1.5 million. In the event that this representation is not
accurate at or prior to completion of the Combination, FuelCell may terminate
the Combination Agreement. If the Combination is completed, the environmental
liabilities of Global, and the risks and uncertainties associated with such
liabilities as described above, will be assumed by the combined company, and
changes to these liabilities may adversely impact the financial condition of the
combined company.
OUR PRODUCTS USE INHERENTLY DANGEROUS, FLAMMABLE FUELS, OPERATE AT HIGH
TEMPERATURES AND USE CORROSIVE CARBONATE MATERIAL, EACH OF WHICH COULD SUBJECT
OUR BUSINESS TO PRODUCT LIABILITY CLAIMS.
Our business exposes us to potential product liability claims that are
inherent in hydrogen and products that use hydrogen. Hydrogen is a flammable gas
and therefore a potentially dangerous product. Hydrogen is typically generated
from gaseous and liquid fuels that are also flammable and dangerous, such as
propane, natural gas or methane, in a process known as reforming. Natural gas
and propane could leak into a residence or commercial location and combust if
ignited by another source. In addition, our Direct FuelCell and SOFC products
operate at high temperatures and our Direct FuelCell products use corrosive
carbonate material, which could expose us to potential liability claims. Any
accidents involving our products or other hydrogen-based products could
materially impede widespread market acceptance and demand for our Direct
FuelCell and SOFC products. In addition, we might be held responsible for
damages beyond the scope of our insurance coverage. We also cannot predict
whether we will be able to maintain our insurance coverage on acceptable terms.
WE ARE SUBJECT TO RISKS INHERENT IN INTERNATIONAL OPERATIONS.
Since we plan to market our Direct FuelCell and SOFC products both inside
and outside the United States and Canada, our success depends, in part, on our
ability to secure international customers and our ability to manufacture
products that meet foreign regulatory and commercial requirements in target
markets. We have limited experience developing and manufacturing our products to
comply with the commercial and legal requirements of international markets. In
addition, we are subject to tariff regulations and requirements for export
licenses, particularly with respect to the export of some of our technologies.
We face numerous challenges in our international expansion, including unexpected
changes in regulatory requirements, fluctua-
41
tions in currency exchange rates, longer accounts receivable requirements and
collections, difficulties in managing international operations, potentially
adverse tax consequences, restrictions on repatriation of earnings and the
burdens of complying with a wide variety of international laws.
FUELCELL HAS LARGE AND INFLUENTIAL STOCKHOLDERS.
MTU currently owns approximately 7.0% of FuelCell outstanding common stock
(based upon the shares of FuelCell's common stock outstanding as of October 31,
2002). Loeb Investors Co. LXXV and Warren Bagatelle (a managing director of an
affiliate of Loeb Investors Co. LXXV) collectively own approximately 4.0% of our
outstanding common stock (based upon the shares of FuelCell's common stock
outstanding as of October 31, 2002). These ownership levels could make it
difficult for a third party to acquire our common stock or have input into the
decisions made by our board of directors, which include Michael Bode (Chief
Executive Officer of MTU CFC Solutions GmbH), 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 products. Therefore, it may be in MTU's interest to possess
substantial influence over matters concerning our overall strategy and
technological and commercial development. In addition, MTU's ownership interest
could raise a conflict of interest if MTU is experimenting with competing
technologies for its own products.
OUR STOCK PRICE HAS BEEN AND COULD REMAIN VOLATILE.
The market price for our common stock has been and may continue to be
volatile and subject to extreme price and volume fluctuations in response to
market and other factors, including the following, some of which are beyond our
control:
- failure to meet our product development and commercialization milestones;
- variations in our quarterly operating results from the expectations of
securities analysts or investors;
- downward revisions in securities analysts' estimates or changes in
general market conditions;
- announcements of technological innovations or new products or services by
us or our competitors;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- investor perception of our industry or our prospects;
- insider selling or buying;
- demand for our common stock; and
- general technological or economic trends.
In the past, following periods of volatility in the market price of their
stock, many companies have been the subjects of securities class action
litigation. If we became involved in securities class action litigation in the
future, it could result in substantial costs and diversion of management's
attention and resources and could harm our stock price, business, prospects,
results of operations and financial condition.
PROVISIONS OF DELAWARE AND CONNECTICUT LAW AND OF FUELCELL'S CHARTER AND
BY-LAWS MAY MAKE A TAKEOVER MORE DIFFICULT.
Provisions in FuelCell's certificate of incorporation and by-laws and in
Delaware and Connecticut corporate law may make it difficult and expensive for a
third party to pursue a tender offer, change in control or takeover attempt that
is opposed by FuelCell's management and board of directors. Public stockholders
who might desire to participate in such a transaction may not have an
opportunity to do so. These anti-takeover provisions could substantially impede
the ability of public stockholders to benefit from a change in control or change
FuelCell's management and board of directors. See "Chapter Three -- Description
of
42
FuelCell's Capital Stock, Global's Preferred Shares and ExchangeCo and CallCo
Share Capital -- Anti-Takeover Effects of Provisions of Delaware and Connecticut
Law, the FuelCell Charter and FuelCell's Bylaws."
THE RIGHTS OF THE GLOBAL SERIES 2 PREFERRED SHARES COULD NEGATIVELY IMPACT THE
COMBINED COMPANY.
Upon completion of the Combination, the Global Series 2 Preferred Shares
will remain outstanding in Global as a consolidated subsidiary of FuelCell. The
terms of the Global Series 2 Preferred Shares provide rights to the holder,
Enbridge Inc., including dividend and conversion rights among others, that could
negatively impact the combined company. For example, the terms of the Global
Series 2 Preferred Shares provide that the holders are entitled to receive
cumulative dividends for each calendar quarter for so long as such shares are
outstanding. Assuming the exchange rate for Canadian dollars is Cdn.$1.4048 to
U.S.$1.00 at the time of the applicable dividend payment date, FuelCell could be
required to pay a preferred dividend of approximately $222,452 per calendar
quarter, subject to reduction in accordance with the terms of the Global Series
2 Preferred Shares. The terms of the Global Series 2 Preferred Shares also
require that the holder be paid any accrued and unpaid dividends on December 31,
2010. To the extent that there is a significant amount of accrued dividends that
are unpaid as of December 31, 2010 and the combined company does not have
sufficient working capital at that time to pay the accrued dividends, the
combined company's financial condition could be adversely affected.
Upon the completion of the Combination, FuelCell has offered to guarantee
Global's dividend obligations, including paying a minimum of Cdn.$500,000 in
cash annually to Enbridge for so long as Enbridge holds the Global Series 2
Preferred Shares.
As a result of the Combination, FuelCell will be required to issue common
stock to the holder of the Global Series 2 Preferred Shares if and when the
holder exercises its conversion rights. The number of shares of common stock
that FuelCell may issue upon conversion could be significant and dilutive to
existing stockholders of the combined company. For example, assuming the holder
of the Global Series 2 Preferred Shares exercises its conversion rights after
July 31, 2020, the exchange rate for Canadian dollars is Cdn.$1.4048 to
U.S.$1.00 at the time of such conversion and FuelCell's common stock price is
$7.50 at the time of such conversion, FuelCell would be required to issue
approximately 2,497,702 shares of its common stock. For more information about
the rights of the Global Series 2 Preferred Shares, please see "-- Description
of the Combination -- Mechanics for Implementing the Combination and Description
of Exchangeable Shares -- Global Series 2 Preferred Shares."
Since the Global Series 2 Preferred Shares will remain outstanding in
Global, Global will not become a wholly-owned subsidiary of FuelCell upon the
completion of the Combination and FuelCell may not be able to take actions that
would be adverse to the holder of the Global Series 2 Preferred Shares without
approval of the holder thereof. In addition, to the extent that the terms of the
Global Series 2 Preferred Shares restrict Global's ability to pay dividends or
make other distributions to other common shareholders of Global, FuelCell's
ability to distribute cash from Global to FuelCell after the completion of the
Combination may be limited. For example, without the consent of the holder of
the Global Series 2 Preferred Shares, Global is restricted from paying dividends
to any other shareholders unless all required dividends have been paid, or set
apart, up to the applicable dividend payment date for the Global Series 2
Preferred Shares.
FUELCELL AND GLOBAL EXPECT TO HAVE SIGNIFICANT NON-RECURRING COSTS ARISING OUT
OF THE COMBINATION.
FuelCell presently expects to incur significant costs following completion
of the Combination to streamline the combined company's business, reduce excess
capacity and eliminate redundant operations. In addition, the combined company
may incur costs to the extent FuelCell chooses to terminate, renegotiate or
amend any of Global's existing obligations as part of the post-closing
integration of the companies. Accordingly, FuelCell believes the combined
company may incur charges to operations, which are not currently reasonably
estimable, in the quarter in which the Combination is completed and/or the
following quarters to reflect costs associated with integrating and streamlining
the businesses and operations of FuelCell and Global. There can be no assurance
that the costs associated with streamlining the business, reducing
43
excess capacity and eliminating redundant operations will not exceed those
projected by FuelCell, and we cannot assure you that the combined company will
not incur additional material charges in subsequent quarters to reflect
additional costs associated with the Combination.
DISTRIBUTIONS FROM GLOBAL TO FUELCELL MAY BE SUBJECT TO CANADIAN WITHHOLDING
TAXES AND FUELCELL MAY BE SUBJECT TO U.S. FEDERAL INCOME TAXATION ON GLOBAL'S
EARNINGS, IF ANY, BEFORE RECEIVING DISTRIBUTIONS FROM GLOBAL ATTRIBUTABLE TO
SUCH EARNINGS.
Under the U.S.-Canada income tax treaty, in general, dividends payable from
a Canadian corporation to a U.S. corporate shareholder owning 10% or more of the
Canadian corporation generally are subject to 5% Canadian withholding tax.
In general, if a U.S. person, directly or indirectly, holds a 10% or
greater equity interest in a non-U.S. entity that is treated as a corporation
for U.S. federal income tax purposes and, together with other U.S. persons who
own 10% or more of the non-U.S. entity, hold more than 50% of the outstanding
equity of the non-U.S. entity, measured by vote or value, the non-U.S. entity
will be treated as a "controlled foreign corporation" with respect to such U.S.
persons. Following the Combination, FuelCell will itself own more than 50% of
the outstanding equity of Global, and, therefore, Global will be a controlled
foreign corporation with respect to FuelCell. As a result, FuelCell could be
required to include in its income for U.S. federal income tax purposes on a
current basis all or a portion of its share of the undistributed "earnings and
profits," as determined for such purposes, of Global, depending on Global's
sources of income and other considerations. In general, FuelCell must include
its share of undistributed earnings and profits of Global where the earnings and
profits are attributable to Global's "subpart F income," which generally is
income from passive and certain other sources, or are invested by Global in
"U.S. property," as determined for U.S. federal income tax purposes.
WE DEPEND ON RELATIONSHIPS WITH STRATEGIC PARTNERS, AND THE TERMS AND
ENFORCEABILITY OF MANY OF THESE RELATIONSHIPS ARE NOT CERTAIN.
Global and FuelCell have each entered into relationships with strategic
partners for design, product development and distribution of their existing
products, and products under development, some of which may not have been
documented by a definitive agreement. Where definitive agreements govern the
relationships between Global and FuelCell and their respective partners, the
terms and conditions of many of these agreements allow for termination by the
partners. Termination of any of these agreements could adversely affect our
ability to design, develop and distribute these products to the marketplace. In
many cases, these strategic relationships are governed by a memorandum of
understanding or a letter of intent. We cannot assure you that Global or
FuelCell will be able to successfully negotiate and execute definitive
agreements with any of these partners, and failure to do so may effectively
terminate the relevant relationship.
ADVERSE MARKET CONDITIONS RELATED TO GLOBAL'S THERMOELECTRIC GENERATORS MAY
IMPACT FUTURE REVENUE AND PROFITS.
Demand for Global's thermoelectric generators depends primarily on the
level of spending by oil and natural gas companies for gas exploration and
development activities and on the level of gas pipeline construction activity.
These activity levels are directly affected by fluctuations in world energy
prices, world supply and demand for oil and natural gas and government
regulations in Canada, the United States and internationally, all of which are
beyond our and our customers' control. Reduced levels of activity in the oil and
natural gas industry can intensify competition and result in lower revenue and
operating profit margin.
44
DESCRIPTION OF THE COMBINATION
OVERVIEW OF THE COMBINATION
On August 4, 2003, Global and FuelCell entered into the Combination
Agreement to combine Global with FuelCell in a share-for-share exchange pursuant
to a plan of arrangement to be submitted for approval by the Court. If all
approvals are received and the Combination closes, upon receipt of Global share
certificates and properly completed letters of transmittal:
- each Canadian Global common shareholder (other than dissenting
shareholders) will receive, at the shareholder's election, for each
Global common share held by the shareholder, either: (i) exchangeable
shares of ExchangeCo; or (ii) shares of FuelCell common stock, in either
case in accordance with the exchange ratio; and
- each non-Canadian Global common shareholder (other than dissenting
shareholders) will receive shares of FuelCell common stock in accordance
with the exchange ratio.
Each exchangeable share will be exchangeable for one share of FuelCell
common stock. The exchangeable shares will have economic and voting rights
equivalent to shares of FuelCell common stock and have been conditionally
approved for listing on the Toronto Stock Exchange.
FuelCell and Global believe that the Combination will create a company with
an increased technology base in a market where there is significant growing
interest from governmental and strategic partners. FuelCell and Global also
expect the combined company to be able to capitalize on leading SOFC technology
and strengthen FuelCell's position throughout the first phase of the Solid State
Energy Conversion Alliance ("SECA") program to develop SOFC products and to
increase the possibility that FuelCell will be able to successfully compete for
advancement through the next two phases of the 10-year $139 million SECA
program. The combined company will have a strong balance sheet, with an expected
aggregate cash balance of over $200 million. FuelCell and Global anticipate that
both sets of shareholders will benefit from a stronger, more diversified company
and increased stock liquidity.
The Combination will allow the companies to combine and integrate their
research and development resources, complementary distribution channels,
products and technologies, strategic alliances and customer bases, which
FuelCell and Global believe will lead to expanded markets, greater technical
resources, diversification and cost efficiencies. FuelCell and Global anticipate
that the combined company's alliance partners and customers will be used to
assist in the commercialization and funding of their company's products,
particularly FuelCell's existing relationships with customers and U.S.
government agencies.
Because of the strong synergies between high temperature carbonate and SOFC
technologies, FuelCell and Global expect to reap immediate technological rewards
from the Combination and anticipate that future technological advances will have
collateral benefits for both the carbonate and SOFC technologies.
FuelCell plans to maintain a concentrated focus on the continued
commercialization of its Direct FuelCell products, while developing Global's
SOFC technology to a point where it can be commercialized and provide increased
breadth to FuelCell's range of distributed generation solutions. FuelCell is
continuing to evaluate Global's generator business to determine its strategic
fit within the combined company and has not made a determination with respect to
whether to retain or sell that business.
Under the terms of the Plan of Arrangement:
- each Canadian Global common shareholder (other than dissenting
shareholders) will receive, at the shareholder's election, for each
Global common share held by the shareholder at the effective time of the
Combination, exchangeable shares of ExchangeCo or shares of FuelCell
common stock; and
- each non-Canadian Global common shareholder (other than dissenting
shareholders) will receive shares of FuelCell common stock.
The number of shares of FuelCell common stock or exchangeable shares received
will be between 0.279 and 0.342, with that number depending on the exchange
ratio in effect at the time the Combination is completed.
45
The exchange ratio will be determined by dividing $2.72 (approximately
Cdn.$3.82) by the 20-day volume-weighted average FuelCell stock price for the
period ending three days prior to the Global Meeting; provided, however, that
the exchange ratio will not be greater than 0.342 nor less than 0.279.
Accordingly, if FuelCell's 20-day volume-weighted average stock price is:
- greater than $9.74, the exchange ratio will be 0.279;
- less than $7.96, the exchange ratio will be 0.342; and
- between $7.96 and $9.74, Global common shareholders will receive
approximately $2.72 of exchangeable shares or FuelCell common stock for
each Global common share held.
Upon completion of the Combination:
- all Global common shareholders will cease to be shareholders of Global;
- each Canadian Global common shareholder (other than dissenting
shareholders) will receive, at the shareholder's election, either
exchangeable shares of ExchangeCo or shares of FuelCell common stock for
each Global common share held by that shareholder at the effective time
of the Combination determined in accordance with the exchange ratio;
- each non-Canadian Global common shareholder (other than dissenting
shareholders) will receive shares of FuelCell common stock for each
Global common share held by that shareholder at the effective time of the
Combination determined in accordance with the exchange ratio;
- each outstanding option to purchase Global common shares will be assumed
by FuelCell and will represent an option to purchase FuelCell common
stock based on the exchange ratio, the terms of the Plan of Arrangement
and the terms of each individual option agreement;
- the Global Series 2 Preferred Shares will remain preferred shares of
Global and FuelCell will assume the obligation to issue FuelCell common
stock upon their conversion; and
- Global will become a consolidated subsidiary of FuelCell.
BACKGROUND
The Global board of directors determined in the fall of 2000 that it would
be in the best interests of Global to seek a significant alliance partner to
assist with Global's commercialization of solid oxide fuel cell products. During
the fall of 2000 through to the end of 2001, management of Global approached
potential strategic partners and entered into various distribution and technical
relationships with a number of partners. While these relationships were
considered helpful to the commercialization and ultimately the distribution and
sale of solid oxide fuel cell products, none of the partners were of the size
and profile that provided the credibility to, and endorsement of, Global's solid
oxide fuel cell technology in the fashion sought by Global.
In 2001, FuelCell and Global entered into discussions regarding the
possibility of joining forces to participate in the DOE's SECA program for the
development of solid oxide planar technology. The parties held discussions
regarding the proposal, with Dr. Hans Maru and Mr. Pinakin Patel of FuelCell
visiting Global on September 27, 2001, and Mr. Eric Potter, Director -- Business
Development and Mr. Paul A. Crilly, Vice President, Finance and Chief Financial
Officer, of Global visiting FuelCell's offices in Danbury, Connecticut on
October 10, 2001. The parties continued discussions during October and early
November of 2001, but discontinued discussions on November 9, 2001, when they
were unable to reach an agreement.
In January 2002, Global engaged Citigroup, an internationally recognized
investment banking and financial advisory services firm, to assist with Global's
existing negotiation of a strategic alliance with a major international
corporation. After extensive discussions and negotiations with a potential
partner which were discontinued in the fall of 2002, no agreement was reached.
North American equity markets experienced prolonged weakness from 2000 to
2002 and over that period of time Global's common share price traded at a
significant discount to that of its peers. In late 2002, the Global board of
directors determined that its plan to use equity financing as a source of
long-term funding for
46
Global's current development focus and planned expenditures on larger power
applications would not succeed, particularly in light of Global's inability to
attract a significant strategic relationship partner. In November 2002, the
Global board of directors determined that it would be in the best interests of
Global to engage in a process of reviewing its strategic alternatives to
maximize shareholder value, including a sale of the solid oxide fuel cell
division, a strategic partnering to strengthen Global's ability to commercialize
its technology and any other initiatives consistent with maximizing shareholder
value, which Global refers to as the "Value Initiatives," which process was
announced in a press release dated November 19, 2002. Global also broadened the
mandate of Citigroup to include advising in respect of the Value Initiatives.
Global, through a worldwide process, with the assistance of Citigroup,
solicited potential interest in respect of a variety of alliance structures from
a lengthy list of potential partners across a broad spectrum of industries.
On November 30, 2002, Mr. Joe Mahler, Chief Financial Officer of FuelCell,
contacted Citigroup to request a copy of the executive summary relating to
Global. On December 2, 2002, Global and FuelCell entered into a customary
confidentiality agreement to permit them to exchange information concerning
their respective businesses, organizations, financial conditions and results of
operations. Citigroup then provided FuelCell with the Global executive summary
package. On January 7, 2003, FuelCell received a timing and procedure letter
from Citigroup regarding the process of submitting proposals regarding Global.
From November 30, 2002 until January 13, 2003, FuelCell's contact was solely
with Citigroup.
In early December of 2002, Quantum commenced discussions with Global and
Citigroup about a potential combination and entered into a confidentiality
agreement with Global to permit the exchange of additional information
concerning their respective businesses, organizations, financial conditions and
results of operations. From December 12, 2002 until January 23, 2003, Quantum's
contact was solely with Citigroup. Quantum submitted a non-binding proposal to
Citigroup on January 23. Numerous discussions and meetings were held between
Quantum and Global between January 23 and February 27, 2003.
On January 13, Global management made a presentation to FuelCell via
teleconference covering materials forwarded by Citigroup. On the call were
Messrs. Peter Garrett, Jim Barker, Brian Borglum and Paul Crilly from Global,
and Dr. Maru and Mr. Mahler from FuelCell. Following the call, FuelCell had
several conversations with Citigroup but did not submit a proposal.
At a Global board of directors meeting on February 27, 2003, the Global
board of directors established the Global Special Committee consisting of
Messrs. Norman Fraser and Glynn Davies and vested the Global Special Committee
with a mandate that included the review and negotiation of a potential
transaction with Quantum. With the assistance of management of Global,
Citigroup, PricewaterhouseCoopers LLP, Bennett Jones LLP and Dorsey & Whitney
LLP, the Global Special Committee initiated a business, financial and legal due
diligence review of Quantum. A new confidentiality agreement was negotiated with
Quantum in early March, 2003. In addition, the parties began due diligence and
negotiated a definitive combination agreement.
On March 19, 2003, at the request of the Toronto Stock Exchange, Global
issued a press release announcing that it was in discussions with another party
regarding a possible business combination. Beginning on March 19, Global and
Quantum and their respective advisors held numerous conference calls to discuss
due diligence issues and to negotiate the Quantum Combination Agreement and
related agreements. On April 1, 2003, Mr. Davies resigned from the Global board
of directors because of the divergence of views amongst the Global board of
directors with respect to the Quantum combination and was replaced on the Global
Special Committee by Mr. Bob Snyder. The parties executed the Quantum
Combination Agreement as of April 8, 2003 and on April 9, 2003, each of Quantum
and Global announced the combination. The parties then began the preparation of
a joint management information circular and proxy statement in respect of such
parties respective shareholder meetings to approve the Quantum combination.
On April 23, 2003, FuelCell announced that it had been selected by the DOE
as a new project participant for its SECA program, subject to negotiation of a
final agreement. The goal of the 10-year, $139 million SECA program is to
develop low-cost solid oxide fuel cells over the next decade in the 3-kW to
10-kW size
47
range that can be fitted together for combined heat and power products for
applications up to 100 kW. Upon receiving the notice of selection, FuelCell
management determined that there was now a potential strategic fit with Global
and began the process of evaluating a potential transaction with Global.
By Notice of Motion dated May 14, 2003, Enbridge, the sole holder of the
Global Series 2 Preferred Shares, commenced an action against Global seeking an
order from the Court declaring: (i) that the Quantum combination unfairly
disregarded the interests of Enbridge and is unfairly prejudicial and oppressive
to Enbridge; (ii) that Global be restrained from proceeding with the Quantum
plan of arrangement; and (iii) that Enbridge had the right under Sections 176,
193 and 234 of the Business Corporations Act (Alberta) to vote its Global Series
2 Preferred Shares as a separate class in connection with the proposed Quantum
combination.
Foundation Equity Corporation ("Foundation"), the holder of approximately
8.9% of Global's outstanding common shares and represented by two members, Mr.
Kerry Brown and Mr. John Howard, on Global's board of directors, filed a
petition on June 5, 2003 in connection with the hearing on the Interim Order
seeking a ruling: (i) that any common shareholder of Global, and specifically
Foundation, be permitted to dissent with respect to its or their Global common
shares in relation to the proposed Quantum combination; (ii) that any common
shareholder of Global, and specifically Foundation, be permitted to vote in
respect of its Global common shares with respect to the shareholder resolution
relating to the proposed Quantum combination regardless of whether or not such
shareholder exercises its dissent right; (iii) that in the event Foundation
undertakes a dissident proxy contest in opposition to the proposed Quantum
combination, then the costs of such dissident proxy contest are to be reimbursed
by Global; and (iv) the appointment of Foundation's counsel to represent, at the
expense of Global, the interests of those shareholders of Global who exercise
their dissent rights in respect of the Quantum combination.
Mr. Brown is the Chairman of the board of directors and Chief Executive
Officer of Foundation and Mr. Howard is a director of Foundation. Messrs. Brown
and Howard have advised the board of directors of Global that a special
committee of the board of directors of Foundation composed of a single director,
Mr. Terry Chalupa, has been vested with the authority to deal with matters
relating to Foundation's position with respect to Global. Messrs. Brown and
Howard have excused themselves from all of Foundation's proceedings relating to
Global and have sought independent counsel with respect to discharging their
duties as directors of Global.
The actions initiated by Enbridge and Foundation delayed the finalization
and mailing of the joint proxy statement prepared in connection with the
proposed Quantum combination and the holding of the shareholders' meetings to
approve the Quantum combination.
On June 13, 2003, Global received an unsolicited letter from FuelCell
proposing a combination. The proposal contemplated FuelCell's purchase of all of
the outstanding common shares of Global in exchange for shares of FuelCell's
common stock. In addition to outlining possible terms of such a transaction, the
proposal outlined perceived strategic, operational and financial synergies
between FuelCell and Global.
The Global Special Committee met on numerous occasions with its financial
and legal advisors to consider the proposal and on June 23, 2003 determined to
recommend to the Global board of directors that the FuelCell proposal be
determined not to constitute a "superior proposal" as defined in the Quantum
Combination Agreement.
On June 24, 2003, the FuelCell board of directors convened its regular
quarterly board meeting and received an informational update on the proposed
transaction with Global and learned that FuelCell had not received a response to
its offer letter of June 13, 2003.
On June 25, 2003, Global's board of directors met and received the written
advice of its financial advisors and the advice of its legal advisors and of the
Global Special Committee. At this meeting, the Global board of directors
determined to discuss the FuelCell proposal further at a subsequent meeting.
Also at this meeting, the Global board of directors reviewed the term sheet
executed by Enbridge and Quantum on June 20, 2003 setting forth the terms of a
proposed settlement of the action initiated by Enbridge. After a full
discussion, the board of directors approved the terms of the proposed settlement
as set forth in the term sheet and authorized
48
management to take all actions necessary or advisable to effect the proposed
settlement. In addition to the FuelCell proposal and Enbridge settlement, the
board of directors reviewed the status of the Quantum combination, and Citigroup
confirmed that nothing had occurred that would cause it to modify or withdraw
the fairness opinion that it had rendered on April 8, 2002, in connection with
the Quantum Combination Agreement.
By virtue of a settlement agreement among Global, Quantum and Enbridge
dated June 27, 2003, Enbridge agreed to discontinue its pending action and
agreed not to oppose the Quantum combination. In connection with the Enbridge
settlement, the Quantum Combination Agreement was amended as of June 27. A
hearing was held on June 27 and in its ruling dated June 27, the Court ordered
Global and Quantum to hold their respective shareholders' meetings. Foundation
requested a stay of the interim order which was denied. Foundation also
requested that the court authorize the funding of a dissident proxy circular, if
a proxy contest was conducted, but such a request was also denied and Foundation
was granted leave to apply for reimbursement of its costs and expenses incurred
in conducting a dissident proxy contest (if undertaken) at the final application
to be held subsequent to the Global meeting and the Quantum meeting to be held
in connection with the Quantum combination.
Having received no response or contact from Citigroup or Global, on July 2,
2003, FuelCell submitted a second letter reiterating and clarifying the terms
outlined in its June 13 letter. In response to that letter, Mr. Jerry Leitman,
President and Chief Executive Officer of FuelCell, received a voicemail and
letter from Mr. Bob Snyder, Chairman of the Global board of directors. Mr.
Snyder noted that the Global board of directors had met on July 2 and had
determined the offer to not be financially superior and were unable to have any
discussions with FuelCell.
On July 10, FuelCell's board of directors met to review the status of the
proposed acquisition of Global and approved an increase in the proposal to
Global's common shareholders from $70 million to $80 million. On July 11, 2003,
FuelCell submitted a revised non-binding proposal to Global increasing its offer
to $80 million. The Global Special Committee met and determined to recommend to
the Global board of directors that the revised proposal constituted a "superior
proposal" under the terms of the Quantum Combination Agreement. The revised
proposal was financially superior to the Quantum combination, the consideration
offered under the FuelCell proposal was demonstrated to be available and the
offer was subject only to confirmatory due diligence, negotiation of definitive
documentation and the full approval of the Global board of directors. On July
13, 2003, Global's board of directors met to consider the revised proposal and
received advice from legal counsel regarding fiduciary duties and written advice
from its financial advisors. After considering applicable law and the advice of
outside counsel, the Global board of directors concluded in good faith that the
FuelCell proposal constituted a superior proposal and was reasonably necessary
for the Global board of directors to act in a manner consistent with its
fiduciary duties under applicable law. Global provided prompt oral and written
notice to Quantum of this determination, which notice included the identity of
FuelCell, all material terms and conditions of the FuelCell proposal and its
intention to furnish information to and enter into negotiations or discussions
with FuelCell.
On July 14, 2003, Global announced that it had received an unsolicited
competing proposal that the board of directors of Global had determined to be a
"superior proposal". The resolution approving the determination that the
competing proposal constituted a "superior proposal" was unanimously approved by
seven of eight directors, with Mr. Stephen Letwin abstaining. Global also
announced that it intended to commence negotiations with the party making the
proposal once a confidentiality agreement was executed. On July 14, Mr. Snyder
called Mr. Leitman to inform FuelCell that Global had determined FuelCell's
proposal to be financially superior to the Quantum combination.
On July 15, 2003, Global and FuelCell executed a confidentiality agreement
which had confidentiality and standstill terms substantially similar to those
contained in Global's confidentiality agreement with Quantum in accordance with
the terms of the Quantum Combination Agreement.
Following the execution of the confidentiality agreement on July 15, Global
and FuelCell commenced confirmatory due diligence.
49
On July 16, 2003, Global received an unsolicited bona fide acquisition
proposal from a third party. The Global Special Committee met to consider the
acquisition proposal and determined, after considering the advice of counsel and
discussions with financial advisors, that the proposal did not constitute a
superior proposal under the Quantum Combination Agreement and so advised the
third party in a letter dated July 21, 2003 without providing any reasons for
this conclusion or encouraging or inviting a further proposal.
FuelCell provided Global with a draft combination agreement on July 16,
2003. Members of FuelCell's management team and their advisors flew to Calgary
on July 18, 2003 and conducted due diligence, met with management and toured
Global's operations. On July 18 the companies' financial and legal advisors met
in Calgary to discuss the combination agreement. From July 21 to July 24,
members of Global's management and its financial and legal advisors conducted
due diligence on FuelCell in Stamford, Danbury and Torrington, Connecticut.
During the period from July 18 to July 28, 2003, the Combination Agreement and
related documents were negotiated. Since that date, no material changes have
been made to such documentation.
Also on July 24, FuelCell's board of directors met to receive an update as
to the status of the transaction and to review the status of the due diligence
efforts performed by management, legal and financial advisors and KPMG.
On July 25, 2003, Global received a revised proposal from the same third
party that had previously delivered an acquisition proposal on July 16. The
Global Special Committee met to consider the revised acquisition proposal and
determined, after considering the advice of counsel and discussions with its
financial advisors, that such proposal did not constitute a superior proposal
under the Quantum Combination Agreement and so advised the third party in a
letter dated July 28, 2003 without providing any reasons for this conclusion or
encouraging or inviting a further proposal.
On July 27, an informational meeting of the Global board of directors was
held to consider: (i) Global management's due diligence report on FuelCell; (ii)
the written advice of Citigroup, which included a comparison of the FuelCell and
Quantum offers; (iii) the due diligence report of Bennett Jones LLP and Dorsey &
Whitney LLP; (iv) the report of PricewaterhouseCoopers LLP on certain historical
and prospective financial information and various financial, operating and other
data about FuelCell; and (v) the preliminary report of the Global Special
Committee.
On July 28, 2003, pursuant to the terms of the Quantum Combination
Agreement, Global provided Quantum with three business days' oral and written
notice prior to the Global board of directors' decision to accept, recommend,
approve or implement the superior proposal from FuelCell, which notice
identified FuelCell and provided full details of all material terms and
conditions of FuelCell's proposal. On July 30, 2003, Quantum advised Global that
it did not wish to meet to discuss and negotiate adjustments to the Quantum
offer which would enable Global and Quantum to proceed with the transactions
contemplated by the Quantum Combination Agreement and that Quantum would advise
Global of their course of action on July 31, 2003. On July 31, Quantum advised
Global that its board of directors had concluded that it was not in the best
interests of Quantum or its stockholders to propose any adjustments to improve
the terms and conditions of the Quantum combination.
On August 1, 2003, the Global board of directors met to discuss, among
other things, the status of the Quantum combination and the FuelCell proposal.
The Global Special Committee delivered their report and the Global board of
directors discussed the key terms of the Combination Agreement with management
and Global's legal advisors. Citigroup confirmed, at the request of the Global
board of directors, that Citigroup would be in a position to deliver a fairness
opinion as of August 1, in respect of the consideration offered to the Global
common shareholders. At the meeting, the Global board of directors unanimously
reconfirmed that the FuelCell proposal constituted a superior proposal under the
terms of the Quantum Combination Agreement. Immediately following this meeting,
Global provided Quantum with oral and written notice of its intention to enter
into a combination agreement with FuelCell and reconfirmed its view that the
FuelCell proposal remained a superior proposal under the terms of the Quantum
Combination Agreement.
Also on August 1, Global received the resignation of Mr. Stephen J.J.
Letwin from the board of directors effective as of 5:00 p.m. on that day. Mr.
Letwin did not specify any reasons for his resignation.
50
Also on August 1, the FuelCell board of directors had a full and candid
discussion about the Combination and had the opportunity to review the
Combination Agreement and documents contemplated thereby. Lazard presented its
oral fairness opinion and confirmed that the exchange ratio was fair, from a
financial point of view, to FuelCell; Lazard subsequently delivered a written
opinion confirming its earlier oral opinion. The board of directors determined
that the Combination was consistent with, and in furtherance of, the long-term
business strategy of FuelCell and was fair to the FuelCell stockholders and in
the best interests of FuelCell.
On August 3, 2003, the Global board of directors met to consider the draft
report of the Global Special Committee and the advice of its legal and financial
advisors. The Global board of directors also reviewed the documentation relating
to the Combination and received advice from legal counsel regarding fiduciary
duties, the terms of the Combination Agreement and the Plan of Arrangement.
After questions and discussions, the meeting was adjourned until 2 p.m. (Calgary
time) on August 4, 2003.
In the morning of August 4, 2003, Global delivered to Quantum a copy of the
Combination Agreement and final documentation executed by FuelCell. The Global
board of directors meeting was reconvened at 2 p.m. and received the final
report of the Global Special Committee unanimously: (i) recommending that the
Global board of directors approve the entering into of the Combination
Agreement; (ii) determining that the Combination is fair to its holders of
common shares and preferred shares and is in the best interests of Global; and
(iii) recommending that Global common shareholders vote in favor of the
Combination and the transactions contemplated thereby. Citigroup delivered its
oral opinion on August 4, and subsequently confirmed the opinion in writing as
of that same date, to the effect that, as of the date of the opinion and subject
to the considerations and limitations set forth therein, the exchange ratio set
forth in the Combination Agreement was fair, from a financial point of view, to
the Global common shareholders. The Global board of directors then resolved
unanimously that the Quantum Combination Agreement be terminated in accordance
with its terms and that notice of termination be delivered to Quantum along with
a cash termination fee of $2 million. Immediately following the termination of
the Quantum Combination Agreement and the payment of the termination fee to
Quantum, the Global board of directors unanimously approved the execution and
delivery of the Combination Agreement after: (i) concluding in good faith, after
considering applicable law and receiving the advice of outside counsel, that
accepting, recommending, approving or implementing the Combination is, in the
good faith judgment of the Global board of directors, reasonably necessary for
it to act in a manner consistent with fiduciary duties under applicable law;
(ii) determining unanimously that the Combination is fair to its holders of
common shares and preferred shares and is in the best interests of Global; (iii)
determining to recommend that its holders of common shares vote in favor of the
Combination and the transactions contemplated thereby; and (iv) advising Global,
and would advise FuelCell, that the Global board of directors will vote the
common shares held by them in favor of the Combination and the transactions
contemplated thereby. Following the execution by Global of the Combination
Agreement, Global and FuelCell issued a joint press release announcing the
Combination.
At the hearing of the Court held on September 30, 2003 in connection with
the granting of the Interim Order included in this Joint Proxy Statement as
Annex C, Enbridge, the sole holder of the Global Series 2 Preferred Shares, did
not oppose the granting of the Interim Order. The Interim Order was granted
without prejudice to Enbridge's right to argue for a separate class vote for its
Global Series 2 Preferred Shares in respect of the Combination. It is
anticipated that these arguments will be heard by the Court on October 17, 2003.
A further announcement will be made by Global at that time.
REASONS FOR THE COMBINATION
FUELCELL
The FuelCell board of directors has unanimously determined that the
Combination and the transactions contemplated thereby are advisable, fair to,
and in the best interests of FuelCell and FuelCell's stockholders and has
approved the Combination Agreement and the Combination.
51
In addition to the factors discussed below under the section titled
"-- Recommendation of the FuelCell Board of Directors," the FuelCell board of
directors considered the following strategic and financial rationale in
unanimously approving the Combination:
- Assists FuelCell in Capitalizing on Recent SECA Award. FuelCell believes
that the Combination will enhance its ability to capitalize on its recent
selection by the DOE for an award for the SOFC development program. The
Combination creates a company with leading SOFC technology, strengthens
FuelCell's position throughout the first phase of the SECA program to
develop SOFC products, and increases the chances that FuelCell will be
able to successfully compete for advancement through the next two phases
of the 10-year $139 million SECA program. SECA's goal is to accelerate
the development of low-cost, high-temperature SOFC fuel cells over the
next decade, in 3-10 kW modules, leading to products generally less than
100 kW. FuelCell believes the combined company will be uniquely
positioned to achieve the goals of the SECA award, to commercialize SOFC
technology, and to take advantage of the resulting opportunities emerging
for SOFC products over the next decade.
- Increases Technology Base. The Combination will increase FuelCell's
technology base in a market where there is significant growing interest
from governmental and strategic partners. Both the distributed generation
and fuel cell markets are growing increasingly competitive, and the
addition of Global's SOFC technology will broaden the range of FuelCell's
distributed generation and fuel cell products, thus allowing it to
compete more effectively. The Combination and Global's significant cash
reserves will allow FuelCell to pursue SOFC technology and exploit the
SECA award without diverting resources or focus in its continued
commercialization of its Direct FuelCell products.
- Exploits Technology Synergies. Both FuelCell's Direct FuelCell carbonate
products and Global's SOFC products are based on high temperature fuel
cell technologies, and as such the combined companies expect to reap
immediate technological rewards from the Combination that should advance
both the carbonate and SOFC technologies. FuelCell also anticipates that
future technological advances will have collateral benefits for both the
carbonate and SOFC technologies.
- Greater Financial Strength. FuelCell believes the combined company will
have a stronger balance sheet and better liquidity that will enable it to
execute its business strategy. In addition, FuelCell believes that adding
Global's cash reserves to its balance sheet will provide FuelCell with
increased cash to help fund development and operations.
- Provides Shareholders with Increased Liquidity. FuelCell anticipates
that shareholders of both companies will benefit from a stronger, more
diversified company and increased stock liquidity.
- Capitalizes on Each Company's Existing Relationships. FuelCell believes
that each company can benefit from the other's existing business
relationships. In particular, FuelCell hopes to use Global's relationship
with Enbridge, which is a large North American distributor of energy
products, to develop a distribution network in Canada.
- Greater Cost Efficiencies. FuelCell believes that the Combination will
enable it to consolidate operations in key areas that will result in cost
reductions. Cost efficiency opportunities include: integrating research
and development efforts, combining product development and
commercialization, integrating manufacturing operations and consolidating
general and administrative expenses.
In considering the Combination, the FuelCell board of directors recognized
that there are risks associated with the acquisition of Global, including that
some of the potential benefits described above may not be realized, that there
may be significant costs associated with realizing these benefits. Please see
the risks set forth under "-- Risk Factors" starting at page 27. Please see also
the potential disadvantages to the Combination set forth under the
"Recommendation of the FuelCell Board of Directors" starting on page 54.
In view of the variety of factors considered in connection with its
evaluation of the Combination, the FuelCell board of directors did not consider
it practicable to and did not quantify or otherwise assign relative weights to
the specific factors considered in reaching its determination.
52
GLOBAL
In determining that the Combination is fair to its holders of common shares
and preferred shares and is in the best interests of Global, the Global board of
directors consulted with Global's management, as well as its financial and legal
advisors. In reaching this decision, the Global board of directors considered
the unanimous recommendation of the Global Special Committee: (i) recommending
that the board of directors approve the entering into of the Combination
Agreement; (ii) determining that the Combination is fair to Global's holders of
common shares and preferred shares and is in the best interests of Global; and
(iii) recommending that Global's common shareholders vote in favour of the
Combination.
In addition to the factors discussed below under the section titled
"Recommendation of the Global Board of Directors," the Global board of directors
considered the advantages set forth below:
- Premium to Global Share Price. The consideration offered by FuelCell
represents a significant premium over the trading price of Global common
shares both immediately prior to the announcement of the Combination and
on November 19, 2002, the date Global initiated its plan to maximize
shareholder value.
- Liquidity. The shares of FuelCell common stock are widely held and
listed on the Nasdaq National Market, and the exchangeable shares, which
are exchangeable for FuelCell common stock, will be listed on the Toronto
Stock Exchange or another recognized Canadian stock exchange.
- Broader Yet Complementary Product Offering. Global expects the combined
company to have a broader range of products in the fuel cell industry.
- Reduction of Engineering and Development Expenditures. FuelCell's system
engineering and integration expertise provides the combined company with
the potential to reduce redundant expertise and expenditures within
Global, and as a result, on a combined basis may reduce overall
engineering and development expenditures. In addition, FuelCell has
demonstrated its ability to secure external funding for product
development programs through industry and governmental partners.
Accessing external funding is a key enabler for the sustainability of
Global's solid oxide fuel cell commercialization program. Cost reduction
of component parts and materials is critical to achieving cost targets
for the mass production and sale of solid oxide fuel cell products.
- Expanded Market Opportunities for Global and FuelCell Products. Global
believes that it is a leader in solid oxide fuel cell development. Global
also believes that it has demonstrated high power densities with its fuel
cell membranes, established a strong intellectual property portfolio and
assembled a talented corps of engineers and scientists from around the
world. FuelCell's customer base and its relationships with governmental
and military agencies may provide additional opportunities for Global to
distribute its current and future products and secure assistance in its
solid oxide fuel cell product development programs. In addition, Global
has sold its thermoelectric generators into 47 countries around the world
and has an extensive marketing and agent network. These distribution
channels may be leveraged by FuelCell in sales of its fuel cell products.
- Larger Company; More Exposure to the United States Markets. Global
expects the combined company to have a larger market capitalization, and
as a result of FuelCell's Nasdaq National Market listing, better access
to U.S. capital and financial markets. In addition, it is expected that
FuelCell's U.S. presence will facilitate greater exposure of Global's
solid oxide fuel cell commercialization achievements for marketing and
funding opportunities.
- Continued Participation in the Alternative Energy Industry. Global
reviewed a number of alternatives in its process of exploring ways to
maximize shareholder value. Global believes the Combination with FuelCell
will give Global's shareholders continued exposure to the alternative
energy industry through their ownership in the combined company. As of
June 30, 2003, Global had invested approximately Cdn.$72.7 million on its
solid oxide fuel cell development, and the Combination may provide an
opportunity for Global to earn a return on this investment. Specifically,
the Combination may enable the combined company to sustain and further
develop its solid oxide fuel cell program.
53
- Tax Deferral. The Combination is structured to provide a Canadian tax
deferral to most Canadian resident holders of Global common shares so
long as they continue to hold exchangeable shares and file a joint
election with ExchangeCo pursuant to Section 85 of the Income Tax Act
(Canada). In addition, provided that the exchangeable shares are listed
on a prescribed stock exchange, they will be a qualified investment for
trusts governed by RRSPs, RRIFs, RESPs and DPSPs and, provided ExchangeCo
maintains a substantial presence in Canada, will not be foreign property
for such plans or funds and for certain other persons subject to Part XI
of the Income Tax Act (Canada).
- Ability to Consider Competing Offers. The Combination Agreement does not
preclude the initiation of competing offers by other potential bidders.
If another offer is received by Global, the Global board of directors may
consider and accept it if the offer meets the criteria specified in the
Combination Agreement, including that it is financially superior to the
Combination and that the offeror has demonstrated that the funds or other
consideration necessary for the offer are available. If a superior offer
is accepted by the Global board of directors, Global is required to pay
FuelCell a cash termination fee of $2 million. As of the date of this
Joint Proxy Statement and except as otherwise disclosed herein, Global
has not received any competing offers.
The Global board of directors also considered the opinion of Citigroup,
delivered orally to the Global board of directors on August 4, 2003 and
subsequently confirmed in writing as of that same date, to the effect that, as
of such date and based upon and subject to the considerations and limitations
set forth therein, the exchange ratio was fair, from a financial point of view,
to the Global common shareholders. The full text of Citigroup's opinion, which
sets forth the assumptions made, general procedures followed, matters considered
and limits on the review undertaken, is included as Annex F to this Joint Proxy
Statement. The summary of Citigroup's opinion set forth below is qualified in
its entirety by reference to the full text of the opinion. Shareholders are
urged to read Citigroup's opinion carefully and in its entirety. For more
information regarding Citigroup's opinion, please see "-- Description of the
Combination -- Opinion of Citigroup" on page 63.
In considering the Combination, the Global board of directors recognized
that there are risks associated with the Combination with FuelCell, including
that some of the potential benefits described above may not be realized, that
there may be significant costs associated with realizing these benefits and that
the fluctuation of FuelCell's share price will affect the consideration to be
received by Global shareholders. Please see the risks set forth under "Risk
Factors" starting on page 27 for a more complete description of the risks
associated with the Combination and the combined companies.
In view of the variety of factors considered in connection with its
evaluation of the Combination, the Global board of directors did not consider it
practicable and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination. The Global board of
directors did not believe that the potential disadvantages described above were
sufficient, individually or in the aggregate, to outweigh the potential benefits
of the Combination.
RECOMMENDATION OF THE FUELCELL BOARD OF DIRECTORS
At its meeting on August 1, 2003, the FuelCell board of directors
unanimously determined that the Combination Agreement and the transactions
contemplated thereby are fair to FuelCell's stockholders and in the best
interest of FuelCell and approved the Combination and the Combination Agreement.
Each of the directors of FuelCell has advised FuelCell that he will vote the
FuelCell common stock held by him in favor of the proposal.
ACCORDINGLY, THE FUELCELL BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
FUELCELL'S STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE COMBINATION AGREEMENT AND
THE COMBINATION.
In reaching its decision to approve the Combination and the Combination
Agreement, the FuelCell board of directors consulted with FuelCell's management,
legal counsel regarding the legal terms of the Combination and financial
advisors regarding the financial aspects of the Combination and the fairness of
the exchange
54
ratio, from a financial point of view, to FuelCell. The factors that FuelCell's
board of directors considered in reaching its determination include the
following:
- historical information concerning FuelCell's and Global's respective
businesses, financial performance and condition, operations, technology
and management, including public reports concerning results of operations
during the most recent fiscal year and fiscal quarter for each company;
- FuelCell management's view of the financial condition, results of
operations and businesses of FuelCell and Global before and after giving
effect to the Combination;
- Global's cash reserves and FuelCell's belief that the addition of such
cash to FuelCell's balance sheet will help fund development and
operations;
- current financial market conditions and historical market prices,
volatility and trading information with respect to the FuelCell common
stock and the Global common shares;
- the value of Global, based upon private market, public market, net asset
value and premium paid valuation methodologies;
- the results of the due diligence investigations of Global conducted by
FuelCell's management and legal and financial advisors;
- the opinion of Lazard delivered on August 1, 2003, to the effect that, as
of such date, the exchange ratio was fair, from a financial point of
view, to FuelCell (for more information regarding the Lazard opinion,
please see "-- Description of the Combination -- Opinion of Lazard");
- the potential opportunities and benefits afforded by the Combination to
FuelCell upon combining its operations with those of Global (for more
information regarding these potential opportunities and benefits, please
see "-- Description of the Combination -- Reasons for the Combination --
FuelCell");
- the terms and conditions of the Combination Agreement generally,
including the circumstances in which termination fees are payable by and
to FuelCell, and the fact that the terms of the Combination Agreement do
not prevent a third party from making a competing offer or proposing a
competing transaction; and
- comparable valuation as compared to trading multiples of similar
alternative energy companies and comparable precedent transactions.
In the course of its analysis, FuelCell's board of directors also
considered the strategic benefits of the Combination. The FuelCell board of
directors determined that the Combination will result in a diversified company
with complementary revenue streams, technologies, customers and alliances that,
on a combined basis, is well positioned to address opportunities in fuel cell
power generation markets. The FuelCell board of directors believes that the
Combination is a complementary strategic combination that will:
- create a company with leading high temperature carbonate and solid oxide
fuel cell technology;
- strengthen FuelCell's position throughout the first phase of the SECA
program to develop SOFC products and increase the possibility that
FuelCell will be able to successfully compete for advancement through the
next two phases of the 10-year $139 million SECA program;
- increase FuelCell's and Global's technology base in a market where there
is significant growing interest from governmental and strategic partners;
- create a combined company with a strong balance sheet with an expected
cash balance of over $200 million;
- benefit shareholders of both companies by creating a stronger, more
diversified company and increased stock liquidity;
55
- consolidate operations with opportunities for cost efficiencies by
integrating research and development efforts, combining product
development and commercialization, integrating manufacturing operations
and consolidating general and administrative expenses; and
- result in an expanded technology and product profile as a provider of
fuel cell distributed generation solutions.
The FuelCell board of directors also identified and considered a number of
potential disadvantages in its deliberations concerning the Combination,
including, but not limited to:
- the risk that the potential benefits of the Combination may not be
realized, in part or at all or that there may be significant costs
associated with realizing these benefits;
- the risk that Global's net cash on or arising out of the completion of
the Combination may be significantly less than at the signing of the
Combination Agreement or the date of the FuelCell Meeting;
- the risk that the Combination may not be completed, including the risks
associated with obtaining the necessary approvals required to complete
the Combination;
- the risk of management and employee disruption associated with the
Combination, including the risk that despite the efforts of the combined
company, key technical, marketing and management personnel might not
remain employed by the combined company;
- the potential costs the combined company may incur if it chooses to (i)
terminate, renegotiate or amend Global's existing obligations, (ii)
streamline the combined company's business, (iii) reduce excess capacity,
including terminating employees, and (iv) eliminate redundant operations;
- the dilutive effect of the Combination on FuelCell's existing
stockholders;
- the risk that the Combination could adversely affect FuelCell's and
Global's relationship with some of its existing or potential customers,
suppliers or strategic partners;
- the potential negative effect on FuelCell's stock price as a result of
the public announcement of the Combination;
- the significant costs involved in completing the Combination;
- the risk relating to the termination of the proposed Combination;
- the potential that FuelCell will lose focus on commercializing its
carbonate Direct FuelCell technology; and
- the risk of litigation, infringement of third party intellectual property
rights and other applicable risks described in this Joint Proxy Statement
under the heading "Risk Factors."
In view of the variety of factors considered in connection with its
evaluation of the Combination, the FuelCell board of directors did not consider
it practicable to and did not quantify or otherwise assign relative weights to
the specific factors considered in reaching its determination. The FuelCell
board of directors did not believe that the potential disadvantages described
above were sufficient, individually or in the aggregate, to outweigh the
potential benefits of the Combination.
At its meeting on August 1, 2003, the FuelCell board of directors
unanimously determined that the Combination Agreement and the transactions
contemplated thereby are advisable, fair to and in the best interests of
FuelCell and approved the Combination and the Combination Agreement. Each of the
directors of FuelCell has advised FuelCell that he will vote the FuelCell common
stock held by him in favor of the proposal.
56
OPINION OF LAZARD
Lazard Freres & Co. LLC, FuelCell's investment bankers, has rendered an
opinion to the FuelCell board of directors as to the fairness as of the date of
the opinion, from a financial point of view, to FuelCell of the exchange ratio
in the acquisition. The full text of the written opinion of Lazard, dated August
1, 2003, is attached to this Joint Proxy Statement as Annex E. We encourage you
to read the opinion carefully and in its entirety to understand the procedures
followed, assumptions made, matters considered and limitations on the review
undertaken by Lazard in providing its opinion. THE OPINION OF LAZARD IS DIRECTED
TO THE FUELCELL BOARD OF DIRECTORS AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER AS TO HOW THAT STOCKHOLDER SHOULD VOTE ON, OR TAKE ANY OTHER
ACTION WITH RESPECT TO, THE ACQUISITION.
At a meeting of FuelCell's board of directors held on August 1, 2003, at
which the FuelCell board of directors considered the acquisition and approved
the Combination Agreement and the acquisition, Lazard rendered its oral opinion
(which was subsequently confirmed in its written opinion) that, as of such date
and based upon and subject to the matters reviewed with FuelCell's board of
directors, the exchange ratio in the Combination was fair to FuelCell from a
financial point of view.
This description of the Lazard opinion is qualified in its entirety by
reference to the full text of the Lazard opinion set forth in Annex E.
FuelCell's stockholders are urged to read the Lazard opinion in its entirety for
a description of the procedures followed, assumptions made, matters considered
and qualifications and limitations on the review undertaken by Lazard in
connection with rendering its opinion. The Lazard opinion is necessarily based
upon the economic, monetary, market and other conditions as they were in effect
on, and the information made available to Lazard as of, the date of the Lazard
opinion. Subsequent developments may affect the conclusion expressed in the
Lazard opinion. Lazard assumes no responsibility for advising any person of any
change in any matter affecting the Lazard opinion or for updating or revising
its opinion based on circumstances or events occurring after the date of the
Lazard opinion. The Lazard opinion addresses only the fairness from a financial
point of view of the exchange ratio to FuelCell as of August 1, 2003. It does
not address the merits of the underlying decision by FuelCell to engage in the
acquisition or the relative merits of the acquisition as compared to other
business strategies that might be available to FuelCell.
In the course of performing its review and analyses for rendering its
opinion, Lazard:
- reviewed the financial terms and conditions of the Combination Agreement;
- analyzed certain historical business and financial information relating
to FuelCell and Global;
- reviewed various financial forecasts and other data provided to Lazard by
FuelCell and Global relating to their respective businesses, including
the financial projections for Global for the years ending December 31,
2003 through 2004 prepared by the management of Global;
- held discussions with members of the senior managements of FuelCell and
of Global with respect to the businesses and prospects of FuelCell and
Global, respectively, and strategic objectives of each;
- reviewed public information with respect to certain other companies in
lines of businesses believed by Lazard to be generally comparable to the
businesses of FuelCell and Global;
- reviewed the financial terms of certain business combinations involving
companies in lines of businesses believed by Lazard to be generally
comparable to those of FuelCell and Global;
- reviewed the financial terms of certain business combinations involving
transaction structures believed by Lazard to be generally comparable to
the transaction structure set forth in the Combination Agreement;
- reviewed the historical stock prices and trading volumes of FuelCell's
common stock and Global's common shares; and
- conducted such other financial studies, analyses and investigations as
Lazard deemed appropriate.
Lazard relied upon the accuracy and completeness of the financial and other
information that it reviewed and used in its analysis, including the financial
and other information provided by FuelCell and Global and
57
reviewed by Lazard for purposes of the Lazard opinion. Lazard did not assume any
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of
FuelCell or Global, or concerning the solvency or fair value of either of
FuelCell or Global. Lazard also relied upon the views of management of FuelCell
generally with respect to the value of the existing technology of Global to be
acquired in the acquisition. With respect to financial forecasts, Lazard assumed
that they were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of FuelCell and of Global
as to the future financial performance of FuelCell and Global, respectively.
Lazard assumed no responsibility for and expressed no view as to such forecasts
or the assumptions on which they were based.
In rendering its opinion, Lazard assumed that the acquisition will be
consummated on the terms described in the Combination Agreement without any
waiver or any modification of any material terms or conditions by FuelCell and
that obtaining the necessary regulatory approvals for the acquisition will not
have an adverse effect on FuelCell, Global or the consummation of the
acquisition.
Further, in rendering its opinion, Lazard did not express any opinion as to
the price at which the common stock of FuelCell or the common shares of Global
may trade subsequent to the announcement of the acquisition or as to the price
at which the common stock of FuelCell may trade subsequent to the consummation
of the acquisition.
Lazard has in the past provided investment banking services to FuelCell for
which Lazard has received customary fees and, as expressed in the opinion, one
of Lazard's managing directors is a member of the immediate family of one of
FuelCell's directors.
SUMMARY OF LAZARD FINANCIAL ANALYSES
The following is a summary of the material financial analyses performed by
Lazard in connection with the rendering of its fairness opinion to the FuelCell
board of directors.
In each of the analyses described below, Lazard based its analyses on the
fully diluted shares outstanding as of April 30, 2003 for Global, as reported in
Quantum's preliminary Joint Management Information Circular and Proxy Statement
on Schedule 14A filed with the Securities and Exchange Commission on May 7, 2003
(the "Quantum Proxy Statement"), and on the fully diluted shares outstanding as
of January 22, 2003 for FuelCell, as reported in FuelCell's Annual Report on
Form 10-K for the fiscal year ended October 31, 2002.
SOME OF THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION
PRESENTED IN TABULAR FORMAT. IN ORDER TO UNDERSTAND FULLY LAZARD'S FINANCIAL
ANALYSES, THE TABLES MUST BE READ TOGETHER WITH THE TEXT OF THE SUMMARY. THE
TABLES ALONE ARE NOT A COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES.
CONSIDERING THE TABLES ALONE COULD CREATE A MISLEADING OR INCOMPLETE VIEW OF
LAZARD'S FINANCIAL ANALYSES.
Selected Precedent Transactions Analysis. Lazard performed selected
precedent transactions analyses to assist the FuelCell board of directors in
valuing Global based on transaction values expressed as multiples of various
financial measures in comparable selected transactions. Lazard reviewed and
analyzed certain publicly available financial and market data relating to
selected transactions in the alternative energy industry. Because of the general
lack of public information relating to precedent transactions in the alternative
energy industry from which to derive sufficient comparative financial metrics,
Lazard also analyzed comparable transactions in other industries, and
specifically those in which a substantial portion of the target's equity value
arose from its net cash.
The selected transactions in the alternative energy industry were:
Proton Energy Systems/Northern Power Systems, Inc.
Ballard Power Systems Inc./Ballard Generation (First Energy)
Hydrogenics/Greenlight Power Technologies
Stuart Energy Systems/Vandenborre Technologies
Plug Power, Inc./H Power Corp.
Maxwell Technologies, Inc./Montena Components Ltd
58
Ballard Power Systems Inc./XCELLSIS Fuel Cell Engines
Ballard Power Systems Inc./Ecostar Electric Drive Systems
Astropower Inc./Atersa
Ballard Power Systems Inc./Textron Systems, Carbon Unit
Kyocera Corporation/Golden Genesis Co.
The selected transactions in other industries in which a substantial
portion of the target's equity value arose from its net cash were:
Sybase Inc./AvantGo Inc.
SBI & Company/Lante Corp.
Openwave Systems Inc./SignalSoft Corp.
Valueclick Inc./Be Free Inc.
Exelixis, Inc./Genomica Corp.
EM Holdings Inc./eMachines Inc.
SPSS Inc./net.Genesis Corp.
Divine Inc./Eprise Corp.
Cross Media Marketing Corp./Lifeminders Inc.
Kana Communications, Inc./Broadbase Software, Inc.
AmericanGreetings.com Inc./Egreetings Network Inc.
In conducting its analysis, Lazard made selected qualitative judgments
concerning the differences between the characteristics of the acquisition of
Global and the selected precedent transactions that Lazard believes affect the
transaction values of the acquisition of Global and those of the precedent
transactions. For example, Lazard considered the Plug Power, Inc./H Power Corp.
transaction to be the most relevant transaction for the purposes of its
precedent transactions analysis, given the significant structural and industry
similarities with the acquisition of Global, and accordingly ascribed
significant weight to its transaction multiples.
In conducting its analysis of comparable transactions, Lazard analyzed
equity value expressed as a multiple of net cash and book equity value. Lazard
then derived ranges for the implied multiples of equity value to net cash and to
book value of equity. Lazard also analyzed the premium paid per share of common
stock of the target company one-day and thirty-days prior to the announcement of
the transaction. Using publicly available information and market data, Lazard
calculated the following median and high and low multiples for the above
comparable companies:
LOW HIGH MEDIAN
----- ----- ------
EQUITY VALUE AS A MULTIPLE OF:
Net Cash.................................................. 0.58x 3.75x 0.96x
Book Value of Equity...................................... 0.44x 7.50x 1.03x
EQUITY PREMIUM/(DISCOUNT) BASED ON CLOSING PRICE:
One day prior to the announcement of the transaction...... 16.5% 158.7% 70.0%
Thirty days prior to the announcement of the
transaction............................................ (61.3)% 404.8% 85.7%
Using the median, high and low multiples calculated above, Lazard derived a
range of multiples for equity value to net cash of 1.25x to 1.50x and for equity
value to book equity value of 1.05x to 1.25x. Using this valuation analysis and
estimates of financial and market data for Global provided by the management of
Global, Lazard derived a range of implied equity values for Global of $75
million to $90 million, or approximately $2.55 to $3.06 per fully-diluted Global
common share.
Lazard also noted that the implied premium to be paid to Global common
shareholders of 92.3% and 62.3% based on the closing price of Global common
shares thirty days prior and one day prior, respectively, to March 19, 2003, the
date of Global's public announcement that it was in discussions with another
party regarding a possible business combination, compared favorably with the
range for the precedent transactions
59
based on the closing price of the target company's common shares thirty days
prior and one day prior to the announcement.
Comparable Public Companies Analysis. Lazard performed a comparable public
companies analysis to assist the FuelCell board of directors in valuing Global
based on various financial multiples of selected comparable public companies in
the alternative energy industry. In performing this analysis, Lazard reviewed
certain financial and market data relating to Global and compared such
information to the corresponding financial and market data of other companies in
the alternative energy industry which Lazard deemed to be comparable to Global.
The selected comparable companies were separated into two groups: companies
with significant strategic partners, typically reflective of such companies'
industry-leading positions; and companies without strategic partners.
Notwithstanding their mutual participation in the fuel cell and energy-tech
industries, Lazard noted that the trading dynamics of these two groups were
markedly distinct, with the companies with significant strategic partners
trading at substantial premiums to those without strategic partners. The
selected comparable companies that Lazard considered were:
COMPANIES WITH STRATEGIC PARTNERS: COMPANIES WITHOUT STRATEGIC PARTNERS:
- Ballard Power Systems Inc. - Active Power, Inc.
- Hydrogenics Corporation - Proton Energy Systems, Inc.
- Plug Power, Inc. - Stuart Energy Systems Corporation
- Quantum Fuel Systems Technologies
Worldwide, Inc.
- FuelCell Energy, Inc.
Lazard compared the publicly-available financial information and market
data for the selected comparable companies. For each of the selected comparable
companies, Lazard calculated and compared the companies' market capitalization
as a multiple of net cash and equity value as a multiple of book equity value.
The median multiples of market capitalization to net cash and equity to book
equity value were:
GROUP MEDIAN OF GROUP MEDIAN OF
EQUITY VALUE TO EQUITY VALUE TO
COMPARABLE COMPANIES NET CASH BOOK EQUITY VALUE
-------------------- --------------- -----------------
Companies with strategic partners........................... 4.26x 1.90x
Companies without strategic partners........................ 0.89x 0.76x
Because of the differences between businesses, operations, financial
conditions and prospects of the companies considered as comparable companies and
those of Global, Lazard believed that it was inappropriate to rely solely on the
quantitative results of its analysis. Accordingly, Lazard also made selected
qualitative judgments concerning the differences between the financial and
operating characteristics of Global and the comparable companies included in the
analysis that Lazard believed affect the public trading values of Global and the
comparable companies. For example, in making such qualitative judgments, Lazard
considered that industry leaders, typically with well-known strategic partners
and investors such as General Motors' partnership with Hydrogenics and Ford's
and Daimler Chrysler's partnerships with Ballard, trade at significant premiums
to other companies within the same industry, as measured by the ratios of equity
value to net cash and equity value to book equity value.
Using the median multiples calculated above and applying certain
qualitative measures, Lazard derived a range of multiples for equity value to
net cash of approximately 1.00x to 1.20x and for equity value to book value of
equity of approximately 0.85x to 1.00x and, using estimates for the relevant
financial and market data for Global provided by the management of Global,
calculated a corresponding range of implied equity values for Global of $60
million to $72.5 million, or approximately $2.04 to $2.47 per fully-diluted
Global common share. Lazard noted that this valuation did not reflect any change
of control premium.
Net Tangible Asset Valuation Analysis. Lazard also performed a net
tangible asset valuation analysis by analyzing the residual value to Global's
common shareholders as the net remaining cash after disposal of Global's
thermoelectric generator division and redemption of the Global Series 2
Preferred Shares at their
60
book value as of December 31, 2002, as reported in the Quantum Proxy Statement.
Because long-term projections for Global's fuel cell business were not provided
by Global, Lazard was unable to separately value Global's fuel cell technology
business, which currently does not generate revenue or earnings. Furthermore,
FuelCell management did not provide Lazard with analyses or estimates of the
value of Global's technology business. Consequently, for the purposes of the net
tangible asset valuation analysis, Lazard did not value Global's SOFC technology
business.
Based on estimates for net cash and for the outstanding Global Preferred
Series 2 Shares provided by Global's management, Lazard calculated an implied
range of net tangible asset values for Global, excluding any value attributable
to the SOFC technology business, of $57.2 million to $60.2 million, or $1.96 to
$2.06 per fully-diluted Global common share.
Exchange Ratio Analysis. Lazard examined the historical exchange ratios of
FuelCell common stock to Global common shares to assist the FuelCell board of
directors in valuing Global based on the relative values of FuelCell's closing
share price to Global's closing share price as of July 28, 2003 and for the
one-month, three-month, six-month and twelve-month periods ended July 28, 2003.
Lazard calculated the exchange ratios using both currency-adjusted and
non-currency adjusted values for Global's common shares. Lazard calculated the
"currency-adjusted" exchange ratio by converting Global's share price to its
U.S. dollar equivalent on a daily exchange rate basis for the period in
questions. Lazard calculated the "non-currency adjusted" exchange ratios by
converting Global's share price to its U.S. dollar equivalent on the first day
of the relevant period.
Lazard calculated the currency-adjusted and non-currency adjusted exchange
ratio as of July 28, 2003 and compared it to the exchange ratios at the low, mid
and high points of the collar, on the basis of both the weighted average daily
trading volume of FuelCell common stock and Global common shares and the simple
average. Lazard also calculated the implied currency-adjusted and non-currency
adjusted exchange ratios for the one-month, three-month, six-month and
twelve-month periods ended July 28, 2003 on the basis of both the weighted
average daily trading volume of FuelCell common stock and Global common shares
and the simple average. The results of Lazard's analysis are set forth in the
table below:
NON-CURRENCY
CURRENCY-ADJUSTED ADJUSTED
------------------ ------------------
SIMPLE WEIGHTED SIMPLE WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
------- -------- ------- --------
Collar Low....................................... 0.279x 0.279x 0.279x 0.279x
Collar Mid....................................... 0.307x 0.307x 0.307x 0.307x
Collar High...................................... 0.342x 0.342x 0.342x 0.342x
July 28, 2003.................................... 0.289x 0.289x 0.289x 0.289x
One-month........................................ 0.260x 0.261x 0.265x 0.265x
Three-month...................................... 0.234x 0.242x 0.222x 0.227x
Six-month........................................ 0.259x 0.261x 0.241x 0.239x
Twelve-month..................................... 0.230x 0.230x 0.216x 0.217x
Using the historical currency-adjusted, weighted average exchange ratio for
the low and high points of the collar, Lazard observed that the transaction
exchange ratio range of 0.279x to 0.342x represents a premium/(discount) of (3%)
to 18% to the exchange ratio on July 28, 2003, 7% to 31% to the one-month
average, 15% to 41% to the three-month average, 7% to 31% to the six-month
average and 21% to 49% to the 12-month average. Lazard observed that the
exchange ratio represents a premium to the historical trading prices of Global's
common shares that is consistent with premiums paid in similar transactions
involving changes of control.
MISCELLANEOUS
In connection with rendering its opinion, Lazard performed a variety of
financial analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant
61
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to a partial analysis or summary description. Accordingly,
notwithstanding the separate analyses summarized above, Lazard believes that its
analyses must be considered as a whole and that selecting portions of the
analyses and factors considered by them, without considering all such analyses
and factors, or attempting to ascribe relative weights to some or all such
analyses and factors, could create an incomplete view of the evaluation process
underlying the Lazard opinion.
In performing its analyses, Lazard made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of FuelCell. The analyses
performed by Lazard are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Lazard did not assign any specific weight to any of the
analyses described above and did not draw any specific conclusions from or with
regard to any one method of analysis. With respect to the analysis of comparable
companies and the analysis of selected precedent transactions summarized above,
no public company utilized as a comparison is identical to FuelCell or Global,
and no transaction is identical to the Combination. Accordingly, an analysis of
publicly traded comparable companies and comparable business combinations is not
mathematical; rather, it involves complex considerations and judgments
concerning the differences in financial and operating characteristics of the
companies and other factors that could affect the public trading values or
announced merger transaction values, as the case may be, of FuelCell or Global
and the companies to which they were compared. The analyses do not purport to be
appraisals or to reflect the prices at which any securities may trade at the
present time or at any time in the future. In addition, the Lazard opinion was
one of many factors taken into consideration by FuelCell's board of directors.
Consequently, Lazard's analysis should not be viewed as determinative of the
decision of FuelCell's board of directors or FuelCell's management with respect
to the fairness of the exchange ratio as set forth in the Combination Agreement.
Lazard is an internationally recognized investment banking firm and is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements, leveraged
buyouts and valuations for estate, corporate and other purposes.
Lazard was selected to act as investment banker to the FuelCell board of
directors because of its expertise and its reputation in investment banking and
mergers and acquisitions and its familiarity with the alternative energy
industry and FuelCell. FuelCell and Lazard have entered into a letter agreement,
dated as of May 15, 2003, relating to the services to be provided by Lazard in
connection with the Combination and the transactions related to it, under which
FuelCell has agreed to pay Lazard customary compensation, a substantial portion
of which is payable only upon completion of the Combination. FuelCell also
agreed to reimburse Lazard for certain out-of-pocket expenses incurred in
connection with the engagement. In addition, FuelCell agreed to indemnify Lazard
against certain liabilities, including liabilities under the federal securities
law, relating to or arising out of its engagement.
RECOMMENDATION OF THE GLOBAL BOARD OF DIRECTORS
The Global board of directors unanimously approved the Combination
Agreement and determined that the Combination is fair to its common shareholders
and preferred shareholders and is in the best interests of Global.
BASED ON THE FACTORS CONSIDERED BY THE GLOBAL BOARD OF DIRECTORS, THE BOARD
UNANIMOUSLY RECOMMENDS THAT GLOBAL COMMON SHAREHOLDERS VOTE "FOR" THE SPECIAL
RESOLUTION TO APPROVE THE COMBINATION ATTACHED TO THIS JOINT PROXY STATEMENT AS
ANNEX A.
In reaching its decision to unanimously approve the Combination Agreement,
the Global board of directors consulted with Global's management, legal counsel
regarding the legal terms of the Combination Agreement and financial advisors
regarding the fairness of the exchange ratio set forth in the Combination
Agreement, from a financial point of view, to Global common shareholders. A copy
of the Citigroup opinion, including the assumptions, qualifications and other
matters contained therein, is attached to this Joint Proxy Statement as Annex F.
62
In considering the Combination, the Global board of directors recognized
that there are risks associated with the Combination with FuelCell, including
that some of the potential benefits of the Combination described above may not
be realized, that there may be significant costs associated with realizing these
benefits and the other risks set forth under "Risk Factors."
In view of the variety of factors considered in connection with its
evaluation of the Combination, the Global board of directors did not consider it
practicable and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination.
OPINION OF CITIGROUP
Citigroup was retained to act as financial advisor to Global in connection
with the Combination. Pursuant to Citigroup's engagement letter agreement with
Global, dated November 19, 2002, Citigroup rendered to the Global board of
directors on August 4, 2003 an oral opinion, which opinion was subsequently
confirmed by delivery of a written opinion, to the effect that, as of the date
of the opinion and based upon and subject to the considerations and limitations
set forth in the opinion, Citigroup's work described below and other factors it
deemed relevant, the exchange ratio was fair, from a financial point of view, to
the holders of Global common shares.
The full text of Citigroup's opinion, which sets forth the assumptions
made, general procedures followed, matters considered and limits on the review
undertaken, is included as Annex F to this Joint Proxy Statement. The summary of
Citigroup's opinion set forth below is qualified in its entirety by reference to
the full text of the opinion. GLOBAL COMMON SHAREHOLDERS ARE URGED TO READ
CITIGROUP'S OPINION CAREFULLY AND IN ITS ENTIRETY.
CITIGROUP'S OPINION WAS LIMITED SOLELY TO THE FAIRNESS OF THE EXCHANGE
RATIO FROM A FINANCIAL POINT OF VIEW AS OF THE DATE OF THE OPINION. NEITHER
CITIGROUP'S OPINION NOR ITS RELATED ANALYSIS CONSTITUTED A RECOMMENDATION OF THE
PROPOSED COMBINATION TO THE GLOBAL BOARD OF DIRECTORS. CITIGROUP MAKES NO
RECOMMENDATION TO ANY GLOBAL COMMON SHAREHOLDER REGARDING HOW THE SHAREHOLDER
SHOULD VOTE WITH RESPECT TO THE PROPOSED COMBINATION.
In arriving at its opinion, Citigroup reviewed a draft dated August 1, 2003
of the Combination Agreement, and held discussions with senior officers,
directors and other representatives and advisors of Global and senior officers
and other representatives and advisors of FuelCell concerning the business,
operations and prospects of Global and FuelCell. Citigroup examined publicly
available business and financial information relating to Global and FuelCell, as
well as financial forecasts and other information and data relating to Global
and FuelCell which were provided to or otherwise reviewed by or discussed with
Citigroup by the respective managements of Global and FuelCell, including
information relating to the potential strategic implications and operational
benefits anticipated by the managements of Global and FuelCell to result from
the Combination. Citigroup reviewed the financial terms of the Combination as
set forth in the Combination Agreement in relation to, among other things:
- current and historical market prices and trading volumes of Global common
shares and FuelCell common stock;
- the historical and projected earnings and other operating data of Global
and FuelCell; and
- the capitalization and financial condition of Global and FuelCell.
Citigroup considered, to the extent publicly available, the financial terms of
other transactions effected that Citigroup considered relevant in evaluating the
Combination and analyzed financial, stock market and other publicly available
information relating to the businesses of other companies whose operations
Citigroup considered relevant in evaluating those of Global and FuelCell.
Citigroup also evaluated the pro forma financial effects of the Combination on
Global and FuelCell. At appropriate times, in connection with its engagement and
at the direction of Global, Citigroup was requested to approach, and held
discussions with, selected third parties to solicit indications of interest in
the possible acquisition of all or a part of Global. In addition to the
foregoing, Citigroup conducted such other analyses and examinations and
considered such
63
other information and financial, economic and market criteria as Citigroup
deemed appropriate in arriving at its opinion.
In rendering its opinion, Citigroup assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or provided to or otherwise reviewed by
or discussed with it and was informed by the managements of Global and FuelCell
that they were not aware of any facts that would make such information
inaccurate or misleading. With respect to financial forecasts and other
information and data relating to Global and FuelCell provided to or otherwise
reviewed by or discussed with it, Citigroup was advised by the respective
managements of Global and FuelCell that such forecasts and other information and
data were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the managements of Global and FuelCell as to the
future financial performance of Global and FuelCell, the potential strategic
implications and operational benefits (including the amount, timing and
achievability thereof) anticipated to result from the Combination and the other
matters covered thereby. Citigroup was not asked to, and did not, express a view
with respect to such forecasts and other information and data or the assumptions
on which they were based. Citigroup assumed, with the consent of the Global
board of directors, that the Combination will be consummated in accordance with
its terms, without waiver, modification or amendment of any material term,
condition or agreement and that, in the course of obtaining the necessary
regulatory or third party approvals, consents and releases for the Combination,
no delay, limitation, restriction or condition will be imposed that would have a
material adverse effect on Global or FuelCell or the contemplated benefits of
the Combination. Representatives of Global advised Citigroup, and Citigroup
assumed, that the final terms of the Combination Agreement would not vary
materially from those set forth in the draft reviewed by it. Citigroup also
assumed, with the consent of the Global board of directors, that, at the
corporate level, the Combination will be tax-free.
Citigroup noted that its opinion relates only to the relative values of
Global and FuelCell. Citigroup did not express any opinion as to what the value
of the FuelCell common stock or the exchangeable shares actually will be when
issued pursuant to the Combination or the price at which the FuelCell common
stock or the exchangeable shares will trade at any time. Citigroup did not make
and was not provided with an independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of Global or FuelCell nor did Citigroup
make any physical inspection of the properties or assets of Global or FuelCell.
CITIGROUP WAS NOT REQUESTED TO CONSIDER, AND ITS OPINION DID NOT ADDRESS
THE RELATIVE MERITS OF THE COMBINATION AS COMPARED TO ANY ALTERNATIVE BUSINESS
STRATEGIES OR TRANSACTIONS THAT MIGHT EXIST FOR GLOBAL OR THE EFFECT OF ANY
OTHER TRANSACTION IN WHICH GLOBAL MIGHT ENGAGE. Citigroup's opinion was
necessarily based upon information available to it, and financial, stock market
and other conditions and circumstances existing, as of the date of its opinion.
In connection with rendering its opinion, Citigroup made a presentation to
the Global board of directors on August 1, 2003 with respect to the material
analyses performed by Citigroup in evaluating the fairness of the exchange ratio
to holders of Global common shares as of the date of Citigroup's opinion. The
following is a summary of that presentation. The summary includes information
presented in tabular format. IN ORDER TO UNDERSTAND FULLY THE FINANCIAL ANALYSES
USED BY CITIGROUP, THESE TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH
SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE
FINANCIAL ANALYSES. The following quantitative information, to the extent it is
based on market data, is, except as otherwise indicated, based on market data as
it existed at or prior to July 30, 2003, and is not necessarily indicative of
current or future market conditions. For the purposes of its analyses, unless
otherwise noted, Citigroup assumed an exchange rate of 1.39 Canadian dollars for
each U.S. dollar. Values below are expressed in U.S. dollars.
Implied Historical Exchange Ratio
Citigroup derived implied historical exchange ratios by dividing the
closing U.S. dollar equivalent price per share of Global common shares (based on
the daily exchange rate of Canadian dollars for each U.S. dollar) by the closing
price per share of FuelCell common stock for each trading day in the period from
July 30, 2002 through July 30, 2003. Citigroup calculated that the implied
exchange ratio as of July 30, 2003
64
was 0.297x. Citigroup also calculated the high, low and average implied exchange
ratios for each of the following calendar periods ended July 30, 2003:
HIGH LOW AVERAGE
------ ------ -------
Last Month................................................. 0.290x 0.194x 0.246x
Last Three Months.......................................... 0.341x 0.162x 0.239x
Last Six Months............................................ 0.376x 0.162x 0.266x
Last Nine Months........................................... 0.376x 0.162x 0.249x
Last Twelve Months......................................... 0.376x 0.136x 0.235x
Citigroup compared the high, low and average historical exchange ratios for
each of the calendar periods listed above to the range for the possible exchange
ratio in the Combination of 0.279x - 0.342x. Citigroup noted that the low and
the average implied historical exchange ratios for each of the calendar periods
listed above were below the lower limit of the range for the possible exchange
ratio in the Combination of 0.279x, and that the high implied historical
exchange ratio for each of the last month and the last three months was within
the range for the possible exchange ratio in the Combination.
Comparable Companies Analysis
Citigroup compared financial, operating and stock market data and
forecasted financial information for selected publicly traded fuel cell
companies that Citigroup deemed appropriate to similar information for Global
and FuelCell. The selected comparable companies were separated into two groups:
companies with well-known strategic partners and those without such partners.
The selected comparable companies considered by Citigroup were:
COMPANIES WITH STRATEGIC PARTNERS
- Ballard Power Systems, Inc.
- Hydrogenics Corporation
- Millennium Cell, Inc.
- Plug Power, Inc.
COMPANIES WITHOUT STRATEGIC PARTNERS
- Stuart Energy Systems Corporation
- Proton Energy Systems, Inc.
The forecasted financial information used by Citigroup for Global and
FuelCell in the course of this analysis was based on publicly available
historical information and management projections of Global and FuelCell,
respectively. The financial information used by Citigroup for the selected
comparable companies in the course of this analysis was based on publicly
available historical information. With respect to Global, FuelCell and the
comparable companies, calculations were made based on the closing price per
share of each company's stock as of July 30, 2003.
For each of the selected comparable companies, Citigroup derived and
compared, the ratio of equity value to cash-on-hand:
COMPARABLE COMPANIES RANGE OF RATIO OF EQUITY VALUE TO CASH-ON-HAND
-------------------- ----------------------------------------------
Companies with Strategic Partners 3.6x - 4.4x
Companies without Strategic Partners 0.5x - 1.1x
Because of the differences between the businesses, operations, financial
conditions and prospects of the companies included in the comparable company
groups and those of Global and FuelCell, Citigroup believed it was inappropriate
to rely solely on the quantitative results of this analysis, and accordingly
also made selected qualitative judgments concerning differences between the
financial and operating characteristics of Global, FuelCell and the comparable
companies that Citigroup believes affect the public trading values of Global,
FuelCell and the comparable companies. For example, in making such qualitative
judgments Citigroup considered that fuel cell companies with well-known
strategic partners and investors, such as General Electric's partnership with
Plug Power, Inc., traded at a significant premium to the comparable
65
companies, such as Global and FuelCell, without well-known strategic partners,
as measured by the ratio of equity value to cash-on-hand.
Citigroup noted that a substantial portion of the equity value of Global
and FuelCell arises from each company's cash-on-hand. Based on the information
for the comparable companies, Citigroup derived a range of 0.7x to 1.0x for the
implied equity value as a multiple of cash-on-hand for Global and a range of
1.5x to 2.0x for the implied equity value as a multiple of cash-on-hand for
FuelCell. Using this cash-on-hand valuation analysis, Citigroup further derived
ranges for the implied equity value per share of Global and FuelCell, and from
these ranges derived a reference range for the implied exchange ratio of 0.171x
to 0.322x. Citigroup compared this derived range to the range for the possible
exchange ratio in the Combination of 0.279x-0.342x. Citigroup noted that the
lower limit of this derived range was below the lower limit of the range for the
possible exchange ratio in the Combination of 0.279x, and that the upper limit
of this derived range was below the upper limit of the range for the possible
exchange ratio in the Combination of 0.342x.
Precedent Transaction Analysis
Citigroup reviewed publicly available information for fifteen combination
or acquisition transactions announced since February 5, 2001 that it deemed
appropriate in analyzing the Combination. Because a limited number of
transactions have occurred in the industries in which Global and FuelCell
operate and because a substantial portion of the equity value of Global arises
from Global's cash-on-hand, the precedent transactions reviewed by Citigroup
primarily were transactions in which cash-on-hand consisted of a substantial
portion of the target company's equity value. The precedent transactions
considered by Citigroup were the following:
ANNOUNCEMENT DATE ACQUIROR TARGET COMPANY
----------------- -------- --------------
February 5, 2001 AmericanGreetings.com, Inc. Egreetings Network, Inc.
February 5, 2001 iVillage, Inc. Women.com Networks, Inc.
April 9, 2001 Kana Communications, Inc. Broadbase Software, Inc.
July 19, 2001 Cross Media Marketing Corporation Lifeminders, Inc.
October 25, 2001 SG Merger Corp. Ecometry Corporation
October 29, 2001 SPSS Inc. NetGenesis Corp.
November 9, 2001 EM Holdings, Inc. EMachines, Inc.
November 19, 2001 Exelixis, Inc. Genomica Corporation
December 28, 2001 Paradyne Networks, Inc. Elastic Networks Inc.
January 10, 2002 U.S. RealTel, Inc. Cypress Communications, Inc.
March 11, 2002 Valueclick, Inc. Be Free, Inc.
May 29, 2002 Openwave Systems Inc. SignalSoft Corporation
July 19, 2002 SBI & Company, Inc. Lante Corporation
November 12, 2002 Plug Power, Inc. H Power Corp.
December 20, 2002 Sybase, Inc. AvantGo, Inc.
For each precedent transaction, Citigroup derived and compared, among other
things, the ratio of the equity value of the target company based on the
consideration to be paid in the transaction to the target company's cash-on-hand
at the time the transaction was announced. With respect to the financial
information for the companies involved in the precedent transactions, Citigroup
relied on information available in public documents.
The following table sets forth the results of this analysis:
RANGE MEDIAN MEAN
----------- ------ -----
RATIO OF EQUITY VALUE TO CASH-ON-HAND................... 0.55x-1.20x 0.99x 0.93x
Citigroup noted that the ratio of Global's equity value to Global's
cash-on-hand implied by the terms of the Combination of 1.34x exceeds the upper
limit of the range of equity value to cash-on-hand derived for the precedent
transactions.
66
Based on the information derived with respect to the precedent
transactions, Citigroup derived a reference range of 0.90x to 1.15x for the
equity value of Global as a multiple of the amount of Global's cash-on-hand at
the time the Combination was announced. From this range, Citigroup further
derived a reference range of 0.229x to 0.291x for the implied exchange ratio
using the closing price per share of FuelCell common stock as of July 30, 2003.
Citigroup compared this derived range to the range for the possible exchange
ratio in the Combination of 0.279x - 0.342x. Citigroup noted that the lower
limit of this derived range was below the lower limit of the range for the
possible exchange ratio in the Combination of 0.279x, and that the upper limit
of this derived range was below the upper limit of the range for the possible
exchange ratio in the Combination of 0.342x.
Liquidation Analysis
Citigroup also performed a liquidation analysis in order to estimate the
residual value that might be available to holders of Global common shares
following a hypothetical liquidation of Global. Citigroup estimated the residual
value of Global as the net remaining cash-on-hand after the repayment of its
outstanding preferred stock and costs associated with the hypothetical shutdown
of Global's fuel cell business, plus the residual equity value of Global's
thermoelectric generator business. Figures for cash-on-hand and outstanding
preferred stock were based on estimates of Global's management as of June 30,
2003. Based on this information, Citigroup derived a range for the implied
equity value per share of Global, and using the closing price per share of
FuelCell common stock as of July 30, 2003, further derived a reference range for
the implied exchange ratio of 0.175x to 0.207x. Citigroup compared this derived
range to the range for the possible exchange ratio in the Combination of
0.279x - 0.342x. Citigroup noted that both the upper and lower limits of this
derived range were below the lower limit of the range for the possible exchange
ratio in the Combination of 0.279x.
CITIGROUP'S ADVISORY SERVICES AND OPINION WERE PROVIDED FOR THE INFORMATION
OF THE GLOBAL BOARD OF DIRECTORS IN ITS EVALUATION OF THE PROPOSED COMBINATION
AND DID NOT CONSTITUTE A RECOMMENDATION OF THE PROPOSED COMBINATION TO GLOBAL OR
A RECOMMENDATION TO ANY HOLDER OF GLOBAL COMMON SHARES AS TO HOW THAT
SHAREHOLDER SHOULD VOTE ON ANY MATTERS RELATING TO THE PROPOSED COMBINATION.
The preceding discussion is a summary of the material financial analyses
furnished by Citigroup to the Global board of directors, but it does not purport
to be a complete description of the analyses performed by Citigroup or of its
presentation to the Global board of directors. The preparation of financial
analyses and fairness opinions is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis or summary
description. Citigroup made no attempt to assign specific weights to particular
analyses or factors considered, but rather made qualitative judgments as to the
significance and relevance of all the analyses and factors considered and
determined to give its fairness opinion as described above. Accordingly,
Citigroup believes that its analyses, and the summary set forth above, must be
considered as a whole, and that selecting portions of the analyses and of the
factors considered by Citigroup, without considering all of the analyses and
factors, could create a misleading or incomplete view of the processes
underlying the analyses conducted by Citigroup and its opinion. With regard to
the comparable companies and precedent transaction analyses summarized above,
Citigroup selected comparable public companies and precedent transactions on the
basis of various factors, including size and similarity of the line of business
of the relevant entities; however, no company utilized in these analyses is
identical to Global or FuelCell and no precedent transaction is identical to the
Combination. As a result, these analyses are not purely mathematical, but also
take into account differences in financial and operating characteristics of the
subject companies and other factors that could affect the Combination or public
trading value of the subject companies to which Global and FuelCell are being
compared.
In its analyses, Citigroup made numerous assumptions with respect to
Global, FuelCell, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Global and FuelCell. Any estimates contained in Citigroup's analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by these analyses. Estimates of values of companies do not purport to be
appraisals or necessarily to reflect the prices at which companies may actually
be sold. Because these
67
estimates are inherently subject to uncertainty, none of Global, FuelCell, the
Global board of directors, the FuelCell board of directors, Citigroup or any
other person assumes responsibility if future results or actual values differ
materially from the estimates.
Citigroup's analyses were prepared solely as part of Citigroup's analysis
of the fairness of the exchange ratio in the Combination and were provided to
the Global board of directors in that connection. The opinion of Citigroup was
only one of the factors taken into consideration by the Global board of
directors in making its determination to approve the Combination Agreement and
the Combination. See "-- Description of the Combination -- Reasons for the
Combination -- Global".
Citigroup is an internationally recognized investment banking firm engaged
in, among other things, the valuation of businesses and their securities in
connection with mergers and acquisitions, restructurings, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Global selected Citigroup to act as its financial
advisor on the basis of Citigroup's international reputation and Citigroup's
familiarity with Global. In the ordinary course of its business, Citigroup and
its affiliates may actively trade or hold the securities of both Global and
FuelCell for its own account or for the account of customers and, accordingly,
may at any time hold a long or short position in those securities. Citigroup and
its affiliates, including Citigroup Inc. and its affiliates, may maintain
relationships with Global, FuelCell and their respective affiliates.
Pursuant to its engagement letter with Citigroup, Global agreed to pay
Citigroup customary fees for its services rendered in connection with the
Combination, including the delivery of its opinion, a significant portion of
which is contingent upon consummation of the Combination. Global has also agreed
to reimburse Citigroup for its reasonable travel and other out-of-pocket
expenses incurred in connection with its engagement, including the reasonable
fees and expenses of its counsel, and to indemnify Citigroup against specific
liabilities and expenses relating to or arising out of its engagement, including
liabilities under the federal securities laws.
MECHANICS FOR IMPLEMENTING THE COMBINATION AND DESCRIPTION OF EXCHANGEABLE
SHARES
The following is a summary description of the material terms of:
- the arrangement under Section 193 of the Business Corporations Act
(Alberta), which will give effect to the Combination;
- the exchangeable share provisions;
- the form of support agreement; and
- the form of voting and exchange trust agreement.
This summary is qualified in its entirety by the full text of the
Combination Agreement, the Plan of Arrangement and the documents listed above,
which we have included as Annexes B and D which are incorporated herein by
reference.
Pursuant to the Combination, each Canadian Global common shareholder (other
than dissenting shareholders) will receive, at the shareholder's election, as
consideration for each Global common share held by that shareholder and subject
to certain proration adjustments described below, either (i) exchangeable shares
of ExchangeCo which have economic rights (including the right to all dividends)
and voting attributes equivalent to those of FuelCell common stock but with
effectively no economic or voting rights in ExchangeCo, or (ii) shares of
FuelCell common stock, the amounts of which will be determined in accordance
with the exchange ratio; and each non-Canadian Global common shareholder (other
than dissenting shareholders) will receive shares of FuelCell common stock which
have economic rights, including the right to all dividends and voting attributes
as described herein under the heading "Chapter Three -- Description of
FuelCell's Capital Stock, and Global's Preferred Shares and ExchangeCo and
CallCo Share Capital -- FuelCell Capital Stock -- Common Stock", the amounts of
which will be determined in accordance with the exchange ratio. Holders of
exchangeable shares will have the right to receive FuelCell common
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stock at any time in exchange for exchangeable shares on a one-for-one basis.
The election to receive exchangeable shares must be received by Computershare
Trust Company of Canada by the close of business on the last business day prior
to the effective time of the Combination. If the closing occurs as expected on
November 3, 2003, your letter of transmittal must be received by the close of
business on October 31, 2003. You may make the election by checking the
appropriate box on the letter of transmittal, completing the declaration of
residency contained therein and returning it, along with your share certificate
or certificates, to Computershare Trust Company of Canada at the address
specified in the letter of transmittal. Global common shareholders who are
non-residents of Canada for purposes of the Income Tax Act (Canada) may not
elect to receive exchangeable shares and any election made by a Global common
shareholder who is a non-resident of Canada will not be valid and that
shareholder will receive FuelCell common stock.
The following are rights relating to the exchange or redemption of
exchangeable shares into FuelCell common stock:
- Shareholder Rights to Exchange or Cause Redemption. Rights (which are
called exchange put rights and retraction rights) to require an exchange
by FuelCell or redemption by ExchangeCo of exchangeable shares for
FuelCell common stock;
- Automatic Rights. Rights (which are called automatic redemption rights,
optional exchange rights, liquidation rights and automatic exchange
rights) that automatically, upon the occurrence of specified automatic or
triggering events, result in the exchange or redemption of exchangeable
shares for FuelCell common stock; and
- CallCo Call Rights. Call rights (which are called retraction call
rights, liquidation call rights and redemption call rights) that override
the exchangeable shareholder's rights listed above, granted to 1065918
Alberta Ltd., a wholly-owned subsidiary of FuelCell ("CallCo"), permit
CallCo to require an exchange of exchangeable shares for FuelCell common
stock with CallCo if a holder exercises retraction rights or in any
circumstances where ExchangeCo would otherwise be required to redeem the
exchangeable shares.
CallCo anticipates that CallCo will exercise its call rights, when
available, and currently foresees limited, if any, circumstances under which
CallCo would not exercise its call rights. Therefore, we expect that holders of
exchangeable shares will only receive FuelCell common stock through an exchange
with CallCo, as opposed to a redemption by ExchangeCo, of exchangeable shares
for FuelCell common stock. While the consideration received upon an exchange or
a redemption will be the same, the tax consequences would be substantially
different. See "Chapter Four -- Information About Tax Considerations -- Canadian
Federal Income Tax Considerations to Shareholders" on page 133.
THE PLAN OF ARRANGEMENT
The Arrangement. The Combination will be effected by means of a plan of
arrangement under Section 193 of the Business Corporations Act (Alberta). We
have included a copy of the Plan of Arrangement as Annex D.
Court Approval of the Plan of Arrangement and Completion of the
Combination. An arrangement of a corporation under Alberta law requires
approval by both the Court and the shareholders of the subject corporation
entitled to vote. Prior to the mailing of this Joint Proxy Statement, Global
obtained the Interim Order of the Court, which is attached as Annex C, providing
for the calling and holding of the Global shareholder meeting and other
procedural matters.
Subject to the approval of the Plan of Arrangement by the common
shareholders at the Global Meeting, the hearing in respect of the final order is
scheduled to take place on October 31, 2003 at 2:00 p.m. (Calgary time) in the
Court at the Court House, 611 -- 4th Street S.W., Calgary, Alberta, Canada. All
shareholders or other interested persons who wish to participate or be
represented or to present evidence or arguments at that hearing must serve and
file a notice of appearance as set out in the Notice of Petition for the final
order and satisfy any other requirements. At the hearing of the application in
respect of the final order, the Court will consider, among other things, the
fairness and reasonableness of the Plan of Arrangement to the Global
securityholders affected by the Plan of Arrangement. The Court may approve the
Plan of Arrangement as proposed or as amended in any manner the Court may
direct, subject to compliance with such terms and
69
conditions, if any, as the Court deems fit. The Court may also determine not to
approve the Plan of Arrangement even if the Plan of Arrangement receives the
requisite approval from Global's common shareholders.
Assuming the final order is granted and the other conditions to the
Combination Agreement are satisfied or waived, it is anticipated that articles
of arrangement will then be filed with the Registrar under the Business
Corporations Act (Alberta) to give effect to the Plan of Arrangement and various
other documents necessary to give effect to the Combination will be executed and
delivered.
The issuance of shares of FuelCell common stock and the exchangeable shares
to holders of Global common shares and FuelCell's assumption of the obligation
to issue common stock upon conversion of the Global Series 2 Preferred Shares
pursuant to the Plan of Arrangement will not be registered under the United
States Securities Act of 1933. The issuance of shares of FuelCell common stock,
the exchangeable shares and the assumption of such conversion obligations will
be made in reliance upon the exemption available pursuant to Section 3(a)(10) of
the United States Securities Act of 1933. Section 3(a)(10) exempts from
registration securities issued in exchange for one or more outstanding
securities where the terms and conditions of the issuance and exchange of such
securities have been approved by any court of competent jurisdiction, after a
hearing upon the fairness of such terms and conditions at which all persons to
whom the securities are proposed to be issued have the right to appear. The
Court is authorized to conduct a hearing to determine the fairness of the terms
and conditions of the Plan of Arrangement, including the proposed issuance of
securities in exchange for other outstanding securities. The final order will
constitute the basis for (i) the exemption under Section 3(a)(10) of the United
States Securities Act of 1933 of the issuance of the shares of FuelCell common
stock and the exchangeable shares in exchange for Global common shares and (ii)
FuelCell's assumption of the obligation to issue FuelCell common stock upon
conversion of the Global Series 2 Preferred Shares. Prior to the hearing on the
final order, the Court will be informed of this effect of the final order.
Subject to the foregoing, it is presently anticipated that the Combination
will become effective on or about November 3, 2003.
Global Common Shares
Under the terms of the Combination Agreement, a Global common shareholder
who is a resident of Canada for purposes of the Income Tax Act (Canada) (other
than a dissenting shareholder) will receive, at the shareholder's election, for
each Global common share held at the effective time of the Combination by that
shareholder between 0.279 and 0.342 exchangeable shares or shares of FuelCell
common stock, depending on the exchange ratio in effect at the time the
Combination is completed. A Global common shareholder (other than a dissenting
shareholder) who is a non-resident of Canada for purposes of the Income Tax Act
(Canada) who is a holder of Global common shares will not be entitled to elect
to receive exchangeable shares, and any election made by any such holder will
not be valid and that shareholder will receive FuelCell common stock.
No certificates representing fractional exchangeable shares or fractional
shares of FuelCell common stock will be issued in the Combination. In lieu of
fractional shares, each Global common shareholder who would otherwise be
entitled to receive a fraction of a share will be paid an amount of cash
(rounded to the nearest whole cent), without interest, equal to the Canadian
dollar equivalent of the product of such fraction and the weighted average
trading price of the shares of FuelCell common stock for the 20 consecutive
trading days ending on the third trading day before the Global Meeting.
Exchange Ratio
The exchange ratio is a fraction, the numerator of which is $2.72 and the
denominator of which is the daily volume-weighted average trading price of
shares of FuelCell common stock on the Nasdaq National Market (rounded to the
nearest four decimal places), for the 20 consecutive trading days ending on the
third trading day prior to the date of the Global Meeting. For these purposes,
the "daily volume-weighted average trading price" means the daily
volume-weighted average price based on trading on the Nasdaq National
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Market between 9:30 a.m. and 4:00 p.m. (Eastern time) as reported by Bloomberg
Financial L.P. If FuelCell's 20-day volume-weighted average stock price is:
- greater than $9.74, the exchange ratio will be 0.279;
- less than $7.96, the exchange ratio will be 0.342; and
- between $7.96 and $9.74, Global common shareholders will receive
approximately $2.72 (approximately Cdn.$3.82) of exchangeable shares or
FuelCell common stock for each Global common share held.
Global Stock Options
Each option to purchase Global common shares outstanding at the effective
time of the Combination will be assumed by FuelCell, without any action on the
part of any Global optionholder, and will represent an option to purchase shares
of FuelCell's common stock, in accordance with their terms and based on the
exchange ratio. The number of shares of FuelCell common stock underlying each
assumed option will be determined by multiplying the number of Global common
shares subject to the option immediately prior to the effective time by the
exchange ratio (rounded down to the nearest whole number of shares of FuelCell
common stock). The exercise price for each assumed option will be determined by
dividing the exercise price per share for the option immediately prior to the
effective time by the exchange ratio (rounded up to the nearest whole cent) and
expressed in United States dollars. For the purposes of determining the new
exercise price of each assumed option, the exercise price per share of Global
common shares subject to each assumed option will be adjusted using the Canadian
dollar exchange rate based upon the average of the noon buying rate expressed to
the fourth decimal place over the 20 trading day period ending on the third day
prior to the Global Meeting, as reported by the Federal Reserve Bank of New
York. If the foregoing calculation results in an assumed option being
exercisable for a fraction of a share of FuelCell common stock, then the number
of shares of FuelCell common stock subject to the assumed option will be rounded
down to the nearest whole number of shares and the exercise price per whole
share of FuelCell common stock will be determined as noted above. The
obligations of Global under the assumed options will be assumed by FuelCell and
FuelCell will be substituted for Global under, and as sponsor of, Global's
Amended Incentive Stock Option Plan. Except as provided in this paragraph, the
term and all other terms and conditions of the assumed options in effect
immediately prior to giving effect to the Combination will govern the assumed
options.
Global Series 2 Preferred Shares
The rights, preferences, privileges and obligations of the Global Series 2
Preferred Shares, as set forth in Global's certificate and articles of amendment
dated July 30, 2000, will be unaffected by the Combination and will be respected
and given effect, upon the exercise of any conversion privilege attached to the
Global Series 2 Preferred Shares, by the issuance by FuelCell, in full
satisfaction of the conversion privilege, of fully-paid and nonassessable shares
of FuelCell common stock in accordance with the exchange ratio at the following
"current conversion prices": (i) (Cdn.$30.96/the exchange ratio) per share of
FuelCell common stock until July 31, 2005; (ii) (Cdn.$33.54/the exchange ratio)
per share of FuelCell common stock after July 31, 2005 until July 31, 2010;
(iii) (Cdn.$36.12/the exchange ratio) per share of FuelCell common stock after
July 31, 2010 until July 31, 2015; (iv) (Cdn.$38.70/the exchange ratio) per
share of FuelCell common stock after July 31, 2015 until July 31, 2020; or (v)
at any time after July 31, 2020, the price equal to 95% of the then current
market price (converted to Cdn.$ at the time of such calculation) as defined in
the articles creating the Global Series 2 Preferred Shares, of shares of
FuelCell common stock at the time of conversion. The foregoing "current
conversion prices" remain subject to further adjustments as provided in Global's
articles for any subsequent events. As illustrated below, the number of shares
of FuelCell common stock issuable upon conversion of the Global Series 2
Preferred Shares after July 31, 2020 may be significantly greater than the
number of shares issuable prior to that time.
The following examples illustrate the number of shares of common stock that
FuelCell will be required to issue to the holders of the Global Series 2
Preferred Shares if and when the holders exercise their conversion
71
rights pursuant to the terms of the Global Series 2 Preferred Shares. The
following examples assume that (i) the exchange ratio for the Combination is
0.342; (ii) the exchange rate for Canadian dollars is Cdn.$1.4048 to U.S.$1.00
at the time of the conversion; and (iii) all accrued dividends on the Global
Series 2 Preferred Shares have been paid through the time of the conversion:
- if the Global Series 2 Preferred Shares convert prior to July 31, 2005,
FuelCell would be required to issue approximately 276,165 shares of
FuelCell common stock;
- if the Global Series 2 Preferred Shares convert after July 31, 2005, but
prior to July 31, 2010, FuelCell would be required to issue approximately
254,919 shares of FuelCell common stock;
- if the Global Series 2 Preferred Shares convert after July 31, 2010, but
prior to July 31, 2015, FuelCell would be required to issue approximately
236,711 shares of FuelCell common stock;
- if the Global Series 2 Preferred Shares convert after July 31, 2015, but
prior to July 31, 2020, FuelCell would be required to issue approximately
220,930 shares of FuelCell common stock; and
- if the Global Series 2 Preferred Shares convert any time after July 31,
2020, assuming FuelCell's common stock price is U.S.$7.50 at the time of
conversion, FuelCell would be required to issue approximately 2,497,702
shares of FuelCell common stock.
Pursuant to the terms of the Plan of Arrangement, Enbridge Inc. may convert
the Global Series 2 Preferred Shares into exchangeable shares if it converts the
Global Series 2 Preferred Shares into Global common shares and makes an election
prior to the election deadline set forth in the letter of transmittal.
DESCRIPTION OF EXCHANGEABLE SHARES
The exchangeable shares will be issued by ExchangeCo and will be
exchangeable at any time on a one-for-one basis, at the option of the holder,
for FuelCell common stock. An exchangeable share will provide a holder with
economic terms and voting rights which are, as nearly as practicable, equivalent
to those of a share of FuelCell common stock. The exchangeable shares were
conditionally approved for listing on the Toronto Stock Exchange on September
18, 2003. The FuelCell common stock issued as part of the Combination or as a
result of the exchange of the exchangeable shares will be listed on the Nasdaq
National Market. Global common shareholders who are Canadian residents and who
receive exchangeable shares under the Combination may, upon filing the necessary
tax elections, obtain a full or partial deferral of taxable capital gains for
Canadian federal income tax purposes in certain circumstances. See "Chapter
Four -- Information About Tax Considerations -- Canadian Federal Income Tax
Considerations to Shareholders" on page 133.
On the Effective Date, FuelCell, ExchangeCo and a trustee (the "Trustee")
will enter into a voting and exchange trust agreement (the "Voting and Exchange
Trust Agreement"). By furnishing instructions to the Trustee under the Voting
and Exchange Trust Agreement, holders of exchangeable shares will be able to
exercise essentially the same voting rights with respect to FuelCell as they
would have if they were holders of FuelCell common stock. Holders of
exchangeable shares will also be entitled to receive from ExchangeCo dividends
that are equivalent to any cash dividends paid on FuelCell common stock from
time to time. The exchangeable shares are subject to adjustment or modification
in the event of a stock split or other change to the capital structure of
FuelCell so as to maintain the initial one-to-one relationship between the
exchangeable shares and the shares of FuelCell common stock.
Retraction, Redemption and Call Rights Applicable to Exchangeable Shares
Retraction of Exchangeable Shares
Subject to the exercise by CallCo of the retraction call right (as
described below), a holder of exchangeable shares will be entitled at any time
following the completion of the Combination to retract (i.e., to require
ExchangeCo to redeem) any or all of the exchangeable shares owned by the holder
and to receive an amount per share equal to the current market price for a share
of FuelCell common stock plus all declared and unpaid cash dividends on each
exchangeable share plus an amount equal to all dividends declared and payable or
paid on FuelCell common stock which have not been declared or paid on
exchangeable shares plus
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an amount equal to all non-cash dividends, payable and unpaid, or undeclared but
payable on such exchangeable shares up to the last business day prior to the day
of closing of the purchase and sale of the exchangeable shares, which will be
fully paid and satisfied by the delivery for each exchangeable share of one
share of FuelCell common stock on any dividend record date which occurred prior
to the retraction date (such aggregate amount, the "Retraction Price"). A holder
of exchangeable shares may retract the holder's exchangeable shares by
presenting to ExchangeCo or its transfer agent (i) the certificate or
certificates representing the number of exchangeable shares the holder desires
to retract, (ii) such other documents as may be required to effect the
retraction of such exchangeable shares and (iii) a duly executed retraction
request:
(a) specifying the number of exchangeable shares the holder desires to
retract;
(b) stating the retraction date on which the holder desires to have
ExchangeCo redeem the exchangeable shares; and
(c) acknowledging the retraction call right of CallCo.
When a holder of exchangeable shares makes a retraction request, CallCo
will have an overriding retraction call right to purchase all but not less than
all of the exchangeable shares subject to the retraction request. CallCo will be
deemed to have exercised the retraction call right unless it notifies ExchangeCo
of its determination not to do so within two business days of notification given
by ExchangeCo to CallCo of receipt of the retraction request. If CallCo does not
notify ExchangeCo within such two business day period, and provided that the
retraction request is not revoked by the holder in the manner described below,
CallCo will acquire the retracted shares in exchange for the Retraction Price.
In the event that CallCo so notifies ExchangeCo, and provided that the
retraction request is not revoked by the holder in the manner described below,
ExchangeCo will redeem the retracted shares on the retraction date.
A holder may withdraw a retraction request by giving notice in writing to
ExchangeCo at any time prior to the close of business on the business day
immediately preceding the retraction date, in which case the retracted shares
will neither be purchased by CallCo nor be redeemed by ExchangeCo. If the
retraction request is not revoked on or prior to the close of business on the
Business Day immediately preceding the retraction date, the retracted shares
will either be purchased by CallCo or redeemed by ExchangeCo. CallCo or
ExchangeCo, as the case may be, will then deliver or cause ExchangeCo's transfer
agent to deliver the Retraction Price to such holder by mailing:
(a) certificates representing the number of shares of FuelCell common stock
equal to the number of exchangeable shares purchased or redeemed,
registered in the name of the holder or such other name as the holder
may request; and
(b) if applicable, a cheque for the aggregate amount of dividends payable
to the holder,
to the address recorded in the securities register of ExchangeCo or to the
address specified in the holder's retraction request or by holding the same for
the holder to pick up at the registered office of ExchangeCo or the office of
the transfer agent as specified by ExchangeCo, in each case less any amounts
required to be withheld because of applicable taxes.
If, as a result of solvency requirements or applicable law, ExchangeCo is
not permitted to redeem all of the retracted shares tendered by a retracting
holder, and provided CallCo has not exercised its retraction call right with
respect to such retracted shares, ExchangeCo will redeem only those retracted
shares tendered by the holder (rounded down to a whole number of shares) as
would not be contrary to provisions of applicable law. The Trustee, on behalf of
the holder of any retracted shares not so redeemed by ExchangeCo or purchased by
CallCo, will require FuelCell to purchase the retracted shares not redeemed on
the retraction date or as soon as reasonably practicable thereafter, pursuant to
the exchange right.
Redemption of Exchangeable Shares
Subject to applicable law and the redemption call right (as described
below), at any time on or after the fifth anniversary of the completion of the
Combination, ExchangeCo may, and in the event of certain
73
circumstances described below under "Early Redemption" will, redeem all but not
less than all of the then outstanding exchangeable shares for an amount per
share equal to the current market price of a share of FuelCell common stock, all
declared and unpaid cash dividends on each exchangeable share plus an amount
equal to all dividends declared and payable or paid on FuelCell common stock
which have not been declared or paid on the exchangeable shares plus an amount
equal to all non-cash dividends, payable and unpaid, or undeclared but payable
on such exchangeable shares up to the last business day prior to the day of
closing of the purchase and sale of exchangeable shares, which will be fully
paid and satisfied by the delivery for each exchangeable share of one share of
FuelCell common stock on any dividend record date which occurred prior to the
redemption date (such aggregate amount, the "Redemption Price"). ExchangeCo
will, at least 55 days prior to the redemption date, or such number of days as
the board of directors of ExchangeCo may determine to be reasonably practicable
under the circumstances in respect of a redemption date arising in connection
with, among other events: (i) a merger, amalgamation, tender offer, material
sale of shares or rights or interest therein or thereto or similar transaction
involving FuelCell; (ii) any matter in respect of which holders of exchangeable
shares are entitled to vote as shareholders of ExchangeCo; or (iii) any matter
in respect of which holders of exchangeable shares are entitled to vote as
shareholders of ExchangeCo in order to approve or disapprove, as applicable, any
change to, or in the rights of the holders of, the exchangeable shares, where
the approval or disapproval, as applicable, of such change would be required to
maintain the economic and legal equivalence of the exchangeable shares and the
FuelCell common stock, provide the registered holders of the exchangeable shares
with written notice of the proposed redemption of the exchangeable shares by
ExchangeCo or the purchase of the exchangeable shares by CallCo pursuant to the
redemption call right. On or after the redemption date and provided CallCo has
not exercised its redemption call right, upon the holder's presentation and
surrender of the certificates representing the exchangeable shares and other
documents as may be required by ExchangeCo at the office of ExchangeCo's
transfer agent or the registered office of ExchangeCo, ExchangeCo will deliver
the Redemption Price to such holder by mailing:
(a) certificates representing the aggregate number of shares of FuelCell
common stock equal to the number of exchangeable shares purchased or
redeemed, registered in the name of the holder or such other name as
the holder may request; and
(b) if applicable, a cheque for the aggregate amount of dividends payable
to the holder,
to the address recorded in the securities register of ExchangeCo or by holding
the same for the holder to pick up at the registered office of ExchangeCo or the
office of ExchangeCo's transfer agent as specified in the written notice of
redemption, in each case less any amounts required to be withheld because of
applicable taxes.
CallCo will have an overriding redemption call right to purchase on the
redemption date all but not less than all of the exchangeable shares then
outstanding (other than exchangeable shares held by FuelCell and its affiliates)
for a purchase price per share equal to the Redemption Price. Upon the exercise
or deemed exercise of the redemption call right, holders will be obligated to
sell all of their exchangeable shares to CallCo. If CallCo exercises the
redemption call right, ExchangeCo's right and obligation to redeem the
exchangeable shares on the redemption date will terminate. CallCo will be deemed
to have exercised the redemption call right unless CallCo provides notice to
ExchangeCo and the transfer agent of its intention not to exercise such right at
least 35 days before the redemption date.
Early Redemption
In certain circumstances, the exchangeable shares may be redeemed by
ExchangeCo prior to the fifth anniversary of the Effective Date. Early
redemption will occur:
1. if, any time following the date that is 15 calendar months after
the completion of the Combination, there are less than 1,000,000
exchangeable shares outstanding (other than exchangeable shares held by
FuelCell and its affiliates) (as such number of shares may be adjusted to
give effect to any subdivision or consolidation of or stock dividend on the
exchangeable shares, any issue or distribution of rights to acquire
exchangeable shares, any issue or distribution of other securities or
rights or evidences of indebtedness or assets, or any other capital
reorganization or other transaction affecting the exchangeable
74
shares) and the board of directors of ExchangeCo decides to accelerate the
redemption of the exchangeable shares, upon at least 60 days' prior written
notice to the registered holders of exchangeable shares and the Trustee;
2. upon the occurrence of a merger, amalgamation, tender offer,
material sale of shares or rights or interests therein or thereto or
similar transaction involving FuelCell, provided that the board of
directors of ExchangeCo determines in good faith and in its sole discretion
that (A) it is not reasonably practicable to substantially replicate the
terms and conditions of the exchangeable shares in connection with the
merger, amalgamation, tender offer, material sale of shares or rights or
interest therein or thereto or similar transaction involving FuelCell and
(B) the redemption of all but not less than all of the outstanding
exchangeable shares is necessary to enable the completion of the merger,
amalgamation, tender offer, material sale of shares or rights or interest
therein or thereto or similar transaction involving FuelCell in accordance
with its terms upon such number of days prior written notice to the holders
of exchangeable shares and the Trustee as the board of directors of
ExchangeCo may determine to be reasonably practicable in such
circumstances;
3. upon a proposal being made for any matter in respect of which
holders of exchangeable shares are entitled to vote as shareholders of
ExchangeCo, provided that the board of directors of ExchangeCo determines
that it is not reasonably practicable to accomplish the business purpose
intended by the matter in respect of which holders of exchangeable shares
are entitled to vote as shareholders of ExchangeCo (which business purpose
must be bona fide and not for the primary purpose of causing the occurrence
of a redemption date) in any other commercially reasonable manner that does
not result in the matter in respect of which holders of exchangeable shares
are entitled to vote as shareholders of ExchangeCo upon such number of days
prior written notice to the holders of exchangeable shares and the Trustee
as the board of directors of ExchangeCo may determine to be reasonably
practicable in such circumstances; or
4. upon the failure by the holders of the exchangeable shares to
approve or disapprove, as applicable, any matter in respect of which
holders of exchangeable shares are entitled to vote as shareholders of
ExchangeCo in order to approve or disapprove, as applicable, any change to,
or in the rights of the holders of, the exchangeable shares, where the
approval or disapproval, as applicable, of such change would be required to
maintain the economic and legal equivalence of the exchangeable shares and
the FuelCell common stock in which case the redemption date shall be the
business day following the day on which the holders of the exchangeable
shares fail to take such action.
Purchase for Cancellation
Subject to applicable law, ExchangeCo may at any time and from time to time
purchase for cancellation all or any part of exchangeable shares by private
agreement with any holder of exchangeable shares.
In addition, subject to applicable law and the articles of ExchangeCo,
ExchangeCo may at any time and from time to time purchase for cancellation all
or any part of the outstanding exchangeable shares, by tender to all holders of
record of exchangeable shares then outstanding or through the facilities of any
stock exchange on which the exchangeable shares are listed or quoted, at any
price per share together with an amount equal to all declared and unpaid
dividends for which the record date has occurred prior to the date of purchase.
Voting, Dividend and Liquidation Rights of Holders of Exchangeable Shares
On the date the articles of arrangement are filed with the Registrar under
the Business Corporation Act (Alberta) giving effect to the Plan of Arrangement,
FuelCell, ExchangeCo and the Trustee will enter into the Voting and Exchange
Trust Agreement.
Voting Rights with Respect to ExchangeCo
Except as required by law or under the Support Agreement, the terms of the
exchangeable share provisions or the Voting and Exchange Trust Agreement, the
holders of exchangeable shares are not entitled
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to receive notice of, attend or vote at any meeting of shareholders of
ExchangeCo. See "Certain Restrictions" and "Amendment and Approval" below.
Voting Rights with Respect to FuelCell
Under the Voting and Exchange Trust Agreement, FuelCell will issue to the
Trustee a special voting share entitling the holder of record to a number of
votes at meetings of holders of FuelCell common stock equal to the number of
exchangeable shares issued and outstanding (other than exchangeable shares held
by FuelCell and its affiliates), which will be held by the Trustee to enable the
holders of exchangeable shares to have voting rights that are equivalent to
those of FuelCell common stockholders.
Each beneficiary on the record date for any meeting at which FuelCell
common stockholders are entitled to vote will be entitled to instruct the
Trustee to vote one share of FuelCell common stock held by the Trustee for each
exchangeable share held by the beneficiary. The Trustee will exercise (either by
proxy or in person) the voting rights only as directed by the relevant
beneficiary and, in the absence of voting instructions from a beneficiary, will
not exercise such votes. A beneficiary may, upon request to the Trustee, obtain
a proxy from the Trustee entitling the beneficiary to vote directly at the
meeting that number of shares of FuelCell common stock held by the Trustee that
corresponds to the number of exchangeable shares held by the beneficiary.
Either the Trustee or FuelCell will send to each beneficiary the notice of
each meeting at which FuelCell common stockholders are entitled to vote,
together with the related meeting materials and a statement as to the manner in
which the beneficiary may instruct the Trustee to exercise the voting rights to
which the beneficiary is entitled. Such mailing by the Trustee or FuelCell will
commence on the same day as FuelCell sends such notice and materials to FuelCell
common stockholders. Either the Trustee or FuelCell will also send to each
beneficiary copies of all proxy materials, information statements, interim and
annual financial statements, reports and other materials sent by FuelCell to
FuelCell common stockholders at the same time as these materials are sent to
FuelCell common stockholders. To the extent that such materials are provided to
the Trustee by FuelCell, the Trustee will also send to each beneficiary all
materials sent by third parties to FuelCell common stockholders, including
dissident proxy circulars and tender and exchange offer circulars, as soon as
reasonably practicable after such materials are delivered to the Trustee.
FuelCell may undertake to provide the materials to each beneficiary in lieu of
the Trustee distributing the materials.
All rights of a beneficiary with respect to the beneficiary votes
exercisable in respect of exchangeable shares held by such beneficiary,
including the right to instruct the Trustee to exercise voting rights will cease
and be terminated immediately before the exchange (whether by redemption,
retraction, or through the exercise of the call rights or the exchange put
right) of all of such holder's exchangeable shares for FuelCell common stock and
upon the liquidation, dissolution or winding-up of ExchangeCo or FuelCell.
Dividend Rights
Subject to applicable law, holders of exchangeable shares will be entitled
to receive dividends (i) in the case of a cash dividend declared on FuelCell
common stock, in an amount of cash for each exchangeable share corresponding to
the cash dividend declared on each share of FuelCell common stock, (ii) except
as provided below in the case of a stock dividend declared on FuelCell common
stock to be paid in shares of FuelCell common stock, in the number of
exchangeable shares for each exchangeable share as is equal to the number of
shares of FuelCell common stock to be paid on each share of FuelCell common
stock, or (iii) in the case of a dividend declared on the FuelCell common stock
in property other than cash or shares of FuelCell common stock, in the type and
amount of property for each exchangeable share as is the same as, or
economically equivalent to (as determined by the board of directors of
ExchangeCo in good faith and in its sole discretion), the type and amount of
property declared as a dividend on each share of FuelCell common stock. Cash
dividends on the exchangeable shares are payable in U.S. dollars or the Canadian
dollar equivalent thereof, at the option of ExchangeCo. The declaration date,
record date and payment date for dividends on the exchangeable shares will be
the same as the relevant date for the corresponding dividends on FuelCell common
stock. See "Chapter Two -- Certain Financial and Other Information About the
Companies -- Business of FuelCell -- Dividend Policy".
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In the case of a stock dividend declared on FuelCell common stock to be
paid in FuelCell common stock, in lieu of declaring a corresponding stock
dividend on the exchangeable shares, the board of directors of ExchangeCo may,
in good faith and in its discretion and subject to applicable law and to
obtaining all regulatory approvals, subdivide, redivide or change each issued
and unissued exchangeable share on the basis that each exchangeable share before
the subdivision becomes a number of exchangeable shares as is equal to the sum
of (i) one share of FuelCell common stock and (ii) the number of shares of
FuelCell common stock to be paid as a stock dividend on each share of FuelCell
common stock. Such subdivision will become effective on the payment date for the
dividend declared on FuelCell common stock without any further act on the part
of the board of directors of ExchangeCo or of the holders of exchangeable
shares. The record date to determine holders of exchangeable shares entitled to
receive exchangeable shares in connection with any subdivision of exchangeable
shares and the effective date of the subdivision will be the same dates as the
record date and payment date, respectively, for the corresponding stock dividend
declared on FuelCell common stock.
Liquidation Rights with Respect to ExchangeCo
On the liquidation, dissolution or winding-up of ExchangeCo or any other
distribution of the assets of ExchangeCo among its shareholders for the purpose
of winding-up its affairs, holders of the exchangeable shares will be entitled
to, subject to applicable law and to exercise by CallCo of the liquidation call
right, preferential rights to receive from the assets of ExchangeCo an amount
equal to the current market price of a share of FuelCell common stock which will
be fully paid and satisfied by the delivery of one share of FuelCell common
stock, plus an amount equal to all declared and unpaid dividends on each such
exchangeable share held by such holder on any dividend record date which
occurred prior to the liquidation date (such aggregate amount, the "Liquidation
Amount") for each exchangeable share held. When a liquidation, dissolution or
winding-up occurs, CallCo will have an overriding liquidation call right to
purchase all but not less than all of the outstanding exchangeable shares (other
than exchangeable shares held by FuelCell and its affiliates) from the holders
of exchangeable shares on the liquidation date for a purchase price per share
equal to the Liquidation Amount.
When an insolvency event occurs, and while it continues, each holder of
exchangeable shares (other than FuelCell and its affiliates) will be entitled to
instruct the Trustee to exercise the exchange right with respect to the
exchangeable shares held by such holder, thereby requiring FuelCell to purchase
such exchangeable shares from the holder. As soon as practicable after the
occurrence of an insolvency event or any event that with the giving of notice or
the passage of time or both, would be an insolvency event, ExchangeCo and
FuelCell will give written notice of the event to the Trustee. As soon as
practicable following receipt of the notice or the Trustee becomes aware of an
insolvency event, the Trustee will notify each holder of exchangeable shares of
the event or potential event and advise the holder of its exchange right. The
purchase price payable by FuelCell for each exchangeable share purchased under
the exchange right will be an amount equal to the aggregate of the current
market price of FuelCell common stock plus all declared and unpaid cash
dividends on each exchangeable share plus an amount equal to all dividends
declared and payable or paid on FuelCell common stock which have not been
declared or paid on exchangeable shares plus an amount equal to all non-cash
dividends, payable and unpaid, or undeclared but payable on such exchangeable
shares on the last business day prior to the day of closing of the purchase and
sale of the exchangeable share under the exchange right, which will be fully
paid and satisfied by the delivery of the exchangeable share consideration which
consists of an amount per share equal to the current market price of a share of
FuelCell common stock, which will be fully paid and satisfied by the delivery
for each exchangeable share of one share of FuelCell common stock, plus an
amount equal to all declared and unpaid dividends on each such exchangeable
share.
Liquidation Rights with Respect to FuelCell
In order for the holders of the exchangeable shares to participate on a pro
rata basis with the holders of FuelCell common stock in the distribution of
assets of FuelCell, immediately prior to the effective time of a determination
by the FuelCell board of directors to institute voluntary liquidation,
dissolution or winding-up proceedings with respect to FuelCell or to effect any
other distribution of assets of FuelCell among its shareholders for the purpose
of winding up its affairs or receipt by FuelCell of notice of and FuelCell
otherwise
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becoming aware of, any threatened or instituted claim, suit, petition or other
proceedings with respect to the involuntary liquidation, dissolution or
winding-up of FuelCell or to effect any other distribution of assets of FuelCell
among its shareholders for the purpose of winding up its affairs, in each case
where FuelCell has failed to contest in good faith any such proceeding within 30
days of becoming aware of the proceedings, each exchangeable share will,
pursuant to the automatic exchange right, automatically be exchanged for shares
of FuelCell common stock equal to the exchangeable share price under the Voting
and Exchange Trust Agreement. Upon a holder's request and surrender of
exchangeable share certificates, duly endorsed in blank and accompanied by such
instruments of transfer as FuelCell may reasonably require, FuelCell will
deliver or cause to be delivered to the holder certificates representing an
equivalent number of shares of FuelCell common stock. For a description of
FuelCell's obligations relating to the dividend and liquidation rights of the
holders of exchangeable shares, see "Certain Restrictions" and "FuelCell Support
Obligations" below.
Exchange Put Right
In the event that either ExchangeCo or CallCo, as the case may be, fails to
complete any redemption, retraction, distribution or liquidation in respect of,
or purchase exchangeable shares required to be completed by it as contemplated
in the exchangeable share provisions, in ExchangeCo's articles or in the Voting
and Exchange Trust Agreement, a holder of exchangeable shares has the right to
require FuelCell to purchase all or any part of the exchangeable shares of the
holder in consideration of the payment by FuelCell of the exchangeable share
price under the Voting and Exchange Trust Agreement (which shall be the
exchangeable share price applicable on the business day immediately prior to
receipt of notice from the holder of exchangeable shares of its exercise of the
exchange put right).
Withholding Rights
Each of FuelCell, ExchangeCo, CallCo and the Trustee will be entitled to
deduct and withhold from any consideration otherwise payable to any holder of
exchangeable shares or FuelCell common stock such amounts as FuelCell,
ExchangeCo, CallCo or the Trustee, as the case may be, is required to deduct and
withhold with respect to such payment under the Income Tax Act (Canada), the
United States Internal Revenue Code or any provision of federal, provincial,
state, local or foreign tax law. To the extent that amounts are so withheld,
such withheld amounts will be treated for all purposes as having been paid to
the holder in respect of which the deduction and withholding was made, provided
that the withheld amounts are actually remitted to the appropriate taxing
authority. To the extent that the amount so required to be deducted or withheld
from any payment to a holder exceeds the cash portion of the consideration
otherwise payable to the holder, FuelCell, ExchangeCo, CallCo and the Trustee
are authorized to sell or otherwise dispose of the portion of the consideration
as is necessary to provide sufficient funds to FuelCell, ExchangeCo, CallCo or
the Trustee, as the case may be, to enable it to comply with the deduction or
withholding requirement and FuelCell, ExchangeCo, CallCo or the Trustee will
notify the holder and remit to the holder any unapplied balance of the net
proceeds of such sale.
Ranking
The exchangeable shares will have a preference over the common shares of
ExchangeCo and any other shares ranking junior to the exchangeable shares with
respect to the payment of dividends and the distribution of assets in the event
of a liquidation, dissolution or winding-up of ExchangeCo, whether voluntary or
involuntary, or any other distribution of the assets of ExchangeCo among its
shareholders for the purpose of winding-up its affairs. See "Chapter
Three -- Description of FuelCell Capital Stock, Global Preferred Shares, and
ExchangeCo and CallCo Share Capital -- ExchangeCo Share Capital".
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Certain Restrictions
So long as any of the exchangeable shares are outstanding, ExchangeCo will
not, without the approval of the holders of the exchangeable shares as described
below under "Amendment and Approval":
1. pay any dividends on the common shares of ExchangeCo or any other
shares ranking junior to the exchangeable shares with respect to payment of
dividends, other than stock dividends payable in common shares of
ExchangeCo or any other such shares ranking junior to the exchangeable
shares, as the case may be;
2. redeem or purchase or make any capital distribution in respect of
common shares of ExchangeCo or any other shares ranking junior to the
exchangeable shares with respect to the payment of dividends or on any
liquidation, dissolution or winding-up of ExchangeCo or any other
distribution of assets of ExchangeCo;
3. redeem or purchase any other shares of ExchangeCo ranking equally
with the exchangeable shares with respect to the payment of dividends or on
any liquidation, dissolution or winding-up of ExchangeCo or any other
distribution of assets of ExchangeCo;
4. issue any exchangeable shares or any other shares of ExchangeCo
ranking equally with, or superior to, the exchangeable shares other than by
way of stock dividends to the holders of exchangeable shares; or
5. amend its articles or by-laws in any manner that would adversely
effect the rights or privileges of the holders of the exchangeable shares.
The restrictions (in 1, 2, 3 and 4 above) will not apply if all dividends
on the outstanding exchangeable shares corresponding to dividends declared and
paid to date on FuelCell common stock have been declared and paid in full on the
exchangeable shares.
Amendment and Approval
The rights, privileges, restrictions and conditions attaching to the
exchangeable shares may be added to, changed or removed only with the approval
of the holders of the exchangeable shares. Any such approval or any other
approval or consent to be given by the holders of the exchangeable shares will
be deemed to have been sufficiently given if given in accordance with applicable
law subject to a minimum requirement that approval or consent be evidenced by a
resolution passed by not less than 66 2/3% of the votes cast on the resolution
at a meeting of the holders of exchangeable shares duly called and held at which
holders of at least 25% of the outstanding exchangeable shares are present in
person or represented by proxy. In the event that no quorum is present at such
meeting within one-half hour after the time appointed for the meeting, the
meeting will be adjourned to a place and time (not less than five days later)
designated by the chair of the meeting. At the adjourned meeting, the holders of
exchangeable shares present or represented by proxy may transact the business
for which the meeting was originally called and a resolution passed at the
adjourned meeting by the affirmative vote of not less than 66 2/3% of the votes
cast on the resolution will constitute the approval or consent of the holders of
the exchangeable shares.
FuelCell Support Obligations
On the date the articles of arrangement are filed with the Registrar under
the Business Corporation Act (Alberta) giving effect to the Plan of Arrangement,
FuelCell, CallCo and ExchangeCo will enter into the Support Agreement attached
as Exhibit C to the Combination Agreement attached to this Joint Proxy Statement
as Annex B. Pursuant to the Support Agreement, FuelCell will make the following
covenants for so long as any exchangeable shares (other than exchangeable shares
owned by FuelCell or its affiliates) remain outstanding:
1. FuelCell will not declare or pay any dividends on FuelCell common
stock unless ExchangeCo (i) on the same day declares or pays, as the case
may be, an equivalent dividend on the exchangeable shares and has
sufficient money or other assets or authorized but unissued securities
available to enable
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the due declaration and the due and punctual payment, in accordance with
applicable law, of any such equivalent dividend or (ii) subdivides the
exchangeable shares in lieu of a stock dividend thereon (as provided for in
the exchangeable share provisions) and has sufficient authorized but
unissued securities available to enable the subdivision;
2. FuelCell will advise ExchangeCo sufficiently in advance of the
declaration of any dividend on FuelCell common stock and take all other
actions as are necessary to ensure that (i) the declaration date, record
date and payment date for dividends on the exchangeable shares are the same
as those for the corresponding dividend on the FuelCell common stock or
(ii) the record date and effective date for a subdivision of the
exchangeable shares in lieu of a stock dividend (as provided for in the
exchangeable share provisions) are the same as the record date and payment
date for the stock dividend on the FuelCell common stock;
3. FuelCell will ensure that the record date for any dividend
declared on the FuelCell common stock is not less than ten business days
after the declaration date of the dividend;
4. FuelCell will take all actions and do all things necessary or
desirable to enable and permit ExchangeCo, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Liquidation Amount, the Retraction Price or the
Redemption Price in respect of each issued and outstanding exchangeable
share (other than exchangeable shares owned by FuelCell or its affiliates)
upon the liquidation, dissolution or winding-up of ExchangeCo or any other
distribution of the assets of ExchangeCo among its shareholders for the
purpose of winding-up its affairs, the delivery of a retraction request by
a holder of exchangeable shares or a redemption of exchangeable shares by
ExchangeCo, including all such actions and all such things as are necessary
or desirable to enable and permit ExchangeCo to cause to be delivered
FuelCell common stock to the holders of exchangeable shares in accordance
with the exchangeable share provisions;
5. FuelCell will take all actions and do all things as are necessary
or desirable in accordance with the exchangeable share provisions to enable
and permit CallCo, in accordance with applicable law, to perform its
obligations arising upon the exercise by it of the Call rights, including
delivering FuelCell common stock to holders of exchangeable shares in
accordance with the provisions of the applicable Call right;
6. FuelCell will not exercise its vote as a direct or indirect
shareholder to initiate the voluntary liquidation, dissolution or
winding-up of ExchangeCo nor take or omit to take any action designed to
result in the liquidation, dissolution or winding-up of ExchangeCo; and
7. FuelCell will recognize the right of a holder of exchangeable
shares to exercise its exchange put right.
The Support Agreement and the exchangeable share provisions provide that so
long as any exchangeable shares not owned by FuelCell or its affiliates are
outstanding, FuelCell will not, without the prior approval of ExchangeCo and the
holders of the exchangeable shares given in the manner described above under
"Amendment and Approval", and subject to certain exceptions, issue or
distribute: (i) FuelCell common stock, securities exchangeable for or
convertible into or carrying rights to acquire FuelCell common stock; (ii)
rights, options or warrants to subscribe for or to purchase FuelCell common
stock; or (iii) shares or securities of FuelCell of any class other than
FuelCell common stock or rights, options or warrants described above or
evidences of indebtedness or other assets of FuelCell, to all or substantially
all of the then outstanding holders of FuelCell common stock, nor will FuelCell
(a) subdivide, redivide or change the then outstanding shares of FuelCell common
stock; (b) reduce, combine, consolidate, or change the FuelCell common stock; or
(c) reclassify or (d) otherwise change the FuelCell common stock or effect and
amalgamation, merger, reorganization or other transaction involving or affecting
the shares of FuelCell common stock, unless the same or an economically
equivalent distribution or change is simultaneously made to the exchangeable
shares (or in the rights of the holders thereof). The board of directors of
ExchangeCo is conclusively empowered to determine in good faith and in its sole
discretion whether any corresponding distribution on or change to the
exchangeable shares is the same as, or economically equivalent to, any proposed
distribution on or change to
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FuelCell common stock. In the event of any proposed tender offer, share exchange
offer, issuer bid, take-over bid or similar transaction with respect to FuelCell
common stock which is recommended by the FuelCell board of directors, or is
otherwise effected or to be effected with the consent or approval of the board
of directors of FuelCell, and in connection with which the exchangeable shares
are not redeemed by ExchangeCo or purchased by CallCo under the redemption call
right, FuelCell will in good faith take all actions and do all such things as
are necessary or desirable and in its power to enable and permit holders of
exchangeable shares to participate in such offer to the same extent and on an
economically equivalent basis as the holders of FuelCell common stock, without
discrimination.
To assist FuelCell in complying with its obligations under the Support
Agreement and to permit CallCo to exercise the call rights, ExchangeCo is
required to notify FuelCell and CallCo if certain events occur, such as: (i) the
voluntary liquidation, dissolution or winding-up of ExchangeCo or to effect any
other distribution of its assets; (ii) its notice of or otherwise becoming aware
of any threatened or instituted claim, suit, petition or other proceeding with
respect to the involuntary liquidation, dissolution or winding-up of ExchangeCo
or other action resulting in a distribution of its assets; (iii) its receipt of
a retraction request from a holder of exchangeable shares; (iv) the
determination of a redemption date; and (v) the issuance by ExchangeCo of any
exchangeable shares or rights to acquire exchangeable shares (other than
pursuant to the Plan of Arrangement).
Under the Support Agreement, FuelCell has agreed not to, and to cause its
affiliates not to, exercise any voting rights attached to the exchangeable
shares owned by it or any of its affiliates on any matter considered at meetings
of holders of exchangeable shares, although it will appoint and cause to be
appointed proxyholders with respect to such exchangeable shares for the sole
purpose of attending meetings of the holders of exchangeable shares in order to
be counted as part of the quorum for each such meeting. As long as any
outstanding exchangeable shares are owned by any shareholder (other than
FuelCell or its affiliates), FuelCell will use its best efforts to maintain a
listing for the exchangeable shares on the Toronto Stock Exchange, or in the
event that a listing on the Toronto Stock Exchange is not available, on another
recognized Canadian stock exchange.
With the exception of: (i) adding to the covenants of any or all parties to
the Support Agreement; (ii) making amendments or modifications not inconsistent
with the Support Agreement as may be necessary or desirable with respect to
matters or questions that, in the good faith opinion of the parties' respective
boards, it may be expedient to make; or (iii) making such changes or corrections
that, on the advice of the parties' respective counsel, are required for the
purpose of curing or correcting any ambiguity, defect, inconsistent provision,
clerical omission, mistake or manifest error (in each case provided that the
board of directors of each of FuelCell, ExchangeCo and CallCo are of the opinion
that such amendments are not prejudicial to the rights or interests of the
holders of the exchangeable shares), the Support Agreement may not be amended
without the approval of the holders of the exchangeable shares given in the
manner described above under "Amendment and Approval".
THE COMBINATION AGREEMENT
The following is a summary of the material provisions of the Combination
Agreement entered into between FuelCell and Global on August 4, 2003. The
following description of the Combination Agreement does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
Combination Agreement, which is attached as Annex B to this Joint Proxy
Statement and is incorporated in this Joint Proxy Statement by reference. All
FuelCell stockholders and Global common shareholders are urged to read the
Combination Agreement carefully and in its entirety.
REPRESENTATIONS AND WARRANTIES
The Combination Agreement contains customary representations and warranties
of each of Global and FuelCell relating to, among other things:
- authority to enter into the Combination Agreement and to complete the
Combination;
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- the parties' organization, capital structures and qualification;
- required consents;
- no defaults;
- intellectual property rights;
- periodic securities reports and financial information;
- liabilities and litigation;
- absence of certain changes and events;
- material contracts;
- customers and suppliers;
- insurance;
- environmental matters and hazardous substances;
- title to properties;
- taxes;
- employee matters;
- information supplied and disclosure;
- compliance with applicable laws; and
- net working capital and anticipated expenditures.
The representations and warranties in the Combination Agreement are
complicated and not easily summarized. You are encouraged to carefully read the
sections of the Combination Agreement entitled "Representations and Warranties
of the Company" and "Representations and Warranties of FCE."
CONDITIONS TO CLOSING
FuelCell's and Global's obligations to complete the Combination are subject
to conditions that must be satisfied or waived before the completion of the
Combination, including:
- the approval of the Combination by the Global common shareholders at the
Global Meeting;
- the approval of the Combination by the Court;
- the approval of the Combination and the Combination Agreement at the
FuelCell Meeting by the FuelCell stockholders;
- the receipt of all required consents and regulatory approvals;
- there must not be any law or court order prohibiting the Combination;
- the representations and warranties of the parties in the Combination
Agreement being true and correct in all material respects and, where
applicable, true and correct in all respects;
- the parties having performed, in all material respects, all agreements
and covenants to be performed by them under the Combination Agreement;
- the parties having received all written consents, assignments, waivers,
authorizations or other certificates necessary to provide for the
continuation in full force and effect of all of their material contracts;
- the approval of Nasdaq for the listing of the shares of FuelCell common
stock to be issued pursuant to the Combination, and Nasdaq must not have
objected to the completion of the Combination contemplated by the Plan of
Arrangement and the Combination Agreement;
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- the listing of the exchangeable shares, issued pursuant to the Plan of
Arrangement, on the Toronto Stock Exchange or another recognized Canadian
stock exchange;
- in respect of the obligations of FuelCell, that there shall have been no
material adverse change in respect of Global;
- in respect of the obligations of Global, that there shall have been no
material adverse change in respect of FuelCell;
- the issuance by FuelCell of the FuelCell common stock and exchangeable
shares pursuant to the Combination shall be exempt from the registration
and qualification requirements of the United States Securities Act of
1933 and applicable state securities or "blue sky" laws;
- that Global shall not have received notice on or prior to the effective
time of the Combination from the holders of more than 5% of the issued
and outstanding shares of Global entitled to consent to or vote on the
matters presented at the Global Meeting, in aggregate, of their intention
to exercise their rights of dissent;
- the parties' net working capital and net cash amounts equaling or
exceeding the amounts set forth in the Combination Agreement less an
amount for anticipated expenditures (referred to in the Combination
Agreement as "cash burn") and certain litigation expenses;
- the parties paying or otherwise satisfying all their costs and expenses
incurred in connection with the transactions contemplated by the Plan of
Arrangement and the Combination Agreement; and
- in respect of the obligations of FuelCell, Global shall have paid any and
all fees owed to Quantum pursuant to the Quantum Combination Agreement.
Each party has the right to waive the conditions (except for the requisite
shareholder and regulatory approvals) to its obligations under the Combination
Agreement.
COVENANTS
Under the Combination Agreement Global and FuelCell have agreed to a number
of covenants, including the following:
- Consents and Approvals. The parties have agreed to apply for and use
their reasonable best efforts to obtain all court, regulatory and other
consents and approvals required for the completion of the Combination and
to use their reasonable best efforts to effect the transactions
contemplated by the Combination Agreement as soon as reasonably
practicable.
- Interim Operations of Global and FuelCell. Until the earlier of the
termination of the Combination Agreement or the completion of the
Combination, each party has agreed that it will operate its business only
in the usual, regular and ordinary manner and, to the extent consistent
with such operation, use all commercially reasonable efforts to preserve
intact its present business organization. Each party has agreed to
refrain from taking any action which would be reasonably likely to
prevent or materially delay the completion of the Combination.
- Stock Exchange Listing. FuelCell will use its reasonable best efforts to
cause the shares of FuelCell common stock to be issued pursuant to the
Combination to be approved for listing on the Nasdaq National Market.
Global will cooperate and assist FuelCell to cause the exchangeable
shares to be listed on the Toronto Stock Exchange or another recognized
Canadian stock exchange.
- Environmental Matters. Global will take all steps necessary to commence
and diligently prosecute the recommendations set forth in the "2002 Phase
II Environmental Site Assessment and Remediation Cost Estimate" prepared
by Global's independent environmental consultant, including the
completion of all necessary or appropriate site characterization
activities (including soil and groundwater sampling and analysis) and the
development of a remedial action plan for the Bassano manufacturing
facility that is satisfactory to the applicable governmental entity.
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- Additional FuelCell Board Seats. Global shall have the right to nominate
one individual for election to the FuelCell board of directors in
connection with the completion of the Combination. FuelCell may in its
sole discretion appoint an additional Global nominee to the FuelCell
board of directors.
The agreements related to the conduct of business in the Combination
Agreement are complicated and not easily summarized. You are urged to carefully
read the sections of the Combination Agreement entitled "Additional Agreements
of the Company" and "Additional Agreements of FCE."
NO SOLICITATION AND RIGHT TO MATCH
Global agreed to immediately cease and cause to be terminated any existing
solicitation, initiation, encouragement, activity or other discussion with any
parties conducted prior to the date of the Combination Agreement. Global will
exercise all rights to require the return of information regarding it previously
provided to such parties and will exercise all rights to require the destruction
of all materials including or incorporating any information regarding Global. In
addition, each of Global and FuelCell will not, and will not authorize or permit
any of its officers, directors, employees, financial advisors, representatives
and agents to, directly or indirectly, solicit, initiate or encourage (including
by way of furnishing information) or participate in or take any other action to
facilitate any inquiries or the making of any proposal which constitutes or may
reasonably be expected to lead to an acquisition proposal from any person, or
engage in any discussions, negotiations or inquiries relating thereto or accept
any acquisition proposal. Notwithstanding the foregoing, each of Global and
FuelCell may at any time prior to the time their respective shareholders have
voted to approve the Combination, engage in discussions or negotiations with a
third party who (without any solicitation, initiation or encouragement, directly
or indirectly, by either Global or FuelCell, as the case may be, or their
respective subsidiaries or any of their respective representatives described
above) seeks to initiate such discussions or negotiations and, (i) in the case
of Global, furnish such third party information concerning Global and its
business, properties and assets which has previously been provided to FuelCell,
if and only to the extent that (A) the third party has first made an unsolicited
bona fide written acquisition proposal that is, in the good faith judgment of
the board of directors of Global, a "superior proposal," i.e., a proposal that
is (a) financially superior to the Combination contemplated by the Combination
Agreement, and (b) as to which the third party has demonstrated that the funds
or other consideration necessary are available, as determined in good faith by
the board of directors, after receiving the written advice of its financial
advisors and is subject only to confirmatory due diligence; and Global's board
of directors has concluded in good faith, after considering applicable law and
receiving the advice of outside counsel that such action is necessary for the
board to act in a manner consistent with its fiduciary duties under applicable
law; (B) prior to furnishing information to or entering into discussions or
negotiations with the third party, Global provides prompt notice orally and in
writing to FuelCell specifying the identity of such person or entity and that it
is furnishing information or entering into discussions or negotiations with such
person or entity in respect of a superior proposal and receives from the third
party an executed confidentiality agreement having confidentiality and
standstill terms substantially similar to those contained in the confidentiality
agreement executed by Global and FuelCell (other than the exclusivity provisions
contained in that agreement), and the parties shall provide full details
forthwith, and in any event within 24 hours, of all material terms and
conditions of the superior proposal and any amendments to the proposal and
confirming in writing the determination of its board of directors that such
proposal constitutes a superior proposal; (C) Global provides notice forthwith
to FuelCell, and in any event within 24 hours, at such time as it is terminating
any such discussions or negotiations with such person or entity; and (D) Global
promptly makes available to FuelCell any information provided to any such person
or entity not previously made available to FuelCell; or (ii) in the case of
FuelCell, in the event that FuelCell receives an unsolicited acquisition
proposal in respect of FuelCell, FuelCell shall be free to, and to authorize or
permit any of its representatives to, directly or indirectly, solicit, initiate
or encourage (including by way of furnishing information) or participate in or
take any other action to facilitate any inquiries or the making of any proposal
which constitutes or may reasonably be expected to lead to one or more
acquisition proposals from any person, or engage in any discussion, negotiations
or inquiries relating thereto.
Global may accept, recommend, approve or implement a superior proposal from
a third party, but only if prior to such acceptance, recommendation, approval or
implementation, the board of directors of Global has
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concluded in good faith, after considering provisions of applicable law and
after giving effect to all proposals to adjust the terms and conditions of the
Combination Agreement and the Plan of Arrangement which may be offered by
FuelCell during the three day notice period described under "Right to Match"
below, and after receiving the advice of outside counsel, that such action is,
in the good faith judgment of the board of directors of the recipient,
reasonably necessary for the board of directors of Global to act in a manner
consistent with its fiduciary duties under applicable law and terminates the
Combination Agreement and concurrently therewith pays the applicable termination
fees described below.
Global must give FuelCell at least three days' notice orally and in writing
prior to any decision by its board of directors to accept, recommend, approve or
implement a superior proposal, which notice must identify the party making the
superior proposal and must provide full details of all material terms and
conditions thereof and any amendments thereto. Global must inform FuelCell of
the status (including all terms and conditions thereof) of any discussions and
negotiations with that party. In addition Global must, and must cause its
financial and legal advisors to, negotiate in good faith with FuelCell to make
such adjustments in the terms and conditions of the Combination Agreement and
the Plan of Arrangement as would enable Global and FuelCell to proceed with the
transactions contemplated by the Combination Agreement. Before executing any
agreement to implement a superior proposal, Global must provide FuelCell with
copies of such final documentation executed by the party making the superior
proposal. In the event that FuelCell proposes to amend the Combination Agreement
and the Plan of Arrangement, the board of directors of Global shall consider the
proposed amendments and not enter into any agreement regarding the acquisition
proposal unless it has provided FuelCell with at least 24 hours written notice
in advance of entering into such agreement that the board of directors has
reconfirmed its view that the acquisition proposal remains a superior proposal.
As used in the Combination Agreement, "acquisition proposal" means a
proposal or offer (other than by the other party to the Combination Agreement),
whether or not subject to a due diligence condition, whether or not in writing,
to acquire in any manner, directly or indirectly, beneficial ownership (as
defined under Rule 13(d) of the United States Securities Exchange Act of 1934)
of more than 20% of the assets of Global or FuelCell, as the case may be, or any
subsidiary thereof, or to acquire in any manner, directly or indirectly, more
than 9.9% (and for the purposes of the payment of termination fees, 20%) of the
outstanding voting shares of Global or FuelCell, as the case may be, whether by
an arrangement, amalgamation, a merger, consolidation or other business
combination, by means of a sale of shares of capital stock, sale of assets,
tender offer or exchange offer or similar transaction involving either Global or
FuelCell, as the case may be, or any of its subsidiaries, including any single
or multistep transaction or series of related transactions which is structured
to permit such third party to acquire beneficial ownership of more than 20% of
the assets of either Global or FuelCell, as the case may be, or any subsidiary
thereof, or to acquire in any manner, directly or indirectly, more than 9.9%
(and for the purposes of the payment of termination fees, 20%) of the
outstanding voting shares of Global or FuelCell, as the case may be (other than
the transactions contemplated by the Combination Agreement).
TERMINATION
Global and FuelCell may terminate the Combination Agreement by mutual
agreement. In addition, either Global or FuelCell may terminate the Combination
Agreement prior to the effective time if any of the following occurs:
- if all conditions for closing the Combination have not been satisfied or
waived by 5:00 p.m. (Calgary time) on December 31, 2003 other than as a
result of a breach by the terminating party, provided that neither party
may terminate the Combination Agreement due to litigation initiated by
Quantum in connection with the Quantum Combination Agreement or by the
holder of the Global Series 2 Preferred Shares until the earlier of: (i)
a final, non-appealable order in such litigation; and (ii) January 31,
2004;
- on or before 5:00 p.m. (Calgary time) on December 31, 2003 if: (i) the
Global securityholders entitled to vote at the Global Meeting do not
approve the arrangement (and the other matters to be approved at
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the Global Meeting) or the Court does not issue the final order; or (ii)
the FuelCell stockholders do not approve the Combination and the
Combination Agreement; or
- if a final and non-appealable order shall have been entered in any action
or proceeding before any governmental entity that prevents or makes
illegal the completion of the Combination.
FuelCell may terminate the Combination Agreement if:
- there has been a breach by Global of any representation, warranty,
covenant or agreement in the Combination Agreement, or any representation
or warranty of Global has become untrue, subject to notice and cure
provisions;
- the Global board of directors or any committee thereof: (i) withdraws or
modifies adversely to FuelCell its approval or recommendation in respect
of the Combination; or (ii) fails to reaffirm its approval or
recommendation within ten days upon request by FuelCell or after a
competing acquisition proposal is announced, proposed, offered or made,
whichever occurs first;
- the Court orders or requires persons other than Global common
shareholders the right to consent, approve or vote in connection with the
Combination as a separate class; or
- Global's levels of net working capital and net cash are below specified
levels on the effective date of the Combination, based upon Global's net
working capital and net cash amounts prior to execution of the
Combination Agreement, as reduced by a specified amount representing
anticipated reductions of working capital and cash.
Global may terminate the Combination Agreement if:
- there has been a breach by FuelCell of any representation, warranty,
covenant or agreement in the Combination Agreement, or any representation
or warranty of FuelCell has become untrue, subject to notice and cure
provisions;
- the FuelCell board of directors or any committee thereof: (i) withdraws
or modifies adversely to Global its approval or recommendation of the
Combination and the Combination Agreement to FuelCell's stockholders; or
(ii) fails to reaffirm its approval or recommendation within ten days
upon request by Global or after a competing acquisition proposal is
announced, proposed, offered or made, whichever occurs first;
- prior to the approval by the Global common shareholders of the
Combination, the Global board of directors accepts, recommends, approves
or implements a superior proposal in compliance with the Combination
Agreement;
- if the daily volume-weighted average of FuelCell's stock price,
calculated in accordance with the Combination Agreement, is less than
$6.65, calculated on a rolling basis for each trading day during any 15
consecutive trading days after the date of the Combination Agreement
until the effective date of the Combination (the "Walk-Away Price"). Upon
the occurrence of any Walk-Away Price, Global may terminate the
Combination Agreement within three days of such occurrence, and if Global
fails to exercise such termination right, Global will be deemed to have
waived its right to terminate in respect of such occurrence, but without
prejudice to any future right to terminate upon the occurrence of a
subsequent Walk-Away Price;
- FuelCell's levels of net working capital and net cash are below specified
levels on the effective date of the Combination, based upon FuelCell's
net working capital and net cash amounts prior to execution of the
Combination Agreement, as reduced by a specified amount representing
anticipated reductions of working capital and cash; or
- FuelCell announces its intention to acquire (by merger, consolidation, or
acquisition of stock or assets) any company, corporation, partnership or
other business organization or division thereof for a purchase price in
excess of $10,000,000.
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TERMINATION AND EXPENSE REIMBURSEMENT FEES
Global must pay FuelCell $900,000 for reimbursement of expenses in cash if:
- FuelCell terminates the Combination Agreement because there has been a
breach by Global of any representation, warranty, covenant or agreement
in the Combination Agreement, or any representation or warranty of Global
has become untrue, subject to notice and cure provisions;
- either party terminates the Combination Agreement because the Global
securityholders entitled to vote at the Global Meeting do not approve the
Combination and any other matters to be approved at the Global Meeting on
or prior to 5:00 p.m. (Calgary time) on December 31, 2003;
- FuelCell terminates the Combination Agreement because the Court orders or
requires any person, other than Global common shareholders the right to
consent to, approve or vote in connection with the Combination, as a
separate class; or
- FuelCell terminates the Combination Agreement because Global has not
satisfied its obligations under the Combination Agreement with respect to
net working capital and net cash.
FuelCell must pay Global $900,000 for reimbursement of expenses in cash if:
- Global terminates the Combination Agreement because there has been a
breach by FuelCell of any representation, warranty, covenant or agreement
in the Combination Agreement, or any representation or warranty of
FuelCell has become untrue, subject to notice and cure provisions;
- either party terminates the Combination Agreement because the FuelCell
stockholders do not approve the Combination and the Combination Agreement
on or prior to 5:00 p.m. (Calgary time) on December 31, 2003; or
- Global terminates the Combination Agreement because FuelCell has not
satisfied its obligations under the Combination Agreement with respect to
net working capital and net cash.
Global must pay FuelCell a termination fee of $2,000,000 in cash if:
- an acquisition proposal by a third party in respect of Global is publicly
announced or is proposed, offered or made, and such acquisition has not
expired or been withdrawn at the time of the Global Meeting and the
securityholders of Global do not approve the Combination and, within
twelve months of the termination of the Combination Agreement, Global
enters into, directly or indirectly, an agreement, commitment or
understanding with respect to such acquisition proposal, an amended
version thereof, a competing acquisition proposal or an acquisition
proposal solicited in response to the foregoing, or any such acquisition
proposal is consummated;
- prior to approval of the Global securityholders, Global terminates the
Combination Agreement because Global has accepted, recommended, approved
or implemented a superior proposal; or
- FuelCell terminates the Combination Agreement because the Global board of
directors or any committee thereof: (i) withdraws or modifies adversely
to FuelCell its approval or recommendation in respect of the Combination;
or (ii) fails to reaffirm its approval or recommendation within ten days
upon request by FuelCell or after a competing acquisition proposal is
announced, proposed, offered or made, whichever occurs first.
FuelCell must pay Global a termination fee of $2,000,000 in cash if:
- Global terminates the Combination Agreement because the FuelCell board of
directors or any committee thereof: (i) withdraws or modifies adversely
to Global its approval or recommendation to FuelCell stockholders; or
(ii) fails to reaffirm its approval or recommendation within ten days
upon request by Global or after a competing acquisition proposal is
announced, proposed, offered or made, whichever occurs first.
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AGREEMENTS OF CERTAIN PERSONS
Global will use its reasonable best efforts to enter into agreements with
persons who may be deemed to be affiliates of Global for the purposes of Rules
144 and 145 promulgated under the United States Securities Act of 1933. Pursuant
to those agreements, Global affiliates will agree, among other things, that they
will not sell, transfer or otherwise dispose of the FuelCell common stock or
exchangeable shares that they will receive in connection with the Combination
except in compliance with the resale restrictions of Rule 145(d) or after
satisfying other specified conditions. The agreements will permit FuelCell to
place restrictive legends on and issue stop-transfer instructions with respect
to the shares of FuelCell common stock and exchangeable shares that the Global
affiliates will receive as a result of the Combination.
DISSENTING SHAREHOLDER RIGHTS
FUELCELL
Under Delaware law, holders of FuelCell common stock will not have
appraisal or dissenters' rights relating to the Combination.
GLOBAL
THE FOLLOWING DESCRIPTION OF THE RIGHTS OF DISSENTING HOLDERS OF GLOBAL
COMMON SHARES IS NOT A COMPREHENSIVE STATEMENT OF PROCEDURES TO BE FOLLOWED BY A
DISSENTING SHAREHOLDER WHO SEEKS PAYMENT OF THE FAIR VALUE OF GLOBAL COMMON
SHARES AND IS QUALIFIED IN ITS ENTIRETY BY THE INTERIM ORDER, THE PLAN OF
ARRANGEMENT AND SECTION 191 OF THE BUSINESS CORPORATIONS ACT (ALBERTA) WHICH WE
HAVE INCLUDED AS ANNEXES C, D AND G TO THIS JOINT PROXY STATEMENT. A GLOBAL
COMMON SHAREHOLDER WHO INTENDS TO EXERCISE THE RIGHT OF DISSENT AND APPRAISAL
SHOULD CAREFULLY CONSIDER AND COMPLY WITH THE PROVISIONS OF SECTION 191, AS
MODIFIED BY THE PLAN OF ARRANGEMENT AND THE INTERIM ORDER, WHICH INTERIM ORDER
PROVIDES THAT GLOBAL COMMON SHAREHOLDERS SHALL HAVE THE RIGHT TO DISSENT IN
RESPECT OF THE PLAN OF ARRANGEMENT. FAILURE TO COMPLY WITH THE PROVISIONS OF
SECTION 191, AS MODIFIED BY THE PLAN OF ARRANGEMENT AND INTERIM ORDER, AND TO
ADHERE TO THE PROCEDURES ESTABLISHED THEREIN, MAY RESULT IN THE LOSS OF ALL
RIGHTS THEREUNDER.
The Court hearing the application for the final order has the discretion to
alter the rights of dissent described herein based on the evidence presented at
such hearing.
Under the Interim Order, registered holders of Global common shares are
entitled, in addition to any other right they may have, to dissent and to be
paid by FuelCell the judicially determined fair value of the common shares held
by them, determined as of the close of business on the last business day before
the day on which the resolution from which they dissented was adopted. A Global
shareholder may dissent only with respect of all of the shares held by the
shareholder or on behalf of any one beneficial owner and registered in the
dissenting shareholder's name. The written objection to the resolution must be
executed by or for the holder of record, fully and correctly, as such holder's
name appears on the holder's share certificates. A vote against the Combination
will not satisfy the notice requirements under Section 191 of the Business
Corporations Act (Alberta) with respect to such shareholder's dissent rights. If
the shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, the written objection should be made in that capacity,
and if the shares are owned of record by more than one person, as in a joint
tenancy or a tenancy in common, the written objection should be made by or for
all owners of record. An authorized agent, including one or more joint owners,
may execute the written objection for a holder of record; however, such agent
must expressly identify the record owner or owners, and expressly disclose in
such written objection that the agent is acting as agent for the record owner or
owners.
ONLY REGISTERED COMMON SHAREHOLDERS MAY DISSENT. BENEFICIAL OWNERS OF
GLOBAL COMMON SHARES REGISTERED IN THE NAME OF A BROKER, CUSTODIAN, NOMINEE OR
OTHER INTERMEDIARY WHO WISH TO DISSENT SHOULD BE AWARE THAT THEY MAY ONLY DO SO
THROUGH THE REGISTERED OWNER OF SUCH SHARES. A REGISTERED HOLDER SUCH AS A
BROKER WHO HOLDS COMMON SHARES AS NOMINEE FOR BENEFICIAL OWNERS, SOME OF WHOM
MAY DESIRE TO OBJECT TO THE RESOLUTION, MUST EXERCISE DISSENT RIGHTS ON BEHALF
OF SUCH BENEFICIAL OWNERS WITH RESPECT TO THE SHARES
88
HELD FOR SUCH BENEFICIAL OWNERS. IN SUCH CASE, THE WRITTEN OBJECTION TO THE
RESOLUTION SHOULD SET FORTH THE NUMBER OF COMMON SHARES COVERED BY IT.
A dissenting holder of Global common shares must send to Global a written
objection to the resolution in respect of the arrangement, which written
objection must be received by Global, c/o Bennett Jones LLP, 4500, 855 -- 2nd
Street S.W., Calgary, Alberta T2P 4K7, Attention: Mr. John MacNeil or the
chairman of the Global Meeting, also c/o Bennett Jones LLP at the address above,
no later than 24 hours before the Global Meeting. An application may be made to
the Court to fix the fair value of the dissenting shareholder's common shares
after the effective date of the Plan of Arrangement. If an application to the
Court is made by either Global or a dissenting shareholder, Global must, unless
the Court otherwise orders, send to each dissenting shareholder a written offer
to pay him an amount considered by the Global board of directors to be the fair
value of the Global common shares. The offer, unless the Court otherwise orders,
will be sent to each dissenting shareholder at least ten days before the date on
which the application is returnable, if Global is the applicant, or within ten
days after Global is served with notice of the application, if a shareholder is
the applicant. The offer will be made on the same terms to each dissenting
holder of Global common shares and will be accompanied by a statement showing
how the fair value was determined.
A dissenting holder of Global common shares may make an agreement with
Global for the purchase of the holder's common shares in the amount of Global's
offer (or otherwise) at any time before the Court pronounces an order fixing the
fair value of the common shares. A dissenting shareholder is not required to
give security for costs in respect of an application and, except in special
circumstances, will not be required to pay the costs of the application or
appraisal. On the application, the Court will make an order fixing the fair
value of the common shares of all dissenting shareholders who are parties to the
application, giving judgment in that amount against Global and in favor of each
of those dissenting shareholders and fixing the time within which FuelCell, in
consideration for the transfer of such dissenting shareholders' shares, must pay
that amount payable to the dissenting shareholders.
After the Combination becomes effective, or after an agreement between
Global and the dissenting holder of Global common shares is made, or upon the
pronouncement of a court order fixing the fair value and giving judgment in that
amount, whichever first occurs, the dissenting shareholder will cease to have
any rights as a shareholder other than the right to be paid the fair value of
the common shares in the amount agreed between Global and the dissenting
shareholder or in the amount of the judgment as the case may be. Until one of
these events occurs, the shareholder may withdraw his dissent, or Global may
rescind the resolution in respect of the arrangement and, in either event, the
dissent and appraisal proceedings in respect of that shareholder will be
discontinued. The Court may in its discretion allow a reasonable rate of
interest on the amount payable to each dissenting shareholder calculated from
the date on which the shareholder ceases to have any rights as a shareholder
until the date of payment.
The Combination Agreement provides that it is a condition to the obligation
of both FuelCell and Global to complete the Combination that Global shall not
have received notice from the holders of more than 5% of the issued and
outstanding shares of Global entitled to consent to or vote on the matters
presented at the Global Meeting, in aggregate, of their intention to exercise
their rights of dissent as described above.
ANTICIPATED ACCOUNTING TREATMENT
FuelCell, as the accounting acquirer, will account for the Combination with
Global using the purchase method of accounting under U.S. GAAP. After completion
of the Combination, the results of operations of Global will be included in the
consolidated financial statements of FuelCell.
BUSINESS COMBINATION COSTS
Regardless of whether the Combination is completed, Global and FuelCell
will each bear its respective expenses and legal fees incurred with respect to
the Combination Agreement and the transactions contemplated thereby. Global and
FuelCell will, however, share equally the costs of printing and filing this
Joint Proxy Statement, as well as the costs of any filings or applications with
any governmental entity relating to the Combination.
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The combined estimated fees, costs and expenses of Global and FuelCell in
connection with the Combination, excluding the $2 million Quantum termination
fee and including, without limitation, change of control payments, financial
advisor fees, soliciting dealer fees, filing fees, legal and accounting fees and
printing and mailing costs are anticipated to be approximately $5.8 million, of
which $3.5 million relates to FuelCell's costs and change of control payments
which are referred to in Note (b)(2) and Note (f) to the Unaudited Pro Forma
Condensed Combined Balance Sheet.
In addition, Global or FuelCell may be required to pay the other party a
termination fee in certain circumstances, as discussed more fully beginning on
page 87.
PROCEDURES FOR EXCHANGE BY GLOBAL COMMON SHAREHOLDERS
Enclosed with this Joint Proxy Statement is a letter of transmittal which
each Global common shareholder must complete, execute and return together with a
certificate for Global common shares in order to receive shares of FuelCell
common stock or exchangeable shares if the Combination is completed. The letter
of transmittal allows Global common shareholders who are residents of Canada for
purposes of the Income Tax Act (Canada) to elect to receive either exchangeable
shares or shares of FuelCell common stock once the Combination is completed.
Global common shareholders who are non-residents of Canada for purposes of the
Income Tax Act (Canada) will not have the option to receive exchangeable shares
and will receive shares of FuelCell common stock. Global common shareholders
will be required to complete a declaration of residency in the letter of
transmittal in order to properly elect to receive exchangeable shares. The
number of exchangeable shares or shares of FuelCell common stock to be received
for each Global common share will be based on the exchange ratio. See
"-- Mechanics for Implementing the Combination and Description of Exchangeable
Shares". A Canadian Global common shareholder who wishes to receive exchangeable
shares or shares of FuelCell common stock may do so by checking the relevant box
on the letter of transmittal to elect to receive the exchangeable shares and
make the declaration of residency. A Canadian Global common shareholder who does
not make an election will receive shares of FuelCell common stock. It is
anticipated that certificates representing the exchangeable shares and shares of
FuelCell common stock will be available immediately following the closing which
is expected to occur on November 3, 2003. In order to receive exchangeable
shares, your properly completed letter of transmittal along with your share
certificate or certificates must be received by Computershare Trust Company of
Canada by the close of business on the last business day before closing. If
closing occurs as expected on November 3, 2003, your letter of transmittal must
be received by the close of business on October 31, 2003.
If Global common shares are registered in the name of a broker, bank or
nominee, the registered holder of the shares must submit the letter of
transmittal on behalf of the beneficial owner.
No certificates representing fractional FuelCell common shares or
fractional exchangeable shares will be issued. In lieu of fractional shares,
each shareholder who would otherwise be entitled to receive a fraction of a
share of FuelCell common stock or an exchangeable share shall be paid an amount
of cash (rounded to the nearest whole cent), without interest, equal to the
Canadian dollar equivalent of the product of such fractional interest multiplied
by the daily volume-weighted average trading price of the shares of FuelCell
common stock for the twenty consecutive trading days ending on and including the
third trading day before the Global Meeting.
Any use of the mail to transmit a certificate for Global common shares and
a related letter of transmittal is at the risk of the shareholder. If these
documents are mailed, it is recommended that registered mail, with return
receipt requested, properly insured, be used.
If the Combination is completed, certificates representing the appropriate
number of exchangeable shares or shares of FuelCell common stock issuable to a
former Global common shareholder who has complied with the procedures set out
above, together with a cheque in the amount, if any, payable in lieu of
fractional exchangeable shares will, as soon as practicable after the later of
the effective date of the Combination and the date of receipt of a certificate
for Global common shares and a related letter of transmittal, be forwarded to
the holder at the address specified in the letter of transmittal by first class
mail or made available at the offices of Computershare Trust Company of Canada
for pickup by the holder, if requested by the holder in the letter of
transmittal.
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If the Combination does not close, all certificates representing Global
common shares transmitted with a related letter of transmittal will be returned
by certified mail to Global common shareholders.
If a share certificate has been lost or destroyed, the letter of
transmittal should be completed as fully as possible and forwarded, together
with a letter describing the loss, to the Toronto or Calgary office of
Computershare Trust Company of Canada. Computershare Trust Company of Canada
will respond to you with its share certificate replacement requirements. If a
share certificate has been lost or destroyed, please ensure that you provide
your telephone number to Computershare Trust Company of Canada so that you may
be contacted.
STOCK EXCHANGE LISTINGS
The shares of FuelCell common stock currently trade on the Nasdaq National
Market. FuelCell has applied to list on the Nasdaq National Market the shares of
FuelCell common stock issuable pursuant to the Combination. The Global common
shares are currently listed on the Toronto Stock Exchange and will be delisted
following the effective date of the Combination. On September 18, 2003, the
Toronto Stock Exchange accepted notice of the proposed Combination and
conditionally approved the listing and posting for trading of the exchangeable
shares, subject to compliance with all of the requirements of the Toronto Stock
Exchange, including distribution of the exchangeable shares to a minimum number
of public shareholders.
ELIGIBILITY FOR INVESTMENT IN CANADA
Exchangeable Shares. In the opinion of Bennett Jones LLP, Canadian counsel
to Global, the exchangeable shares, if listed on a prescribed stock exchange in
Canada (which currently includes the Toronto Stock Exchange) will be qualified
investments under the Income Tax Act (Canada) for trusts governed by RRSPs,
RRIFs, DPSPs and RESPs. In addition, if ExchangeCo maintains a substantial
presence in Canada, the exchangeable shares will not be foreign property under
the Income Tax Act (Canada) for such plans or funds and for certain other
persons to whom Part XI of the Income Tax Act (Canada) applies.
FuelCell has indicated that it intends to take all actions necessary to
cause ExchangeCo to maintain the listing of the exchangeable shares on the
Toronto Stock Exchange. ExchangeCo will be considered to have a substantial
presence in Canada if it satisfies certain asset tests or if it maintains an
office in Canada and ExchangeCo or a corporation controlled by it, employs more
than five employees in Canada full time in the active conduct of a business,
other than an investment activity or a business carried on through a partnership
of which the corporation is not a majority interest partner. FuelCell is of the
view that following the Combination, ExchangeCo will satisfy this substantial
presence test and expects that ExchangeCo will continue to satisfy this test.
Voting Rights and Exchange Rights. The rights of the holders of
exchangeable shares to direct the voting of the one share of FuelCell special
voting stock by the Trustee, and the rights granted to the Trustee to exchange
exchangeable shares for FuelCell common stock in certain circumstances, will not
be a qualified investment for trusts governed by RRSPs, RRIFs, DPSPs and RESPs
and will be foreign property under Part XI of the Income Tax Act (Canada).
However, as indicated under "Chapter Four -- Information About Tax
Considerations -- Canadian Federal Income Tax Considerations to
Shareholders -- Shareholders Resident in Canada", each of FuelCell and Global is
of the view that the fair market value of any such rights is nominal. Based on
such view, there should be no material consequences under the Income Tax Act
(Canada) to RRSPs, RRIFs and DPSPs holding such non-qualified investments. RESPs
holding such non-qualified investments may, however, realize adverse
consequences, including potential revocation of the registration of the RESP,
regardless of the fair market value of such non-qualified investments.
FuelCell Common Stock. The FuelCell common stock will be a qualified
investment under the Income Tax Act (Canada) for trusts governed by RRSPs,
RRIFs, DPSPs and RESPs, provided such shares are listed on a prescribed stock
exchange (which currently includes the Nasdaq National Market). The FuelCell
common stock will, however, be foreign property for such plans or funds and for
certain other persons to whom Part XI of the Income Tax Act (Canada) applies.
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OTHER REGULATORY MATTERS
Except as described under "-- Summary -- Regulatory Approvals," neither
FuelCell nor Global is aware of any material license or regulatory permit that
it holds that might be adversely affected by the Combination or of any material
regulatory approval or other action by any federal, provincial, state or foreign
government or any administrative or regulatory agency that would be required to
be obtained prior to the effective date of the Combination, other than
compliance with applicable securities laws of various jurisdictions.
RESALES OF EXCHANGEABLE SHARES AND FUELCELL COMMON STOCK
UNITED STATES
The issuance of shares of FuelCell common stock and exchangeable shares to
holders of Global common shares will not be registered under the United States
Securities Act of 1933, as amended. The shares of FuelCell common stock and the
exchangeable shares will be issued in reliance upon the exemption available
pursuant to Section 3(a)(10) of the Securities Act of 1933. Section 3(a)(10)
exempts securities issued in exchange for one or more outstanding securities
from the general requirement of registration where the terms and conditions of
the issuance and exchange of such securities have been approved by any court of
competent jurisdiction, after a hearing upon the fairness of the terms and
conditions and exchange at which all persons to whom the securities will be
issued have the right to appear. The Court is authorized to conduct a hearing to
determine the fairness of the terms and conditions of the Plan of Arrangement,
including the proposed issuance of securities in exchange for other outstanding
securities. The Court entered the Interim Order on September 30, 2003 and,
subject to the approval of the Plan of Arrangement by Global common
shareholders, a hearing on the fairness of the arrangement will be held on
October 31, 2003 by the Court. See "-- The Plan of Arrangement -- Court Approval
of the Arrangement of Completion of the Combination" on page 69.
The shares of FuelCell common stock, the exchangeable shares and the shares
of FuelCell common stock issuable upon the exchange of exchangeable shares will
be freely transferable under U.S. federal securities laws, except by persons who
are affiliates of Global or FuelCell prior to the Combination or persons who are
affiliates of FuelCell after the Combination. Shares held by Global or FuelCell
affiliates may be resold only in transactions permitted by Rule 901 in
combination with Rule 903 or Rule 904 of Regulation S under the Securities Act
of 1933, the resale provisions of Rule 145(d)(1), (2) or (3) under the
Securities Act of 1933 or as otherwise permitted under the Securities Act of
1933. Rule 145(d)(1) generally provides that affiliates of Global may sell
securities of FuelCell received pursuant to the Combination pursuant to an
effective registration statement or in compliance with the volume, current
public information and manner of sale limitations of Rule 144. These limitations
generally permit sales made by an affiliate in any three-month period that do
not exceed the greater of 1% of the outstanding shares of FuelCell or the
average weekly trading volume over the four calendar weeks preceding the
placement of the sell order provided the sales are made in unsolicited, open
market "broker transactions". Rules 145(d)(2) and (3) generally provide that
these limitations lapse for non-affiliates of FuelCell after a period of one or
two years, depending upon whether information continues to be publicly available
with respect to FuelCell.
Under Rule 904, persons who are not affiliates of FuelCell (or who are
affiliates of FuelCell solely by virtue of holding a position as an officer or
director of FuelCell) may sell shares of FuelCell common stock and exchangeable
shares without registration under the Securities Act of 1933 if no "directed
selling efforts" (as defined in Rule 902 of Regulation S) are made by the seller
or any of its affiliates or any person acting on their behalf, no offer is made
to a person in the United States, and either: (i) at the time the buy order is
originated, the buyer is outside the United Sates, or the seller and any person
acting on behalf of the seller reasonably believes the buyer is outside the
United States; or (ii) the transaction is executed in, on or through the
facilities of the Toronto Stock Exchange and neither the seller nor any person
acting on behalf of the seller knows that the transaction has been pre-arranged
with a buyer in the United States. In the case of sales by a person who is an
officer or director of FuelCell and is an affiliate of FuelCell solely by virtue
of holding that position, no selling concession, fee or other remuneration may
be paid in connection with the offer or sale other than the usual and customary
broker's commission that would be received by a person executing the transaction
as agent. Additional conditions apply to resales by persons who are affiliates
of FuelCell other than by virtue of holding a position as an officer or director
of FuelCell.
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Persons who may be deemed to be affiliates of an issuer generally include
individuals or entities that control, are controlled by, or are under common
control with, the issuer and generally include executive officers and directors
of the issuer as well as principal shareholders of the issuer.
FuelCell has agreed that it will file and maintain effective the necessary
registration statements covering the issuance of FuelCell common stock from time
to time in exchange for the exchangeable shares. The shares of FuelCell common
stock issued from time to time in exchange for the exchangeable shares therefor
will be freely transferable under U.S. federal securities laws, subject to
restrictions on persons who were affiliates of Global or FuelCell prior to the
Combination or who are affiliates of FuelCell after the Combination.
FuelCell has agreed to file a registration statement with the U.S.
Securities and Exchange Commission on Form S-3 to register for resale the
FuelCell common stock issued to persons who are considered affiliates of Global
prior to completion of the Combination. That resale registration statement will
not, however, register shares issued to Global officers and directors, who will
be permitted to resell FuelCell common stock only if they comply with the
requirements of Rule 145. FuelCell has also agreed to file a registration
statement with the U.S. Securities and Exchange Commission on Form S-3 (or
another available registration form) to register the FuelCell common stock
issuable upon conversion of the Global Series 2 Preferred Shares or exchange of
the exchangeable shares. Finally, FuelCell will assume all outstanding options
issued under Global's Amended Incentive Stock Option Plan, and FuelCell has
agreed to file a registration statement with the U.S. Securities and Exchange
Commission on Form S-8 to register the shares of its common stock that may be
issued upon exercise of those options.
CANADA
FuelCell and ExchangeCo expect to receive rulings or orders from certain
provincial securities regulatory authorities in Canada providing exemptions from
the prospectus and registration requirements (and the rights and protections
otherwise afforded thereunder):
- to permit the issuance of the exchangeable shares and FuelCell common
stock to Global common shareholders upon completion of the Combination;
- to permit the issuance of FuelCell common stock to holders of
exchangeable shares upon the exchange thereof;
- to permit FuelCell to assume the obligation to exchange Global options
for FuelCell common stock;
- to permit the issuance of FuelCell common stock to holders of Global
options upon the exercise thereof;
- to permit the issuance of FuelCell common stock upon the conversion of
Global Series 2 Preferred Shares; and
- to permit resale of the exchangeable shares, FuelCell common stock
received in connection with the Combination or FuelCell common stock
issuable pursuant to the exchangeable shares, upon the exercise of
Global options or upon exchange of the conversion of Global Series 2
Preferred Shares, in those Canadian provinces without restriction by a
shareholder other than a "control person", provided that no unusual
effort is made to prepare the market for any such resale or to create a
demand for the securities which are the subject of any such resale and
no extraordinary commission or consideration is paid in respect thereof.
ONGOING CANADIAN REPORTING REQUIREMENTS
Upon completion of the Combination, FuelCell, ExchangeCo and CallCo will be
reporting issuers in certain of the Canadian provinces. An application has been
made on behalf of ExchangeCo for appropriate exemptions from statutory financial
and reporting requirements, including exempting insiders of ExchangeCo from the
requirements of filing insider reports with respect to trades of ExchangeCo
securities in those Canadian provinces on the condition that FuelCell continues
to file with the relevant securities regulatory authorities copies of certain of
its reports filed with the U.S. Securities and Exchange Commission and that
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holders of exchangeable shares receive certain materials that are sent to
holders of FuelCell common stock, including annual and interim financial
statements of FuelCell and FuelCell stockholder meeting materials. The Toronto
Stock Exchange has also advised us that upon receipt from Canadian securities
regulators of an order granting appropriate exemptions from statutory and
financial reporting requirements, ExchangeCo will be exempt from their financial
and reporting requirements.
After the consummation of the arrangement and subject to ExchangeCo
receiving the reporting exemptions discussed in the preceding paragraph, holders
of exchangeable shares will receive annual and interim financial statements of
FuelCell in lieu of financial statements of ExchangeCo.
An application will also be made on behalf of FuelCell and CallCo for a
ruling that FuelCell and CallCo be deemed to cease to be reporting issuers in
the applicable provinces.
INTERESTS OF CERTAIN PERSONS IN THE COMBINATION
You should be aware that members of the management and board of directors
of Global have interests in the Combination, including those referred to below,
that may present them with actual or potential conflicts of interest in
connection with the Combination. These interests include the following:
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Pursuant to the Combination Agreement, FuelCell has agreed to maintain all
rights to indemnification existing at the time of execution of the Combination
Agreement in favor of the directors and officers of Global and its subsidiaries
in accordance with the charter documents and bylaws of each entity and indemnity
agreements between Global and each director and senior officer of Global to the
fullest extent permitted under the Business Corporations Act (Alberta). The
Combination Agreement also provides that for a period of six years from the
effective date of the Combination, FuelCell will continue in effect director and
officer liability insurance for such persons equivalent to the current Global
policies in effect at the time of execution of the Combination Agreement;
provided that in no event will FuelCell be required to expend in any one year an
amount in excess of 150% of the annual premiums currently paid by FuelCell for
similar insurance carried by FuelCell for its own directors and officers.
RIGHTS ON CHANGE OF CONTROL
Global entered into change of control agreements with Paul Crilly and
Bernie LeSage in September 2001 and with Peter Garrett and Brian McGurk in
August 2002. These agreements have not been amended in any way in connection
with the Combination. The agreements entered into with Messrs. Garrett, Crilly
and LeSage provide for them to receive severance benefits if their employment is
terminated (either voluntarily by the employee or involuntarily) within six
months of a change in control of Global. Under these agreements, Messrs.
Garrett, Crilly and LeSage shall be paid, within 30 days of termination, two and
one-half years' pay at their base salary, plus an amount equal to 1.25 times the
sum of the last two annual bonuses paid to them in the two previously completed
fiscal years of Global. In addition, all stock options that have not been
exercised shall become immediately exercisable for a period of 90 days from the
date of termination. The change of control agreement entered into with Mr.
McGurk provides for him to receive the same severance benefits if his employment
is involuntarily terminated within six months of a change in control of Global.
Global entered into an employment agreement with one officer, Mr. Garrett,
on August 4, 2003. This agreement is for an indefinite term and provides for the
payment to Mr. Garrett of a salary of Cdn.$260,000 per annum together with an
incentive bonus of up to 60% of his salary. The agreement can be terminated by
Global for cause, and by Mr. Garrett upon the occurrence of specified events
upon the payment to Mr. Garrett of a termination payment equal to eighteen
months salary and bonus. The agreement can also be terminated by Mr. Garrett
within six months of the occurrence of a "change of control", as defined in the
change of control agreement between Global and Mr. Garrett. Upon the occurrence
of a change of control, the obligations of Global to Mr. Garrett will be
governed solely by the change of control agreement, and in no event shall Mr.
Garrett be entitled to payments under both his employment agreement and his
change of control agreement.
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CERTAIN DIRECTORS OF GLOBAL
Messrs. Kerry Brown and John Howard, currently both members of Global's
board of directors, are significant shareholders of Foundation Equity
Corporation, which holds approximately 8.9% of Global's common shares as of the
date of this Joint Proxy Statement.
APPOINTMENTS TO FUELCELL BOARD OF DIRECTORS
Under the terms of the Combination Agreement, prior to the effective time
of the Combination, FuelCell's board of directors will be expanded to twelve
voting members and will appoint one of the individuals nominated by Global to
serve on FuelCell's board of directors. In addition, FuelCell may in its sole
discretion choose to appoint one additional nominee of Global, in which case
FuelCell would increase the number of directors comprising its board
accordingly.
GLOBAL STOCK OPTIONS
Pursuant to the Combination Agreement, all Global stock options will
continue to vest in accordance with their terms and FuelCell will assume
Global's Amended Incentive Stock Option Plan and the obligations of Global under
each outstanding Global stock option. Each Global stock option outstanding
immediately prior to the effective time of the Combination will be assumed by
FuelCell and will represent an option to purchase shares of FuelCell common
stock in accordance with the exchange ratio.
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CHAPTER TWO -- CERTAIN FINANCIAL AND OTHER INFORMATION
ABOUT THE COMPANIES
BUSINESS OF FUELCELL
FuelCell is a world leader in the development and manufacture of carbonate
fuel cell power plants for distributed power generation. FuelCell has designed
and is developing standard fuel cell power plants that offer significant
advantages compared to existing power generation technology. These advantages
include higher fuel efficiency than existing distributed generation equipment,
significantly lower emissions, quieter operation, lower vibration, flexible
siting and permitting requirements, scalability and potentially lower operating,
maintenance and generation costs. FuelCell is currently conducting, and has
successfully concluded, field trials of fuel cell power plants ranging from 250
kW to 2 MW.
According to a 2001 study by Allied Business Intelligence ("ABI"), the
cumulative worldwide electrical generating capacity is expected to grow from
3,137 gigawatts in 2000 to 4,280 gigawatts in 2011, a 2.8 percent compound
annual growth rate. At an estimate of $750 per kW, that amounts to an
approximate $850 billion market potential for new central station and
distributed power generation. FuelCell estimates that distributed generation
currently captures between 10% and 20% of this market. FuelCell believes that
there is a market opportunity to increase the share for distributed generation
equipment that can respond to the need for higher reliability, lower emissions,
higher efficiency utilizing cogeneration, the ability to distribute power in
more flexible sizes at specific load centers, enhanced security by installing
incremental power plants in dispersed locations, and increased energy
independence by utilizing fuels other than oil. FuelCell's Direct FuelCell
products, which have higher efficiency, cleaner generation and are more easily
sited than existing distributed generation equipment, have the attributes to
penetrate this market and further enable its growth.
FuelCell's carbonate fuel cell, known as the Direct FuelCell, 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 to produce
hydrogen. FuelCell believes that this "one-step" 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 proton
exchange membrane ("PEM") and phosphoric acid, generally use complex, external
fuel processing equipment to convert the fuel into hydrogen. This external
equipment increases capital cost and reduces electrical efficiency.
FuelCell's Direct FuelCell has been demonstrated using a variety of
hydrocarbon fuels, including natural gas, methanol, diesel, biogas, coal gas,
coal mine methane and propane. FuelCell's commercial DFC power plant products
are expected to achieve an electrical efficiency of between 45% and 57%.
Depending on location, application and load size, FuelCell expects that a
co-generation configuration will reach an overall energy efficiency between 70%
and 80%.
FuelCell's designs use the basic single fuel cell stack incorporated in
FuelCell's sub-megawatt class product as the building block for its megawatt
class products. All three of FuelCell's products will offer the capability of
using the exhaust heat by-product for combined cycle applications utilizing an
unfired gas turbine, and for co-generation applications using the high quality
heat by-product for high-pressure steam, district heating and air conditioning.
FuelCell's products are designed to meet the power requirements of a wide
range of customers such as utilities, industrial facilities, data centers,
shopping centers, wastewater treatment plants, office buildings, hospitals,
universities and hotels. FuelCell's current products, the DFC300A, DFC1500 and
DFC3000, are rated at 250 kW, 1 MW and 2 MW in capacity. FuelCell expects its
commercial products to mature to three configurations: 300 kW, 1.5 MW and 3 MW
for distributed applications generally up to 10 MW. FuelCell is also developing
new products, based on FuelCell's existing power plant design, for applications
in the 10 to 50 MW range.
FuelCell expects initial commercial sales will be to "early adopters."
Energy users that, due to environmental or energy efficiency concerns, are
unable to or choose not to site traditional combustion-based generation, or
energy users that need more reliable electricity sources than provided by the
grid, current diesel back-up generators, and batteries, may be willing to pay
higher prices per kW to obtain the power that they
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need. FuelCell expects that these "early adopters" will include energy users
that are able to take advantage of government subsidies that provide funding for
fuel cell installations. FuelCell expects examples of "early adopters" will be
institutions, commercial and industrial customers in pollution non-attainment
zones and customers in grid-constrained regions. "Early adopters" are also
anticipated to include customers with opportunity fuels such as industrial or
municipal wastewater treatment gas, and co-generation and reliability
applications such as hospitals, schools, universities and hotels.
FuelCell's current focus is to further reduce the costs of its products and
develop sustainable markets for DFC power plants. FuelCell believes that the
initial early adopter customers will lead to additional orders that will enable
it to increase volume and implement FuelCell's cost reduction plan. As a result,
FuelCell believes it will eventually be able to provide a lower cost product and
therefore achieve greater market potential with commercial and industrial
customers.
MARKET OPPORTUNITIES FOR DISTRIBUTED GENERATION
A solution with which to meet the growing worldwide demand for electricity
is distributed generation in general and FuelCell's fuel cell technology in
particular. ABI has reported that global fuel cell energy generating capacity
could increase to between 16,000 and 25,000 MW by 2012, a substantial increase
from the 2002-installed fuel cell generating capacity of approximately 45 MW.
The key drivers for fuel cell distributed generation have been defined for
a number of years and recent general economic events as well as specific power
industry developments have strengthened the need for FuelCell's clean, reliable
and highly efficient DFC power plants.
- Operational Efficiency. FuelCell's DFC power plants have the potential
to reach efficiencies of 45 to 57 percent in single cycle applications
and 70 to 80 percent for combined heat and power applications. This is
greater than the fuel efficiency of the average U.S. fossil fuel plant of
30 to 35 percent.
- Reliability. The continued growth of the 24/7 global economy increases
the need for higher electrical reliability than the existing central
power plant generator and the constrained transmission and distribution
system can provide. DFC power plants can be located directly at the
customer's site, thereby increasing reliability.
- Grid Constraints. In many areas, the electrical transmission and
distribution system has not kept pace with economic development,
resulting in a shortage of available power and this trend is expected to
continue. By locating DFC power plants at customers' sites and
configuring them to operate independently of the grid, the transmission
and distribution system can be avoided completely.
- Emissions. Highly industrialized regions of the world, especially urban
areas, suffer from high pollution rates that restrict the ability to add
traditional combustion-based power generation. Fuel cells, which have
ultra-low emissions, can be sited in these areas and allow these regions
to grow their economies by increasing power generation while reducing
pollution.
- Security. FuelCell's DFC products can enhance security by installing
smaller, incremental power plants in dispersed locations, thereby
reducing dependence on large, vulnerable infrastructure.
- Transmission and Distribution Efficiency. Line losses related to
delivering electricity from large central power plants through the
transmission and distribution system to end-use customers has been
estimated to be greater than ten percent. FuelCell's DFC power plants,
which are located at the customer's site, avoid these line losses.
- Capacity Addition Efficiency. Fuel cell distributed generation extends
beyond the operations of each individual power plant to aggregate
capacity additions. FuelCell's DFC power plants range in size from 250 kW
to 2 MW, and multiple units combined together can provide power plant
systems up to 10 MW and larger. Conversely, traditional combustion-based
central and/or regional power plants are larger in size, typically 50 to
100 MW or larger, resulting, in many cases, in excess capacity until
demand grows over time. Consequently, FuelCell's DFC distributed power
generation can be added in
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increments that more closely match expected demand and in a shorter time
frame from order to start up.
- Energy Independence. According to a DOE/Energy Information
Administration (EIA) study, the U.S. currently imports over 50 percent of
the oil it consumes. FuelCell's DFC power plants are designed to
primarily operate on natural gas, coal (which can be converted to
synthetic gas), as well as municipal and industrial wastewater treatment
gas, all abundant U.S. resources. In addition, FuelCell's DFC power
plants utilize these domestic fuel sources significantly more
efficiently, thereby enhancing the use of existing U.S. resources.
Many governments at various levels, both in the U.S. and abroad, are
proactively pursuing programs and subsidies to stimulate the development of
alternative energy generation in general and fuel cells in particular. FuelCell
estimates there are over $100 million of global incentives available for
distributed generation, alternative energy and renewable technologies, including
FuelCell's DFC power plants, with subsidies ranging up to 50 percent of project
costs depending on the application and the site. FuelCell and its partners have
been able to take advantage of specific incentives in California, New Jersey,
Massachusetts, Germany and Japan, and FuelCell has projects that have received
preliminary approval for incentives in New York and Connecticut.
FUELCELL'S DEVELOPMENT PROGRAM
DEMONSTRATION PROJECTS
FuelCell has over 24,000 hours of experience with its demonstration
projects and "alpha" units conducted at FuelCell's facilities. FuelCell has used
these demonstration projects to develop its core fuel cell component technology,
including its full-height vertical stack design. FuelCell will continue to use
demonstration projects as it expands its development of fuel cell/turbine and
liquid-fueled products.
FIELD TRIAL PROGRAM
FuelCell has used these programs to test operational characteristics of
FuelCell's designs; gain "end-user" site experience to better understand
interconnection, installation and operating issues; to identify design
improvement opportunities; and to test redesigned components and solutions.
Based on experience gained from FuelCell's demonstrations projects and field
trial program, FuelCell has developed the next generation product, the DFC300A,
which incorporates design improvements throughout the power plant, including
more efficient thermal management and gas flow within the fuel cell module and
enhancements in the mechanical and electrical balance-of-plant systems that
result in higher performance, lower cost, and smaller footprint. FuelCell is
currently delivering DFC300A power plants to global customer sites.
Since the inception of FuelCell's field trial program in 1999, FuelCell has
accumulated over 125,000 hours of combined operational experience with
FuelCell's DFC300 products in a variety of conditions and settings and on a
range of fuels.
In 2003, FuelCell expects to initiate its field trial program for its 1 MW
DFC1500 and 2 MW DFC3000 power plants.
FIELD FOLLOW PROGRAM FOR FUELCELL'S DFC300A DESIGN
FuelCell's field follow program is expected to be used to monitor fleet
performance, including additional instrumentation, field service and data
gathering, to build operational history (availability, kWh output, etc.) of
FuelCell's DFC300A power plants in order to further enhance FuelCell's product
design to allow for cost reduction, performance improvement, increased
reliability and serviceability. There are currently 15 units operating in
Europe, Japan and the U.S., and these units have generated more than 12 million
kilowatt hours of electricity at customers' sites.
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STRATEGIC DISTRIBUTION ALLIANCES AND CUSTOMERS
FuelCell entered into significant strategic alliance, distribution, and
market development agreements to facilitate the sale of its DFC products.
FuelCell's distribution partners include MTU CFC Solutions GmbH, a subsidiary of
DaimlerChrysler AG, in Germany; Marubeni Corporation in Asia; and Caterpillar,
Inc.; PPL Energy Plus, a subsidiary of PPL Corporation; Chevron Energy Solutions
L.P. and Alliance Power in the U.S.
MTU is operating 250 kW fuel cell power plants at seven locations in Europe
(in Germany unless otherwise noted), including an energy park at RWE, Germany's
largest utility; a telecommunications center for Deutsche Telecom; a tire
manufacturing facility for Michelin; at Rhon-Klinikum Hospital; a hospital for
IPF in Germany; at Grundstat Clinic; and IZAR, a shipbuilder, in Spain.
Marubeni has ordered 4.25 MW of DFC power plants from FuelCell and is
currently operating a DFC300A at the Kirin Brewery near Tokyo, Japan. Shipments
are in progress for DFC300A power plants for Nippon Metal and the City of
Fukuoka, also in Japan, with customer commitments for the balance of their order
not yet identified.
PPL has ordered 1.75 MW of DFC power plants and currently has units
installed at two Starwood Resorts properties (Sheraton Edison and Sheraton
Parsippany in New Jersey); two units at Zoot Enterprises headquarters building
in Bozeman, Montana; and one unit at the U.S. Coast Guard station in Bourne,
Mass. FuelCell recently shipped a DFC300A to Ocean County College in New Jersey,
and expects to ship one more DFC300A power plant for a customer site that has
not been announced.
The Southern Company, Alabama Municipal Electric Authority and
Mercedes-Benz are currently operating a 250 kW DFC power plant at Mercedes'
manufacturing facility in Tuscaloosa, Alabama. These demonstration partners have
the option to negotiate exclusive arrangements for the sale, distribution and
service of FuelCell's DFC power plants in several southern U.S. states that must
be exercised upon completion of the project.
Caterpillar is expected to finalize a DFC300A power plant sale to American
Municipal Power-Ohio and install it at a substation in the City of Westerville,
Ohio. In addition, Caterpillar is offering FuelCell's DFC products to its
customers and is developing its own one-megawatt fuel cell power plant that will
incorporate FuelCell's DFC technology. Caterpillar expects this one megawatt
fuel cell power plant be completed and ready for market introduction in 2004.
Both Chevron Energy Solutions, LP and Alliance Power are market
distribution partners that offer FuelCell's DFC power plants as part of their
portfolio of energy solutions. To date, neither partner has an executed contract
for the sale of our DFC products.
The Los Angeles Department of Water and Power is a direct customer of
FuelCell Energy and has two operating DFC300A power plants -- one at its
headquarters building, and one at the Terminal Island Wastewater Treatment
facility. A third power plant will be installed at a site to be determined.
FuelCell expects to establish additional long-term relationships that will
facilitate the marketing, development and installation of FuelCell's fuel cell
power plants throughout the world.
SOLID STATE ENERGY CONVERSION ALLIANCE ("SECA")
In April 2003, FuelCell was selected by DOE as a new project participant,
subject to final negotiation and execution of a contract, for its SECA program.
The total project award amount for the solid oxide fuel cell development program
is approximately $139 million that will be cost-shared by the DOE. FuelCell was
selected by DOE based on FuelCell's team (Versa Power Systems, Inc. ("Versa"),
Materials and Systems Research, University of Utah, Gas Technology Institute,
Electric Power Research Institute, Dana Corporation and Pacific Northwest
National Laboratories) and its advanced state of development of high temperature
DFC carbonate technology, systems development, manufacturing experience and
progress it has made in its commercialization. FuelCell, as team leader, is
expected to coordinate development activities and contribute its expertise in
fuel cell manufacturing, assembly, stacking, sealing, internal reforming,
advanced cooling to
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enhance electrical efficiency and product packaging. FuelCell invested $2
million in Versa for a 15.8 percent ownership position that also includes board
representation.
The SECA project, when fully developed, is expected to complement
FuelCell's current DFC product offerings by including combined heat and power
products for applications up to 100 kW. Target applications include remote
sites, telecommunications, commercial and residential buildings, back-up, mobile
standby and auxiliary power units. For the worldwide residential/small business
market alone, ABI, in 2001, projected an installed fuel cell generating capacity
of between 3,400 MW (moderate forecast) and 5,300 MW (aggressive forecast) by
2011.
FUELCELL'S STRATEGY
DFC PRODUCTS
In 2003, FuelCell essentially completed the DFC300A near-term product
strategy that included standardizing its products (including certifications for
product safety, interconnection, installation and performance), expanding its
manufacturing facility to 50 MW of annual capacity and developing its
distribution partners and service capability. FuelCell qualified multiple
vendors for balance of plant and fuel cell components, completed its first
article testing mission critical sub-systems and identified and implemented
product cost reductions. FuelCell incorporated product enhancements for its
DFC300A power plants into its one- and two-MW fuel power plants. Specific
product cost-out teams were created to focus on value engineering and further
product cost reductions on all components.
FuelCell is currently monitoring the performance of its operating DFC
products at customer sites worldwide to gain additional performance data.
FuelCell expects to develop sustainable markets for its DFC products in target
markets such as universities, hospitals, wastewater treatment facilities and
hotels, among others, as well as in grid-support applications for utility
customers.
In the near-term, FuelCell expects that DFC product sales will be assisted
by government-sponsored incentive programs. When further product cost reductions
can be identified and implemented, which FuelCell expects will be a function of
its cost-out programs and increased order volume. FuelCell expects that it will
become less dependent on subsidy programs and will be able to price its fuel
cell power plants more competitively. If FuelCell achieves further product cost
reductions, it anticipates broadening the market opportunities for its fuel cell
power plants, thereby resulting in increased sales of its DFC products.
SECA PROGRAM
The ten-year, $139 million SECA program has three phases. The first phase
focuses on the technological development of SOFC stationary modules in the 3 to
10 kilowatt size range and scalable systems for applications up to 100 kW
operating on natural gas with target efficiencies of 45 percent. Phase one is
scheduled to be a three-year, $24 million program to be cost-shared by DOE and
the FuelCell team.
Phases two and three are expected to focus on enhancing system efficiencies
to 50 percent and 55 percent, respectively, as well as operating on additional
fuels such as propane and diesel. The development of hybrid power plants
combining fuel cells with turbines and stirling engines will also be evaluated
in the later phases. Advancement to these phases is dependent upon success
achieved in Phase One, DOE selection and approval and subsequent congressional
appropriations.
MORE INFORMATION
FuelCell commenced operations in 1969 and is a corporation governed by the
laws of the State of Delaware. FuelCell's principal executive offices are
located at 3 Great Pasture Road, Danbury, Connecticut 06813 Tel: (203) 825-6000
Fax: (203) 825-6100.
A more detailed description of the business of FuelCell is contained in
FuelCell's Annual Report on Form 10-K, which is included in Annex H to this
Joint Proxy Statement .
100
SELECTED FINANCIAL DATA
The following selected consolidated financial data presented below as of
the end of each of the years in the five-year period ended October 31, 2002 have
been derived from FuelCell's audited consolidated financial statements together
with the notes thereto (the "Consolidated Financial Statements"). The data set
forth below is qualified by reference to, and should be read in conjunction
with, the Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in
FuelCell's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which
are included in Annex H to this Joint Proxy Statement.
FOR THE NINE MONTH PERIODS
FOR THE YEARS ENDED OCTOBER 31, ENDED JULY 31,
------------------------------------------------------------------- ---------------------------
1998 1999 2000 2001 2002 2002 2003
----------- ----------- ----------- ----------- ----------- ------------ ------------
(U.S. $ IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
REVENUES:
Research and development
contracts............. $ 24,318 $ 18,553 $ 17,986 $ 20,882 $ 33,575 $ 23,407 $ 14,312
Product Sales and
Revenues.............. -- 1,412 2,729 5,297 7,656 4,121 12,157
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues........ 24,318 19,965 20,715 26,179 41,231 27,528 26,469
COST AND EXPENSES:
Cost of research and
development
contracts............. 16,106 12,690 12,508 19,033 45,664 29,452 28,365
Cost of product sales
and revenues.......... -- 1,025 4,968 16,214 32,129 17,333 38,232
Administrative and
selling expenses...... 6,999 6,684 8,055 9,100 10,451 8,175 9,590
Research and development
expenses.............. 2,258 1,813 1,917 3,108 6,806 4,634 6,050
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations.... (1,045) (2,247) (6,733) (21,276) (53,819) (32,066) (55,768)
License fee income,
net................... 678 1,527 266 270 270 203 203
Interest expense........ (269) (169) (141) (116) (160) (121) (102)
Interest and other
income, net........... 267 195 2,138 5,684 4,876 3,890 3,633
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before provisions
for income taxes...... (369) (694) (4,470) (15,438) (48,833) (28,094) (52,034)
Provision for income
taxes................. 13 291 -- -- 7 -- --
Minority interest....... -- -- 11 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss................ (382) (985) (4,459) (15,438) (48,840) (28,094) (52,034)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Basic and diluted loss
per share............. (0.02) (0.04) (0.16) (0.45) (1.25) (0.72) (1.32)
Basic and diluted shares
outstanding........... 24,486,108 24,906,856 28,297,594 34,359,320 39,135,256 39,104,394 39,328,881
AS AT OCTOBER 31, AS AT
------------------------------------------------------------------- JULY 31,
1998 1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- ----------- ------------
(U.S. $ IN THOUSANDS)
Working capital......... $ 10,234 $ 7,204 $ 71,576 $ 276,173 $ 218,334 $ 163,821
Total assets............ 26,843 19,831 91,028 334,020 289,803 236,127
Long-term debt.......... 1,944 1,625 -- 1,252 1,696 1,562
Total shareholders'
equity................ 15,870 14,815 83,251 319,716 271,702 219,971
101
BUSINESS OF CALLCO
CallCo is a company incorporated under the Business Corporations Act
(Alberta) on September 11, 2003 for the purpose of implementing the Combination.
To date, CallCo has not carried on and, following the effective date of the
Combination will not carry on, any business except in connection with its role
as a party to the Combination. CallCo is a wholly-owned subsidiary of FuelCell
and its registered office address is 4300 Bankers Hall West, 888-3rd Street,
S.W., Calgary, Alberta.
BUSINESS OF EXCHANGECO
ExchangeCo is a company incorporated under the Business Corporations Act
(Alberta) on September 11, 2003 for the purpose of implementing the Combination.
To date, ExchangeCo has not carried on and, following the effective date of the
Combination will not carry on any business except in connection with its role as
a party to the Combination. ExchangeCo is an indirect wholly-owned subsidiary of
FuelCell and its registered office address is 4300 Bankers Hall West, 888-3rd
Street, S.W., Calgary, Alberta.
The directors of ExchangeCo are Jerry Leitman, Joseph Mahler, Christopher
Nixon and Brian Pukier. Messrs. Leitman and Mahler are each executive officers
of FuelCell. Messrs. Nixon and Pukier are each partners of Stikeman Elliott LLP,
counsel to ExchangeCo. The officers of ExchangeCo are Jerry Leitman, President
and Joseph Mahler, Secretary/Treasurer.
102
BUSINESS OF GLOBAL
Global was originally incorporated as Global Thermoelectric Power Systems
Ltd. on March 10, 1975 and was continued under the Business Corporations Act
(Alberta) on December 30, 1983. On April 1, 1985, Global amalgamated with its
wholly-owned subsidiary, Rigtronics Systems Ltd. By Articles of Amendment dated
April 8, 1991, Global changed its name to Global Thermoelectric Inc.
On September 17, 2001, Global incorporated a Delaware corporation, Global
Thermoelectric Corporation, as a wholly-owned subsidiary. Global Thermoelectric
Corporation markets and sells thermoelectric generators in the United States and
has a sales office located in Houston, Texas. The head office and registered
office of Global is located at 4908 -- 52nd Street S.E. Calgary, Alberta T2B
3R2.
Global is focused on the development and commercialization of solid oxide
fuel cell products. It is also engaged in the development, manufacture and sale
of thermoelectric power generators for remote power applications.
Fuel cells combine hydrogen and oxygen electrochemically to produce
electricity, heat and water. Hydrogen is obtained from hydrocarbon fuels such as
natural gas, propane and gasoline. In the case of Global's fuel cells, these
hydrocarbon fuels can be used with minimal external "reforming." Utilizing
electrochemical reactions to produce electricity results in a more efficient use
of fuel while producing less environmentally harmful emissions such as nitrous
oxides. In addition, the scalability of fuel cell designs for distributed or
decentralized power production provides an economic alternative to large,
capital intensive power generation facilities. The ability to capture and
utilize the heat produced by the fuel cell also contributes to higher fuel
efficiencies. These advantages are important with the advent of deregulation
within the power industries of North America. Greater fuel efficiencies and fuel
cells' compatibility with a hydrogen fuel infrastructure also address concerns
related to energy security in the United States. Fuel cells can also be utilized
in transportation applications as replacements of, and supplements to, the
internal combustion engine.
Thermoelectric generators produce electricity directly from heat and are
utilized for remote power applications in the pipeline, oil and gas and
telecommunication industries. Global's common shares are listed for trading on
the Toronto Stock Exchange under the symbol "GLE."
A description of Global's business is contained in its Annual Information
Form for the year ended December 31, 2002, which is included in Annex I to this
Joint Proxy Statement. The Annual Information Form also includes Global's
audited financial statements for the period ended December 31, 2002, as well as
Global's Management's Discussion and Analysis thereon. Annex I also includes
Global's unaudited financial statements for the periods ended March 31 and June
30, 2003, as well as Global's Management's Discussion and Analysis thereon.
RECENT DEVELOPMENTS
Termination of Quantum Combination Agreement. Prior to the execution of
the Combination Agreement, on August 4, 2003 Global terminated the Quantum
Combination Agreement in accordance with its terms. Pursuant to the terms of the
Quantum Combination Agreement, Global paid Quantum a $2 million termination fee.
The termination of the Quantum Combination Agreement and payment of the $2
million termination fee were required for Global to pursue the Combination with
FuelCell and enter into the Combination Agreement.
SELECTED CONSOLIDATED FINANCIAL DATA OF GLOBAL
Set forth below is a summary of consolidated financial information with
respect to Global and its wholly-owned subsidiary, Global Thermoelectric
Corporation, at the dates and for the periods indicated prepared in accordance
with Canadian GAAP. The statement of operations data for the periods ended
December 31, 2000, 2001 and 2002 and the balance sheet data as at December 31,
2001 and 2002 have been derived from Global's audited financial statements
included in Global's Annual Information Form for the year ended December 31,
2002 included in Annex I in this Joint Proxy Statement. The statement of
operations data for the year ended March 31, 2000 and the balance sheet data as
at March 31, 2000 and December 31, 2000 have been derived
103
from audited financial statements not included in this Joint Proxy Statement.
The data for the year ended and as at March 31, 1999 have been derived from
unaudited financial statements not included in this Joint Proxy Statement. The
data for the six months ended June 30, 2002 and 2003 and as at June 30, 2003
have been derived from unaudited financial statements included in Global's
Interim Report for the quarter ended June 30, 2003 included in Annex I in this
Joint Proxy Statement. Historical financial information may not be indicative of
future performance of Global or the combined entity. The following selected
financial data should be read in conjunction with the financial statements and
related notes and "Global's Management's Discussion and Analysis" included in
Global's Annual Information Form for the year ended December 31, 2002 included
in Annex I of this Joint Proxy Statement and Interim Report for the period ended
June 30, 2003.
FOR THE NINE FOR THE FOR THE FOR THE SIX MONTH
FOR THE YEARS ENDED MONTHS ENDED YEARS ENDED YEARS ENDED PERIODS ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
------------------- ------------ ------------ ------------ -------------------
1999 2000 2000 2001 2002 2002 2003
-------- -------- ------------ ------------ ------------ -------- --------
(THOUSANDS OF CDN.$, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenue from continuing
operations.................... $10,300 $18,534 $14,649 $ 15,357 $ 21,770 $ 9,906 $ 10,845
Revenue -- fuel cell contract
research...................... -- -- -- -- 541 -- 203
Gross margin -- generators...... 3,433 5,313 3,798 4,883 8,651 4,116 4,143
Investment income............... -- 444 3,605 5,911 2,899 1,418 1,338
Research, engineering and
development -- net............ 2,174 1,980 4,980 15,087 23,321 12,499 8,998
Net (loss) earnings from
continuing operations......... (1,052) 140 (1,967) (12,968) (24,543) (12,923) (14,081)
Per common share -- basic and
diluted..................... (0.08) 0.00 (0.09) (0.49) (0.89) (0.47) (0.51)
Discontinued operations, net of
income tax(1).................
(Loss) earnings from
discontinued operations..... (274) 112 (372) 433 137 -- --
Gain on sale of discontinued
operations.................. -- -- -- 744 -- -- --
Total discontinued operations,
net of income tax............. (274) 112 (372) 1,177 137 -- --
Per common share -- basic and
diluted..................... (0.02) 0.01 (0.01) 0.04 0.01 -- --
Net (loss) earnings............. (1,326) 252 (2,339) (11,791) (24,406) (12,923) (14,081)
Per common share -- basic and
diluted..................... (0.10) 0.01 (0.10) (0.45) (0.88) (0.47) (0.51)
Preferred share dividends....... 197 48 482 500 500 500 500
(1) In August 2001, Global sold the assets of its military heater business
segment to a U.S. purchaser. For reporting purposes, the results of
operations and the financial position of the business have been presented as
discontinued operations.
AS AT MARCH 31, AS AT DECEMBER 31, AS AT
----------------- ------------------------------ JUNE 30,
1999 2000 2000 2001 2002 2003
------- ------- -------- -------- -------- --------
(THOUSANDS OF CDN.$)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term
investments.................................. $ -- $24,290 $135,300 $121,064 $ 95,306 $ 82,803
Total assets................................... 10,463 41,439 160,675 146,849 122,403 108,754
Long-term obligations.......................... 1,014 737 630 407 486 751
Shareholders' equity........................... 4,482 35,085 151,467 139,272 114,465 99,918
104
THE COMBINED COMPANY
Upon the completion of the Combination, the combined company will retain
the name "FuelCell Energy, Inc." and will be headquartered in Danbury,
Connecticut. The board of directors of FuelCell will be expanded to 12 voting
members, including a designee from Global. In addition, FuelCell may in its sole
discretion choose to appoint one additional nominee of Global, in which case,
FuelCell would increase the number of directors comprising its board
accordingly. On the effective date of the Combination, FuelCell's board of
directors will appoint an individual nominated by Global to serve on FuelCell's
expanded board of directors. Jerry D. Leitman, FuelCell's Chairman, President
and Chief Executive Officer, and Joseph G. Mahler, FuelCell's Senior
Vice-President and Chief Financial Officer, will lead the combined company in
these respective roles. Global will be operated as a consolidated subsidiary of
FuelCell.
FuelCell anticipates that the companies' respective alliance partners and
customers can be used to assist in the commercialization and funding of each
company's products, particularly FuelCell's existing relationships with
customers and U.S.-based governmental agencies. FuelCell anticipates that the
combined company will result in a more cost efficient, well-capitalized and
diversified company to address fuel cell power generation markets. In addition,
the combined company is expected to have complementary revenue streams across
established markets with an expanded technology profile and product portfolio as
an energy systems solution provider, leading to broader customer awareness,
industry leadership, branding and distribution opportunities.
FuelCell believes that the Combination will allow FuelCell and Global to
combine and integrate their research and development resources, complementary
distribution channels, products and technologies, strategic alliances and
customer bases, which is expected to lead to expanded markets, greater technical
resources, diversification and cost efficiencies. Following completion of the
Combination, the combined company will focus Global's solid oxide fuel cell
development efforts on fuel cell membranes and stacks, its core competencies,
consistent with Global's cost reduction initiatives over the past year. In
addition, the combined company expects to focus on fuel cell systems development
and integration to the extent that it is able to leverage FuelCell's system
engineering capabilities and obtain external funding for its system development
programs. FuelCell is continuing to evaluate Global's generator business to
determine its strategic fit within the combined company and has not made a
determination whether to retain or sell that business. Global may determine to
reduce its labor force, either before or after the effective date of the
Combination. Other than the Combination, FuelCell has no present plans or
proposals which relate to or would result in an extraordinary corporate
transaction such as a merger, reorganization, liquidation, a sale or transfer of
a material amount of assets or any other material changes to its corporate
structure or business.
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
At July 31, 2003, on a pro forma condensed combined basis, the combined
company had:
- total assets of $330 million;
- total cash and cash equivalents, and investments of $228 million;
- total stockholders' equity of $293 million;
- long-term debt and capital leases of $2 million;
- preferred shares of subsidiary of $8.4 million, representing the Global
Series 2 Preferred Shares remaining outstanding after the Combination;
and
- approximately 48,846,909 outstanding shares of common stock (assuming an
exchange ratio of 0.325 and excluding FuelCell common stock issuable upon
the exercise of options and warrants and conversion of Global Series 2
Preferred Shares).
105
For the nine months ended July 31, 2003, on a pro forma combined basis, the
combined company had:
- revenue of $38 million;
- net loss of $68 million; and
- basic and diluted loss per share of $(1.39).
For a discussion of the assumptions underlying this pro forma condensed
combined financial information, please see "-- Unaudited Pro Forma Condensed
Combined Financial Statements" on page 110.
MANAGEMENT OF THE COMBINED COMPANY AFTER THE COMBINATION
For information concerning FuelCell's current board members, see Annex H.
As of September 24, 2003, the current directors and officers of FuelCell
beneficially owned approximately 5,343,123 shares of FuelCell common stock,
constituting approximately 12.78% of the outstanding FuelCell common stock as of
such date and no Global common shares. Based upon their beneficial ownership of
Global common shares as of September 24, 2003, the directors and officers of
Global will own or control, directly or indirectly, after the completion of the
Combination, approximately 91,249 shares of FuelCell common stock (assuming an
exchange ratio of 0.279). Beneficial ownership of Global directors and officers
does not include shares issuable upon the exercise of vested options.
FISCAL YEAR
The fiscal year of the combined company will be November 1 through October
31 of each year.
CAPITALIZATION
The following table sets forth FuelCell's capitalization as of July 31,
2003:
- on an actual basis; and
- on a pro forma basis as adjusted to reflect the issuance by FuelCell of
9,490,276 shares of its common stock to Global common shareholders in
connection with the Combination (based on 29,200,850 Global common shares
outstanding as of August 4, 2003), and the assumption by FuelCell of the
obligations to issue its common stock upon conversion of the Global
Series 2 Preferred Shares; and on a pro forma basis as adjusted to
reflect the purchase price allocation for the Combination.
JULY 31, 2003
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(THOUSANDS OF U.S.$)
Cash, cash equivalents and investments (U.S. Treasuries).... $ 168,577 $ 228,365
========= =========
Long-term debt and capital leases........................... 1,879 2,063
Preferred shares of subsidiary, 0 shares authorized and
issued (actual), 1,000,000 shares authorized, issued and
outstanding (pro forma as adjusted)....................... -- 8,400
Stockholders' equity:
Preferred stock, par value $0.01 per share, 250,000,
shares authorized; 0 shares issued and outstanding..... -- --
Common stock, $0.0001 par value, 150,000,000 shares
authorized (actual); 39,356,633 shares issued and
outstanding (actual); 48,846,909 shares issued and
outstanding (pro forma as adjusted).................... 4 5
Additional paid-in capital.................................. 340,065 413,091
Accumulated deficit......................................... (120,098) (120,098)
--------- ---------
Total capitalization................................... $ 221,850 $ 303,461
========= =========
106
The pro forma as adjusted capitalization information is based on the
financial statements of FuelCell as of July 31, 2003 and of Global as of June
30, 2003 and assumes an exchange ratio of 0.325. The preceding table does not
include:
- 2,900,000 shares of FuelCell common stock issuable upon exercise of
warrants outstanding on July 31, 2003 at a weighted average exercise
price of $30.06 per share;
- 5,361,766 shares of FuelCell common stock subject to outstanding options
as of July 31, 2003 at a weighted average exercise price of $10.01 per
share;
- 465,844 additional shares of FuelCell common stock reserved for future
issuance under FuelCell's Section 423 Stock Purchase Plan;
- 1,692,872 additional shares of FuelCell common stock available for future
grant under FuelCell's 1998 Equity Incentive Plan;
- 424,783 shares of FuelCell common stock issuable upon exercise of Global
stock options to be assumed by FuelCell in connection with the
Combination at a weighted average exercise price of approximately $6.18
per share (based on options to purchase 1,307,025 Global common shares
outstanding as of August 4, 2003, and assuming a currency exchange rate
of Cdn.$1.4048 to U.S.$1.00); and
- shares of FuelCell common stock issuable upon conversion of the Global
Series 2 Preferred Shares. Please see "Chapter One -- The
Combination -- Description of the Combination -- Mechanics for
Implementing of the Combination and Description of Exchangeable
Shares -- Global Series 2 Preferred Shares" for a description of the
conversion rights of the Global Series 2 Preferred Shares.
COMPARATIVE MARKET PRICE DATA
FuelCell's common stock has been traded on the Nasdaq National Market under
the symbol "FCEL" since June 7, 2000. Global common shares trade on the Toronto
Stock Exchange under the symbol "GLE." The table below sets forth, for the
periods indicated, the high and low daily sales prices for FuelCell common stock
and Global common shares as reported in published financial sources.
FUELCELL
-----------------
HIGH LOW
------- -------
(U.S.$) (U.S.$)
FISCAL YEAR ENDED OCTOBER 31, 2001
Quarter ended January 31.................................... $41.75 $22.63
Quarter ended April 30...................................... 36.25 19.25
Quarter ended July 31....................................... 46.72 15.50
Quarter ended October 31.................................... 20.45 10.48
FISCAL YEAR ENDED OCTOBER 31, 2002
Quarter ended January 31.................................... 22.80 13.23
Quarter ended April 30...................................... 18.65 15.02
Quarter ended July 31....................................... 17.24 6.10
Quarter ended October 31.................................... 8.24 4.54
FISCAL YEAR ENDED OCTOBER 31, 2003
Quarter ended January 31.................................... 9.41 5.25
Quarter ended April 30...................................... 6.45 5.00
Quarter ended July 31....................................... 9.10 7.91
August 1 through September 30............................... 14.34 6.76
107
GLOBAL
-----------------
HIGH LOW
------- -------
(CDN.$) (CDN.$)
FISCAL YEAR ENDED DECEMBER 31, 2001
Quarter ended March 31...................................... $24.80 $13.05
Quarter ended June 30....................................... 20.89 12.46
Quarter ended September 30.................................. 17.50 5.01
Quarter ended December 31................................... 10.40 5.50
FISCAL YEAR ENDED DECEMBER 31, 2002
Quarter ended March 31...................................... 7.94 6.05
Quarter ended June 30....................................... 7.39 3.50
Quarter ended September 30.................................. 3.80 1.45
Quarter ended December 31................................... 2.77 1.48
FISCAL YEAR ENDED DECEMBER 31, 2003
Quarter ended March 31...................................... 2.85 2.10
Quarter ended June 30....................................... 2.83 2.20
July 1 through July 31...................................... 3.44 2.65
August 1 through August 31.................................. 3.99 2.99
September 1 through September 30............................ 4.80 3.61
On the last trading day before the public announcement by Global and
FuelCell of the Combination, which last trading day was August 1, 2003 for
Global and August 4, 2003 for FuelCell, Global common shares closed at Cdn.$3.45
(approximately U.S.$2.46) on the Toronto Stock Exchange and shares of FuelCell
common stock closed at $7.47 on the Nasdaq National Market. The 20-day
volume-weighted average trading price ending on August 4, 2003 for shares of
FuelCell common stock was approximately $8.3639. On September 30, 2003, the
closing price of the Global common shares was Cdn.$4.25 on the Toronto Stock
Exchange and the closing price of the shares of FuelCell common stock was $11.70
on the Nasdaq National Market. The table above shows only historical
comparisons. Because the market prices of FuelCell common stock and Global
common shares will likely fluctuate prior to the Combination, these comparisons
may not provide meaningful information, and the market value of the FuelCell
common stock that FuelCell will issue to holders of Global common shares
pursuant to the Combination may increase or decrease prior to the effective date
of the Combination. You are encouraged to obtain current market quotations for
FuelCell common stock and Global common shares and to review carefully the other
information contained in this Joint Proxy Statement.
On September 24, 2003, there were 39,375,633 outstanding shares of FuelCell
common stock and there were approximately 705 holders of record.
On September 24, 2003, 29,201,450 Global common shares were outstanding and
there were approximately 154 holders of record.
FuelCell has never declared or paid any cash dividends on its common stock
and does not anticipate paying any cash dividends in the foreseeable future.
Global has never declared or paid any cash dividends on its common shares.
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES
The financial information regarding Global, including the Global audited
consolidated financial statements contained in Global's Annual Information Form
for the year ended December 31, 2002 included in Annex I, Global's Interim
Report for the quarter ended June 30, 2003 included in Annex I, and the Global
unaudited financial statements and the summaries thereof contained in this Joint
Proxy Statement are reported, unless otherwise noted, in Canadian dollars and
have been prepared in accordance with Canadian
108
GAAP. Note 18 to the December 31, 2002 audited consolidated financial statements
(in Global's Annual Information Form for the year ended December 31, 2002
included in Annex I) provides a reconciliation of the measurement differences
between Global's financial statements and U.S. GAAP. The financial information
regarding FuelCell, including the FuelCell audited financial statements, the
FuelCell unaudited financial statements and the summaries thereof contained in
this Joint Proxy Statement are reported in U.S. dollars and have been prepared
in accordance with U.S. GAAP. The FuelCell unaudited pro forma combined
condensed financial statements included elsewhere in this Joint Proxy Statement
are reported in U.S. dollars and have been prepared in accordance with U.S.
GAAP.
For each period indicated, the following table provides the high and low
exchange rates for one Canadian dollar expressed in U.S. dollars, the average of
these exchange rates on the last day of each month during the period, and the
exchange rate at the end of the period, based upon the noon buying rate in New
York City for cable transfers in Canadian dollars, as certified for customer
purposes by the Federal Reserve Bank of New York:
TWELVE-MONTH PERIOD ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
High...................................... 0.6691 0.6697 0.6969 0.6925 0.7105
Low....................................... 0.6200 0.6254 0.6410 0.6535 0.6341
Average................................... 0.6368 0.6442 0.6732 0.6738 0.6740
Period End................................ 0.6329 0.6260 0.6664 0.6925 0.6504
On September 24, 2003, the exchange rate for one Canadian dollar expressed
in U.S. dollars based on the noon buying rate of the Federal Reserve Bank of New
York was $0.7384.
For each period indicated, the following table provides the high and low
exchange rates for one U.S. dollar expressed in Canadian dollars, the average of
these exchange rates during such period, and the exchange rate at the end of
such period, based upon the noon buying rate of the Bank of Canada:
TWELVE-MONTH PERIOD ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
High...................................... 1.6132 1.6021 1.5593 1.5298 1.5765
Low....................................... 1.5110 1.4936 1.4341 1.4433 1.4075
Average................................... 1.5703 1.5484 1.4852 1.4858 1.4884
Period End................................ 1.5796 1.5926 1.5002 1.4433 1.5305
On September 24, 2003, the exchange rate for one U.S. dollar expressed in
Canadian dollars based on the noon spot rate was Cdn.$1.3543.
109
COMPILATION REPORT ON PRO FORMA FINANCIAL STATEMENTS
The Board of Directors
FuelCell Energy, Inc.:
We have read the accompanying unaudited pro forma condensed combined
balance sheet of FuelCell Energy, Inc. as of July 31, 2003 and the unaudited pro
forma condensed combined statements of operations for the year ended October 31,
2002 and for the nine months ended July 31, 2003 and performed the following
procedures:
1. Compared the figures in the columns captioned "FuelCell" to the unaudited
financial statements of the Company as at July 31, 2003 and for the nine
months then ended, and the audited financial statements of the Company for
the year ended October 31, 2002, respectively, and found them to be in
agreement.
2. Compared the figures in the columns captioned "Global" to the unaudited
financial statements of Global as at June 30, 2003 and for the nine months
then ended and the unaudited financial statements of Global for the year
ended December 31, 2002, respectively, and found them to be in agreement.
3. Made enquiries of certain officials of the Company who have responsibility
for financial and accounting matters about:
a. the basis for determination of the pro forma adjustments; and
b. whether the pro forma financial statements comply as to form in all
material respects with accounting principles generally accepted in the
United States of America.
The officials:
a. described to us the basis for determination of the pro forma
adjustments, and
b. stated that the pro forma statements comply as to form in all material
respects with accounting principles generally accepted in the United
States of America.
4. Read the notes to the pro forma statements, and found them to be consistent
with the basis described to us for determination of the pro forma
adjustments.
5. Recalculated the application of the pro forma adjustments to the aggregate
of the amounts in the columns captioned "FuelCell" and "Global" as at July
31, 2003 and for the nine months then ended, and for the year ended October
31, 2002, and found the amounts in the column captioned "Pro Forma" to be
arithmetically correct.
A pro forma financial statement is based on management assumptions and
adjustments, which are inherently subjective. The foregoing procedures are
substantially less than either an audit or a review, the objective of which is
the expression of assurance with respect to management's assumptions, the pro
forma adjustments, and the application of the adjustments to the historical
financial information. Accordingly, we express no such assurance. The foregoing
procedures would not necessarily reveal matters of significance to the pro forma
financial statements, and we therefore make no representation about the
sufficiency of the procedures for the purposes of a reader of such statements.
Hartford, CT KPMG LLP
September 30, 2003 Certified Public Accountants
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF FUELCELL ENERGY, INC.
The following unaudited pro forma condensed combined balance sheet as of
July 31, 2003 and the unaudited pro forma condensed combined statement of
operations for the year ended October 31, 2002 and nine months ended July 31,
2003 are based on the historical financial statements of FuelCell and Global
after giving effect to the Combination as a purchase of Global by FuelCell using
the purchase method of accounting
110
and the assumptions and adjustments described in the accompanying notes to the
unaudited pro forma condensed combined financial statements.
The pro forma information is based on preliminary estimates and assumptions
set forth in the notes to such information. The pro forma information is
preliminary and is being furnished solely for informational purposes and is not
necessarily indicative of the combined results of operations or financial
position that might have been achieved for the period or date indicated, nor is
it necessarily indicative of future results that may occur. It does not reflect
cost savings expected to be realized from the elimination of certain expenses
and from the synergies to be created or the costs to implement such cost savings
or synergies. No assurance can be given that operating cost savings and
synergies will be realized.
Pro forma adjustments are necessary to reflect the estimated purchase
price, the new capital structure and to adjust amounts related to Global's net
tangible and intangible assets to a preliminary estimate of their fair values.
Pro forma adjustments are also necessary to reflect the amortization expense
related to amortizable intangible assets, changes in depreciation and
amortization expense resulting from fair value adjustments to net tangible
assets, certain transaction costs, stock compensation, dividends on cumulative
redeemable convertible preferred shares of Global and the income tax effect
related to the pro forma adjustments.
The pro forma adjustments and allocation of purchase price are preliminary
and are based in part on estimates of the fair value of the assets acquired and
liabilities assumed. Management in determining purchase price allocations has
considered a number of factors, including preliminary valuations.
The final purchase price allocation will be completed after asset and
liability valuations are finalized by management. A final determination of these
fair values, which cannot be made prior to the completion of the Combination,
will include management's consideration of all pertinent factors. This final
valuation will be based on the actual net tangible and intangible assets of
Global that exist as of the date of the completion of the Combination. Any final
adjustments may change the allocations of purchase price which could affect the
fair value assigned to the assets and liabilities and could result in a change
to the unaudited pro forma condensed combined financial statements. Amounts
preliminarily allocated to intangible assets with indefinite lives may
significantly decrease or be eliminated and amounts allocated to intangible
assets with definite lives may increase significantly, which could result in a
material increase in amortization of intangible assets. In addition, the impact
of ongoing integration activities, the timing of the completion of the
Combination and other changes in Global's net tangible and intangible assets
prior to completion of the Combination could cause material differences in the
information presented.
The unaudited pro forma condensed combined balance sheet as of July 31,
2003 is presented as if the Combination had been completed on July 31, 2003 and,
due to different fiscal period ends, combines the historical balance sheet of
FuelCell at July 31, 2003 and the historical balance sheet of Global at June 30,
2003.
The unaudited pro forma condensed combined statement of operations of
FuelCell and Global for the year ended October 31, 2002 is presented as if the
Combination had been completed on November 1, 2001 and, due to different fiscal
period ends, combines the historical results of FuelCell for the year ended
October 31, 2002 and the historical results of Global for the twelve months
ended December 31, 2002. The unaudited pro forma condensed combined statement of
operations of FuelCell and Global for the nine months ended July 31, 2003 is
presented as if the Combination had been completed on November 1, 2002 and, due
to different fiscal period ends, combines the historical results of FuelCell for
the nine months ended July 31, 2003 and the historical results of Global for the
nine months ended June 30, 2003.
The historical results of Global for the nine month period ended June 30,
2003 were calculated as the historical results of Global for its fiscal year
ended December 31, 2002 less the results for the nine month period ended
September 30, 2002, plus the results for the six month period ended June 30,
2003.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with FuelCell's historical consolidated financial statements
and accompanying notes for its fiscal year ended October 31, 2002 and the nine
month period ended July 31, 2003 included elsewhere in this Joint Proxy
Statement and Global's historical financial statements in Annex I for its fiscal
year ended December 31, 2002
111
and the six months ended June 30, 2003. The unaudited pro forma condensed
combined financial statements are not intended to represent or be indicative of
the consolidated results of operations or financial condition of the combined
company that would have been reported had the Combination been completed as of
the dates presented, and should not be taken as representative of the future
consolidated results of operations or financial condition of the combined
company.
Global's historical consolidated financial statements are prepared in
accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP.
Note 18 to Global's December 31, 2002 audited consolidated financial statements
(in Global's Annual Information Form for the year ended December 31, 2002
included in Annex I) provides a reconciliation of the measurement differences
between Global's financial statements and U.S. GAAP. For the purposes of
presenting the selected unaudited pro forma combined financial information,
financial information relating to Global has been adjusted to conform to U.S.
GAAP.
There were no intercompany balances or transactions between FuelCell and
Global. No material pro forma adjustments were required to conform Global's
accounting policies to FuelCell's accounting policies. Reclassifications have
been made to conform Global's historical amounts to FuelCell's presentation.
FuelCell has not yet identified any pre-Combination contingencies where the
related asset, liability or impairment is probable and the amount of the asset,
liability or impairment can be reasonably estimated. Upon completion of the
Combination and prior to the end of the purchase price allocation period, if
information becomes available which would indicate it is probable that such
events have occurred and the amounts can be reasonably estimated, such items
will be included in the final purchase price allocation.
112
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET OF
FUELCELL ENERGY, INC.
AND GLOBAL THERMOELECTRIC INC.
AS OF JULY 31, 2003
U.S. GAAP -- (U.S.$ IN THOUSANDS)
FUELCELL GLOBAL
JULY 31, JUNE 30, PRO FORMA
2003 2003(A) ADJUSTMENTS PRO FORMA
--------- --------- ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents................... $ 65,670 $ 57,792 $ (1,700)(b) $ 121,762
Short-term investments...................... 86,671 3,657 90,328
Accounts receivable, net.................... 7,264 2,484 9,748
Inventories................................. 15,699 3,390 83(c) 19,172
Other current assets........................ 3,111 371 3,482
--------- -------- -------- ---------
Total current assets..................... 178,415 67,694 (1,617) 244,492
--------- -------- -------- ---------
Property, plant and equipment, net............ 39,712 12,975 214(d) 52,901
Long-term investments......................... 16,236 39 16,275
Intangible assets............................. -- -- 2,600(e) 2,600
Goodwill...................................... -- -- 12,215(b) 12,215
Other assets, net............................. 1,764 -- 1,764
--------- -------- -------- ---------
Total assets............................. $ 236,127 $ 80,708 $ 13,412 $ 330,247
========= ======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........... $ 317 $ 36 $ $ 353
Accounts payable............................ 3,951 629 4,580
Accrued liabilities......................... 5,677 5,334 6,137(f) 17,148
Deferred license fee income................. 113 -- 113
Customer advances........................... 4,536 -- 4,536
--------- -------- -------- ---------
Total current liabilities................ 14,594 5,999 6,137 26,730
--------- -------- -------- ---------
Long-term debt.............................. 1,562 148 1,710
Site restoration............................ -- 409 409
--------- -------- -------- ---------
Total liabilities........................ 16,156 6,556 6,137 28,849
--------- -------- -------- ---------
Commitments and contingencies
Preferred shares of subsidiary................ -- -- 8,400(b) 8,400
Shareholders' equity:
Preferred stock............................... -- 18,007 (18,007)(g) --
Common stock.................................. 4 99,983 (99,982)(g) 5
Additional paid-in capital.................... 340,065 538 72,488(g) 413,091
Accumulated deficit........................... (120,098) (39,747) 39,747(g) (120,098)
Cumulative translation adjustment............. -- (4,629) 4,629(g) --
--------- -------- -------- ---------
219,971 74,152 (1,125) 292,998
--------- -------- -------- ---------
$ 236,127 $ 80,708 $ 13,412 $ 330,247
========= ======== ======== =========
See accompanying notes.
113
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(a) Certain reclassifications have been made to the historical presentation
of Global in order to conform to the pro forma condensed combined presentation.
The Global assets, liabilities and equity have been translated to U.S. dollars
based upon the U.S. to Canadian conversion rate as of June 30, 2003.
(b) Under the purchase method of accounting, the total estimated
consideration as shown in the table below is allocated to Global's tangible and
intangible assets and liabilities based on their estimated fair values as of the
date of the completion of the Combination. The preliminary estimated
consideration is allocated as follows (U.S.$ in thousands):
CALCULATION OF CONSIDERATION
Purchase of Global common shares(1)....................... $70,892
Estimated direct transaction fees and expenses(2)......... 1,700
Assumption of Global stock options(3)..................... 2,135
Assumption of Global Series 2 Preferred Shares(4)......... 8,400
-------
Total consideration....................................... $83,127
=======
PRELIMINARY ALLOCATION OF CONSIDERATION
Global book value of net assets........................... 74,152
-------
Initial purchase allocation adjustment.................... $ 8,975
Less adjustments to historical net book values:
Inventories (note c)...................................... 83
Net equipment and leasehold improvements (note d)......... 214
Intangible assets (note e)................................ 2,600
Change of control obligations (note f).................... (1,815)
Quantum termination fee (note f).......................... (2,000)
Global transaction costs (note f)......................... (2,322)
-------
Adjustment to goodwill................................. $12,215
=======
---------------
(1) Represents the value of 9,490,276 shares of FuelCell common stock to be
issued to Global common shareholders based on the closing price of
FuelCell common stock on August 4, 2003 of $7.47 per share and the pro
forma exchange ratio. The pro forma exchange ratio has been determined
by dividing $2.72 by $8.3639, the 20-day daily volume-weighted average
FuelCell stock price ended August 4, 2003. The actual exchange ratio
will be determined by dividing $2.72 by the 20-day daily
volume-weighted average FuelCell stock price ending three days prior to
the Global Meeting and will range between 0.279 and 0.342 shares of
FuelCell common stock or exchangeable shares for each Global common
share. The actual amount of FuelCell common stock and exchangeable
shares received by Global common shareholders could materially differ
based on the variable exchange ratio structure.
The actual amount and value of FuelCell common stock and exchangeable
shares issued as consideration to Global shareholders may materially
affect the amount of intangible assets and goodwill recognized.
(2) Represents FuelCell's estimated direct Combination costs, including
financial advisory, legal, accounting and other costs.
(3) Represents the estimated fair value of Global stock options outstanding
as of August 4, 2003 assumed by FuelCell as valued under the
Black-Scholes options pricing model.
(4) Represents the estimated value of the Global Series 2 Preferred Shares
that will remain preferred shares of Global following the Combination.
Such value has been preliminarily determined by FuelCell's management
after consideration of a number of factors, including preliminary
valuations
114
incorporating a discounted cash flow approach. The final determination
of value by management may differ materially from this preliminary
allocation.
(c) Represents the estimated purchase accounting adjustment to capitalized
manufacturing profit in inventory. This amount was estimated as part of the
initial assessment of the fair value of assets acquired and liabilities assumed.
The amount ultimately allocated to inventory may differ materially from this
preliminary allocation. No tax effect considerations have been reflected due to
the uncertainty concerning the realizability of the net deferred tax assets and
the resulting tax assets or liabilities resulting from the Combination.
(d) Represents the estimated adjustments required to record Global's net
equipment and leasehold improvements at its estimated fair value. This
adjustment is preliminary and is based on management's estimates. The actual
adjustment may differ materially and will be based on final valuations. No tax
effect considerations have been reflected due to the uncertainty concerning the
realizability of the net deferred tax assets and the resulting tax assets or
liabilities resulting from the Combination.
(e) Of the total estimated purchase price, a preliminary estimate of
approximately $2.6 million has been allocated to amortizable intangible assets
acquired. Amortizable intangible assets consists of $1.7 million allocated to
customer relationships to be amortized over five years and $0.9 million
allocated to backlog to be amortized over one year. This adjustment is
preliminary and is based on management's estimates and the preliminary work of
independent appraisers. The actual adjustment may differ materially and will be
based on final valuations. No tax effect considerations have been reflected due
to the uncertainty concerning the realizability of the net deferred tax assets
and the resulting tax assets or liabilities resulting from the Combination.
(f) Represents the estimated obligation for change of control payments of
approximately $1.8 million to certain Global senior executives, the Quantum
termination fee of $2 million and estimated direct Combination costs of $2.3
million, including financial advisory, legal, accounting and other costs not
accrued in Global's June 30, 2003 balance sheet. No tax effect considerations
have been reflected due to the uncertainty concerning the realizability of the
net deferred tax assets and the resulting tax assets or liabilities resulting
from the Combination.
(g) Represents adjustments to reflect the elimination of the components of
the historical equity of Global totaling $74.2 million, the issuance of $70.9
million of new FuelCell common stock, and $2.1 million for the estimated value
of Global's stock options to be assumed by FuelCell.
115
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS OF FUELCELL
ENERGY, INC.
AND GLOBAL THERMOELECTRIC INC.
YEAR ENDED OCTOBER 31, 2002
U.S. GAAP -- (U.S.$ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FUELCELL GLOBAL
OCTOBER 31, DECEMBER 31, PRO FORMA
2002 2002(A) ADJUSTMENTS PRO FORMA
----------- ------------ ----------- -----------
REVENUES
Research and development contracts..... $ 33,575 $ 346 $ $ 33,921
Product sales and revenues............. 7,656 13,922 21,578
----------- -------- ------- -----------
Total revenues...................... 41,231 14,268 -- 55,499
COSTS AND EXPENSES
Cost of research and development
contracts........................... 45,664 492 46,156
Cost of product sales and revenues..... 32,129 8,683 1,303(b) 42,115
Administrative and selling expenses.... 10,451 6,519 16,970
Research and development costs......... 6,806 15,841 22,647
----------- -------- ------- -----------
Total costs and expenses............ 95,050 31,535 1,303 127,888
----------- -------- ------- -----------
Loss from operations................... (53,819) (17,267) (1,303) (72,389)
License fee income, net................ 270 -- 270
Interest expense....................... (160) (19) (179)
Interest and other income, net......... 4,876 1,854 6,730
Minority interest of preferred shares
of Global........................... -- -- (844)(c) (844)
----------- -------- ------- -----------
Loss from continuing operations before
provision for income taxes.......... (48,833) (15,432) (2,147) (66,412)
Provision for income taxes............. 7 266 273
----------- -------- ------- -----------
Loss from continuing operations........ (48,840) (15,698) (2,147) (66,685)
Discontinued operations, net of income
taxes............................... -- 88 88
----------- -------- ------- -----------
Net loss before dividends on preferred
shares.............................. (48,840) (15,610) (2,147) (66,597)
Dividends on preferred shares.......... -- (844) 844(c) --
----------- -------- ------- -----------
Net loss applicable to common stock.... $ (48,840) $(16,454) $(1,303) $ (66,597)
=========== ======== ======= ===========
LOSS PER SHARE
Basic and diluted loss per share....... $ (1.25) $ (1.37)
=========== ===========
Basic and diluted shares
outstanding(d)...................... 39,135,256 48,625,532
=========== ===========
See accompanying notes.
116
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(a) Global's historical consolidated financial statements are prepared in
accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP.
Note 18 to Global's December 31, 2002 audited consolidated financial statements
(in Global's Annual Information Form for the year ended December 31, 2002
included in Annex I) provides a reconciliation of the measurement differences
between Global's financial statements and U.S. GAAP. Global's statement of
operations for the year ended December 31, 2002, has been translated to U.S.
dollars based on the average U.S. to Canadian conversion rate for the year.
Reclassifications have been made to the historical presentation of Global
in order to conform to the pro forma combined presentation.
(b) Represents pro forma adjustment to reflect incremental depreciation and
amortization resulting from fair value adjustments to net equipment and
leasehold improvements and amortizable intangible assets as illustrated below.
This adjustment is preliminary and based on management's estimates of the fair
value. The actual adjustment may differ materially and will be based on final
valuations.
ANNUAL GLOBAL HISTORICAL
DEPRECIATION AND DEPRECIATION AND
FAIR VALUE USEFUL LIFE AMORTIZATION AMORTIZATION INCREASE
---------- ----------- ---------------- ----------------- --------
(THOUSANDS IN U.S.$)
Net equipment and leasehold
improvements................... $12,458 Various $1,969 $1,906 $ 63
Amortizable intangibles:
Customer relationships......... 1,700 5 340 -- 340
Backlog........................ 900 1 900 -- 900
------
Net adjustment to depreciation
and amortization............... $1,303
======
(c) Represents Global preferred stock dividends paid and in arrears based
on a 5% dividend rate subject to additional rate adjustments for dividends not
paid during the period.
(d) The pro forma basic and diluted weighted average number of shares are
calculated by adding FuelCell's weighted average basic shares outstanding and
the number of Global common shares outstanding as of the date the Combination
was announced multiplied by an assumed exchange ratio of 0.325 (the exchange
ratio as of August 4, 2003).
117
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
OF FUELCELL ENERGY, INC.
AND GLOBAL THERMOELECTRIC INC.
NINE MONTHS ENDED JULY 31, 2003
U.S. GAAP -- (U.S.$ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FUELCELL GLOBAL
JULY 31, JUNE 30, PRO FORMA
2003 2003(A) ADJUSTMENTS PRO FORMA
----------- --------- ----------- -----------
REVENUES
Research and development contracts....... $ 14,312 $ 195 $ $ 14,507
Product sales and revenues............... 12,157 11,294 23,451
----------- -------- ------- -----------
Total revenues........................ 26,469 11,489 -- 37,958
COSTS AND EXPENSES
Cost of research and development
contracts............................. 28,365 253 28,618
Cost of product sales and revenues....... 38,232 7,648 977(b) 46,857
Administrative and selling expenses...... 9,590 4,336 13,926
Research and development costs........... 6,050 10,618 16,668
Other expenses:
Corporate transaction costs........... -- 2,596 2,596
Corporate restructuring costs......... -- 846 846
Site restoration costs................ -- 654 654
----------- -------- ------- -----------
Total costs and expenses............ 82,237 26,951 977 110,165
----------- -------- ------- -----------
Loss from operations..................... (55,768) (15,462) (977) (72,207)
License fee income, net.................. 203 -- 203
Interest expense......................... (102) (8) (110)
Interest and other income, net........... 3,633 1,364 4,997
Minority interest of preferred shares of
Global................................ -- -- (716)(c) (716)
----------- -------- ------- -----------
Loss from continuing operations before
provision for income taxes............ (52,034) (14,106) (1,693) (67,833)
Provision for income taxes............... -- 68 68
----------- -------- ------- -----------
Loss from continuing operations.......... (52,034) (14,174) (1,693) (67,901)
Discontinued operations, net of income
taxes................................. -- 88 88
----------- -------- ------- -----------
Net loss before dividends on preferred
shares................................ (52,034) (14,086) (1,693) (67,813)
Dividends on preferred shares............ -- (716) 716(c) --
----------- -------- ------- -----------
Net loss applicable to common stock...... $ (52,034) $(14,802) $ (977) $ (67,813)
=========== ======== ======= ===========
LOSS PER SHARE
Basic and diluted loss per share......... $ (1.32) $ (1.39)
=========== ===========
Basic and diluted shares
outstanding(d)........................ 39,328,881 48,819,157
=========== ===========
See accompanying notes.
118
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(a) Global's historical consolidated financial statements are prepared in
accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP.
Note 18 to Global's December 31, 2002 audited consolidated financial statements
(in Global's Annual Information Form for the year ended December 31, 2002
included in Annex I) provides a reconciliation of the measurement differences
between Global's financial statements and U.S. GAAP. The Global statement of
operations for the nine months ended June 30, 2003 has been translated to U.S.
dollars based on the average U.S. to Canadian conversion rate for the nine month
period.
Reclassifications have been made to the historical presentation of Global
in order to conform to the pro forma combined presentation.
(b) Represents pro forma adjustment to reflect incremental depreciation and
amortization resulting from fair value adjustments to net equipment and
leasehold improvements and amortizable intangible assets as illustrated below.
This adjustment is preliminary and based on management's estimates of the fair
value. The actual adjustment may differ materially and will be based on final
valuations.
NINE MONTHS GLOBAL HISTORICAL
DEPRECIATION AND DEPRECIATION AND
FAIR VALUE USEFUL LIFE AMORTIZATION AMORTIZATION INCREASE
---------- ----------- ---------------- ----------------- --------
(U.S.$ IN THOUSANDS)
Net equipment and leasehold
improvements................... $12,458 Various $1,632 $1,585 $ 47
Amortizable intangibles:
Customer relationships......... 1,700 5 225 -- 255
Backlog........................ 900 1 675 -- 675
----
Net adjustment to depreciation
and amortization............... $977
====
(c) Represents Global preferred stock dividends paid and in arrears based
on a 5% dividend rate subject to additional rate adjustments for dividends not
paid during the period.
(d) The pro forma basic and diluted weighted average number of shares are
calculated by adding FuelCell's weighted average basic shares outstanding as of
July 31, 2003 and the number of shares of Global common shares outstanding as of
the date the Combination was announced multiplied by an assumed exchange ratio
of 0.325 (the exchange ratio as of August 4, 2003).
119
CHAPTER THREE -- DESCRIPTION OF FUELCELL'S CAPITAL STOCK,
GLOBAL'S PREFERRED SHARES AND EXCHANGECO
AND CALLCO SHARE CAPITAL
FUELCELL CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under FuelCell's Certificate of Incorporation, as amended (the "FuelCell
Charter"), FuelCell has authority to issue a total 150,000,000 shares of common
stock and 250,000 shares of preferred stock.
As of August 4, 2003, there were 39,329,251 shares of FuelCell common stock
outstanding held by approximately 691 holders of record. As of August 4, 2003,
there were also warrants outstanding to purchase an aggregate of 2,900,000
shares of FuelCell's common stock.
The following is a summary of the material features of FuelCell's capital
stock. The following summary does not purport to be complete and is subject to,
and qualified in its entirety by, the provisions of the FuelCell Charter and
FuelCell's bylaws, and by the provisions of applicable law.
COMMON STOCK
Holders of FuelCell common stock are entitled to one vote for each share on
all matters voted on by stockholders. Holders of FuelCell common stock do not
have cumulative voting rights in the election of directors.
Holders of FuelCell common stock do not have subscription, redemption or
conversion privileges. Subject to the preferences or other rights of any
preferred stock that may be issued from time to time, holders of FuelCell common
stock are entitled to participate ratably in dividends on FuelCell common stock
as declared by FuelCell's board of directors. Holders of FuelCell common stock
are entitled to share ratably in all assets available for distribution to
stockholders in the event of liquidation or dissolution of FuelCell, subject to
distribution of the preferential amount, if any, to be distributed to holders of
preferred stock. No holder of any of FuelCell capital stock has any preemptive
right to subscribe for or purchase any of FuelCell securities of any class or
kind.
PREFERRED STOCK
The FuelCell Charter authorizes the board of directors, without any vote or
action by the holders of FuelCell common stock, to issue up to 250,000 shares of
preferred stock from time to time in one or more series. FuelCell's board of
directors is authorized to determine the number of shares and designation of any
series of preferred stock and the dividend rights, dividend rate, conversion
rights and terms, voting rights (full or limited, if any), redemption rights and
terms, liquidation preferences and sinking fund terms of any series of preferred
stock. Issuances of preferred stock would be subject to the applicable rules of
the Nasdaq National Market or other organizations on whose systems FuelCell's
stock may then be quoted or listed. Depending upon the terms of preferred stock
established by FuelCell's board of directors, any or all series of preferred
stock could have preference over FuelCell's common stock with respect to
dividends and other distributions and upon liquidation of FuelCell. Issuance of
any such shares with voting powers, or issuance of additional shares of FuelCell
common stock, would dilute the voting power of FuelCell's outstanding common
stock.
FuelCell has no present plans to issue any preferred stock, except for the
issuance of the special voting share to be issued in connection with the
Combination under the Voting and Exchange Trust Agreement. Under that agreement,
FuelCell will issue to the trustee a special voting share entitling the trustee
to a number of votes at meetings of holders of FuelCell common stock equal to
the number of exchangeable shares issued and outstanding (other than
exchangeable shares held by FuelCell and its affiliates). FuelCell will issue
the voting share to the trustee to enable the holders of exchangeable shares to
have voting rights that are equivalent to those of FuelCell common stockholders.
120
WARRANTS
On April 26, 2002, in connection with its strategic relationship with
Caterpillar, Inc., FuelCell issued to Caterpillar warrants to purchase 1,500,000
shares of FuelCell's common stock, in six series of warrants providing for the
purchase of 250,000 shares per series at prices ranging from $16.76 to $23.46.
The warrants were to vest based on Caterpillar's meeting cumulative sales
targets and were to expire from 12 to 30 months after their issuance if
Caterpillar did not meet the relevant sales targets within those time periods.
As of August 4, 2003, warrants to purchase 500,000 shares have expired. The
remaining outstanding warrants for the purchase of 1,000,000 shares bear an
average exercise price of $22.21 and, if unvested, will expire between October
26, 2003, and October 26, 2004.
On June 15, 2001, in connection with its strategic relationship with
Marubeni, Inc., FuelCell issued to Marubeni warrants to purchase 1,900,000
shares of FuelCell's common stock. On August 1, 2003, FuelCell extended the
expiration dates of those warrants. Currently, 760,000 of the warrants vest once
Marubeni has ordered a total of 10 MW of FuelCell's products and expire if
Marubeni has not done so by December 15, 2003. The remaining 1,140,000 warrants
vest once Marubeni has ordered a total of 45 MW of FuelCell's products and
expire if Marubeni has not done so by March 15, 2005. The warrants bear an
average exercise price of $42.90.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE AND CONNECTICUT LAW, THE
FUELCELL CHARTER AND FUELCELL'S BYLAWS
DELAWARE ANTI-TAKEOVER PROVISIONS
Section 203 of the Delaware General Corporation Law limits a publicly-held
Delaware corporation's ability to engage in a "business combination," with an
"interested stockholder" for a period of three years following the date such
person became an "interested stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved either the business combination or
the transaction that resulted in the interested stockholder becoming an
interested stockholder;
- upon the consummation of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
- at or following the time such person became an interested stockholder,
the business combination is approved by the board of directors of the
corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of 66 2/3% of the outstanding voting
stock of the corporation which is not owned by the interested
stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the three years prior
to the determination of interested stockholder status, owned, 15% or more of a
corporation's outstanding voting stock. The term "business combination" includes
mergers, asset or stock sales and other similar transactions resulting in a
financial benefit to an interested stockholder. Section 203 makes it more
difficult for an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. The existence of this
provision would be expected to have an anti-takeover effect with respect to
transactions not approved in advance by the board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by stockholders. A Delaware corporation may "opt
out" of Section 203 with an express provision in its original certificate of
incorporation or any amendment thereto. Our certificate of incorporation does
not contain any such exclusion.
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CONNECTICUT ANTI-TAKEOVER PROVISIONS
The laws of the State of Connecticut, where our principal executive offices
are located, impose restrictions on certain transactions between certain foreign
corporations and significant stockholders. Section 33-840 of the Connecticut
Business Corporation Act prohibits certain publicly-held foreign corporations
that are based in Connecticut from engaging in a "business combination"
(including the issuance of equity securities which have an aggregate market
value of 5% or more of the total market value of the outstanding shares of the
company) with an "interested shareholder" as defined in the Connecticut Business
Corporation Act for a period of five years from the date of the shareholder's
purchase of stock, unless approved in a prescribed manner. The application of
this statute could prevent a change of control. Generally, approval is required
by the board of directors, by a majority of our non-employee directors and by
80% of the outstanding voting shares and two-thirds of the voting power of the
outstanding shares of the voting stock other than shares held by the interested
shareholder. These provisions could prevent us from entering into a business
combination that otherwise would be beneficial to us or to our stockholders.
FUELCELL'S CHARTER AND BY-LAWS
A number of provisions of the FuelCell Charter and FuelCell's by-laws
concern matters of corporate governance and the rights of stockholders. Some of
these provisions, including, but not limited to, the inability of stockholders
to take action by unanimous written consent, supermajority voting provisions
with respect to any amendment of voting rights provisions, the filling of
vacancies on FuelCell's board of directors by the affirmative vote of a majority
of the remaining directors, and the ability of FuelCell's board of directors to
issue shares of preferred stock and to set the voting rights, preferences and
other terms thereof, without further stockholder action, may be deemed to have
an anti-takeover effect and may discourage takeover attempts not first approved
by the FuelCell board of directors, including takeovers which stockholders may
deem to be in their best interests. If takeover attempts are discouraged,
temporary fluctuations in the market price of FuelCell common stock, which may
result from actual or rumored takeover attempts, may be inhibited. These
provisions, together with the ability of the FuelCell board of directors to
issue preferred stock without further stockholder action, could also delay or
frustrate the removal of incumbent directors or the assumption of control by
stockholders, even if the removal or assumption would be beneficial to
FuelCell's stockholders. These provisions could also discourage or inhibit a
merger, tender offer or proxy contest, even if favorable to the interests of
stockholders, and could depress the market price of FuelCell's common stock. The
FuelCell board of directors believes these provisions are appropriate to protect
FuelCell's interests and the interests of FuelCell's stockholders. The FuelCell
board of directors has no present plans to adopt any further measures or devices
which may be deemed to have an "anti-takeover effect".
AMENDMENTS
The FuelCell Charter provides that the affirmative vote of at least 80% of
the votes entitled to be cast by stockholders of FuelCell is required to amend
provisions of the FuelCell Charter relating to stockholder action. The FuelCell
Charter further provides that amendments to provisions of FuelCell's bylaws
which would authorize the classification of directors for staggered terms may be
only effected by a vote of FuelCell's stockholders. Other than with respect to
the classification of directors, which requires the affirmative vote of
stockholders, FuelCell's directors may amend FuelCell's bylaws.
LIMITATION ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person, including an officer and director, who was
or is, or is threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such cooperation), by
reason of the fact that such person is or was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or
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proceeding, provided such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal actions and proceedings, had no
reasonable cause to believe that his conduct was unlawful. A Delaware
corporation may indemnify any person, including an officer or director, who was
or is, or is threatened to be made, a party to any threatened, pending or
contemplated action or suit by or in the right of such corporation, under the
same conditions, except that no indemnification is permitted without judicial
approval if such person is adjudged to be liable to such corporation. Where an
officer or director of a corporation is successful, on the merits or otherwise,
in the defense of any action, suit or proceeding referred to above, or any
claim, issue or matter therein, the corporation must indemnify that person
against the expenses (including attorneys' fees) which such officer or director
actually and reasonably incurred in connection therewith.
FuelCell's certificate of incorporation provides that none of our directors
will be personally liable to us or our stockholders for monetary damages for
breach of fiduciary duty as a director, except to the extent such exemption from
liability or limitation thereof is not permitted under the Delaware General
Corporation Law as currently in effect or as the same may hereafter be amended.
Pursuant to Section 102(b) (7) of the Delaware General Corporation Law, the
FuelCell Charter eliminates the liability of our directors to us or our
stockholders, except for liabilities related to breach of duty of loyalty,
actions not in good faith and certain other liabilities.
FuelCell maintains directors' and officers' liability insurance policies.
FuelCell's by-laws provide for indemnification of FuelCell's officers and
directors to the fullest extent permitted by applicable law.
GLOBAL SERIES 2 PREFERRED SHARES
Global has 1,000,000 Global Series 2 Preferred Shares issued and
outstanding. Upon completion of the Combination, the Global Series 2 Preferred
Shares will remain outstanding in Global and will not be affected pursuant to
the terms of the Plan of Arrangement.
As a result of the Combination, FuelCell will assume the obligation to
issue FuelCell common stock upon conversion of the Global Series 2 Preferred
Shares. Currently, the Global Series 2 Preferred Shares are convertible into
Global common shares at a price, each referred to as the "current conversion
price," as follows: Cdn.$30.96 per common share until July 31, 2005; Cdn.$33.54
per common share after July 31, 2005 until July 31, 2010; Cdn.$36.12 per common
share after July 31, 2010 until July 31, 2015; Cdn.$38.70 per common share after
July 31, 2015 until July 31, 2020; or at any time after July 31, 2020 at a price
equal to 95% of the then current market price (which is the volume-weighted
average price at which board lots of Global common shares have traded on an
applicable stock exchange during the 20 consecutive trading days commencing 30
trading days before such price is to be determined) at the time of conversion.
Following the completion of the Combination, the Global Series 2 Preferred
Shares will have the right to convert into a number of shares of FuelCell common
stock, which number is equal at any particular time to the result obtained by
dividing (x) by (y); where (x) equals the sum of Cdn.$25.00 plus all accrued and
unpaid dividends; and (y) equals the current conversion price divided by the
exchange ratio (and assuming that after July 31, 2020, (y) equals the current
conversion price).
The Global Series 2 Preferred Shares carry the right to receive a
preferential cumulative dividend. The rate of this dividend varies inversely
with the price of Global common shares as follows: where the price of such a
share is less than or equal to Cdn.$35.96, the dividend rate will be 5% per
annum; where the price of such a share is between the range of Cdn.$35.97 and
Cdn.$40.96, the dividend rate will be 4% per annum; where the price of such a
share is between the range of Cdn.$40.97 and Cdn.$45.97, the dividend rate will
be 3% per annum; where the price of such a share is between the range of
Cdn.$45.97 and Cdn.$50.96, the dividend rate will be 2% per annum; and where the
price of such share is above Cdn.$50.96, the dividend rate will be 1% per annum.
Dividends accrue and are cumulative from July 31, 2000 and are payable, subject
to reduction in accordance with the terms of the Global Series 2 Preferred
Shares, on the tenth day of January, April, July and October in each year (the
"dividend payment date"). On December 31, 2010, the amount of all accrued and
unpaid dividends must be paid to the holders of Global Series 2 Preferred
Shares. Unless all required dividends up to and including the dividend payment
date for the most recently completed calendar
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quarter have been declared and paid, or set apart for payment, with respect to
the Global Series 2 Preferred Shares, no dividends may be paid on the Global
common shares without the approval of the holder of the Global Series 2
Preferred Shares.
The Global Series 2 Preferred Shares are not redeemable by Global prior to
July 31, 2004. On or after July 31, 2004, and subject to the Business
Corporations Act (Alberta), the Global Series 2 Preferred Shares may be redeemed
by Global, in whole or part, if on the day that the requisite notice of
redemption is first given, the volume-weighted average price at which the Global
common shares are traded on the applicable stock exchange during the 20
consecutive trading days ending on a date not earlier than the fifth preceding
date on which the notice of redemption is given was not less than a 20% premium
to the current conversion price on payment of Cdn.$25.00 per Global Series 2
Preferred Share to be redeemed, together with an amount equal to all accrued and
unpaid dividends to the date fixed for redemption, the whole constituting the
redemption price. On or after July 31, 2010, the Global Series 2 Preferred
Shares are redeemable at any time on payment of Cdn.$25.00 per Global Series 2
Preferred Share to be redeemed together with an amount equal to all accrued and
unpaid dividends to the date fixed for redemption, the whole constituting the
redemption price.
Subject to the Business Corporations Act (Alberta), the holder of the
Global Series 2 Preferred Shares is not entitled to receive notice of or to
attend or vote at any meeting of the Global common shareholders. In the event of
liquidation, dissolution or winding up of Global, whether voluntary or
involuntary, or any other distribution of assets of Global among its
shareholders for the purpose of winding up its affairs, the holder of Global
Series 2 Preferred Shares will be entitled to receive the amount paid up on such
Global Series 2 Preferred Shares together with an amount equal to all accrued
and unpaid dividends thereon, which amounts will be calculated as if such
dividend were accruing for the period from the expiration of the last calendar
quarter for which the dividends thereon have been paid in full up to the date of
such event, the whole before any amount will be paid or any property or assets
of Global will be distributed to the holder of Global common shares or to the
holders of any other shares ranking junior to the Global Series 2 Preferred
Shares in any respect. If such amounts are not paid in full, the Global Series 2
Preferred Shares will participate ratably with all other preferred shares and
all other shares, if any, which rank on parity with the Global Series 2
Preferred Shares with respect to the return of capital or any other distribution
of the assets of Global, in respect of any return of capital in accordance with
the sums which would be payable on the Global Series 2 Preferred Shares and such
other shares on such return of capital, if all sums so payable were paid in full
in accordance with their terms. After payment to the holder of the Global Series
2 Preferred Shares of the amounts so payable to them, the holder of the Global
Series 2 Preferred Shares will not be entitled to share in any other
distribution of the property or assets of Global.
EXCHANGECO SHARE CAPITAL
The following summary of certain provisions of ExchangeCo's share capital
does not purport to be complete and is subject to, and qualified in its entirety
by, the provisions of the articles and by-laws of ExchangeCo and by the
provisions of applicable law.
AUTHORIZED CAPITAL
The authorized capital of ExchangeCo consists of an unlimited number of
common shares and an unlimited number of exchangeable shares.
COMMON SHARES
There are 100 common shares of ExchangeCo issued and outstanding, all of
which are held indirectly by FuelCell. The holders of common shares of
ExchangeCo are entitled to receive notice of and to attend all meetings of
shareholders and are entitled to one vote for each share held of record on all
matters submitted to a vote of holders of common shares of ExchangeCo. Subject
to the prior rights of the holders of any shares ranking senior to the common
shares of ExchangeCo with respect to priority in the payment of dividends, the
holders of common shares of ExchangeCo are entitled to receive such dividends as
may be declared by the
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board of directors of ExchangeCo out of funds legally available for such
dividends. Holders of common shares of ExchangeCo are entitled upon any
liquidation, dissolution or winding-up of ExchangeCo, subject to the prior
rights of holders of exchangeable shares or any other shares ranking senior to
the ExchangeCo common shares, to receive the remaining property and assets of
ExchangeCo.
EXCHANGEABLE SHARES
See "Chapter One -- The Combination -- Description of the
Combination -- Mechanics for Implementing the Combination and Description of
Exchangeable Shares" for a summary of certain provisions of the exchangeable
shares.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the exchangeable shares will be
Computershare Trust Company of Canada. The trustee under the Voting and Exchange
Trust Agreement will be Computershare Trust Company of Canada.
CALLCO SHARE CAPITAL
The following summary of certain provisions of CallCo's share capital does
not purport to be complete and is subject to, and qualified in its entirety by,
the provisions of the articles and by-laws of CallCo and by the provisions of
applicable law.
AUTHORIZED CAPITAL
The authorized capital of CallCo consists of an unlimited number of common
shares.
COMMON SHARES
There are 100 common shares of CallCo issued and outstanding, all of which
are held by FuelCell. The holders of common shares of CallCo are entitled to
receive notice of and to attend all meetings of shareholders and are entitled to
one vote for each share held of record on all matters submitted to a vote of
holders of common shares of CallCo. The holders of common shares of CallCo are
entitled to receive such dividends as may be declared by the board of directors
of CallCo out of funds legally available for dividends. Holders of common shares
of CallCo are entitled upon any liquidation, dissolution or winding-up of CallCo
to receive the remaining property and assets of CallCo.
COMPARISON OF SHAREHOLDER RIGHTS
If the Combination is consummated, holders of Global common shares will
transfer their common shares to FuelCell in consideration for exchangeable
shares or shares of FuelCell common stock. Such holders will have the right to
exchange their exchangeable shares for an equivalent number of shares of
FuelCell common stock. Global is a corporation governed by Alberta law. FuelCell
is a corporation organized under Delaware law. While the rights and privileges
of shareholders of an Alberta corporation are, in many instances, comparable to
those of stockholders of a Delaware corporation, there are certain differences.
These differences arise from differences between Alberta and Delaware law, and
between the Global articles of amalgamation and bylaws and the FuelCell Charter
and FuelCell's bylaws.
The following is a summary comparison of some important differences between
the rights of Global shareholders and FuelCell stockholders. The summary is not
intended to be complete or to address all differences and is qualified in its
entirety by reference to Alberta law, Delaware law, Global's articles of
amalgamation and bylaws and the FuelCell Charter and bylaws. For a further
description of the rights of the holders of shares of FuelCell common stock,
please see "-- FuelCell Capital Stock."
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GLOBAL SHAREHOLDER RIGHTS FUELCELL STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
VOTE REQUIRED FOR EXTRAORDINARY Under Alberta law, the approval Under Delaware law, the
TRANSACTIONS of at least two-thirds of votes affirmative vote of a majority
cast at a meeting is required of the outstanding stock
for extraordinary corporate entitled to vote is required
actions, including: for:
- amalgamations; - mergers;
- continuances; - consolidations;
- sales, leases or exchanges of - dissolutions; or
all or substantially all of the
property of a corporation; and - sales of substantially all of
the assets of the corporation,
- liquidations and dissolutions.
provided that, unless the
Alberta law may also require the certificate of incorporation
separate approval by the holders requires otherwise, no vote is
of a class or series of shares required where either:
for extraordinary corporate
actions. - the corporation's certificate
of incorporation is not amended,
the shares of stock of the
corporation become equivalent
shares of the surviving
corporation and the stock of
the corporation issued in the
merger does not exceed 20% of
the previously outstanding
stock; or
- the merger is with a wholly
owned subsidiary of the
corporation for the purpose of
forming a holding company and,
among other things, the
certificate of incorporation
and bylaws of the holding
company immediately following
the merger will be identical
to the certificate of
incorporation and bylaws of
the corporation prior to the
merger.
AMENDMENT TO GOVERNING Under Alberta law, the approval Under Delaware law, the
DOCUMENTS of at least two-thirds of the affirmative vote of the holders
votes cast at a meeting is of a majority of the outstanding
required to amend the articles stock entitled to vote is
of the corporation. required to approve a proposed
amendment to the certificate of
If the amendment would affect incorporation, following the
the rights of any holders of a adoption of the amendment by the
class or series of shares board of directors of the
differently than other shares, corporation, provided that the
the amendment also requires the certificate of incorporation may
approval of a majority of the provide for a greater vote.
shares of the class or series.
If the amendment would increase
Under Alberta law, the creation, or decrease the number or the
amendment or repeal of bylaws par
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GLOBAL SHAREHOLDER RIGHTS FUELCELL STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
requires that, after being value of the shares of such
approved by the directors of the class or adversely affect the
corporation, the creation, rights of any holders of a class
amendment or repeal of the bylaw or series of stock, the
must be approved by a majority amendment also requires the
of the votes of the shareholders approval of a majority of the
of the corporation at the next shares of the class or series.
shareholder meeting.
Under Delaware law, shareholders
are given the power to adopt,
alter and repeal bylaws,
provided that the certificate of
incorporation may also provide
such power to the board of
directors.
The FuelCell Charter provides
that the affirmative vote of the
holders of at least 80% of
FuelCell's stockholders, voting
together as a single class, is
required to amend provisions of
the FuelCell Charter relating to
stockholder action.
The FuelCell Charter further
provides that provisions in
FuelCell's bylaws providing for
the classification of directors
for staggered terms may only be
amended by the affirmative vote
of a majority of the
stockholders. The board of
directors of FuelCell may
otherwise adopt, amend or repeal
FuelCell's bylaws.
DISSENTERS' RIGHTS Under Alberta law, each of the Under Delaware law, holders of
matters listed below will shares may dissent from a merger
entitle shareholders to exercise or consolidation in some
rights of dissent and to be paid situations by demanding payment
the fair value of their shares: equal to the fair value of their
shares. These rights of dissent
- any amalgamation with another and appraisal only apply in the
corporation (other than with event of a merger or
certain affiliated consolidation and not in the
corporations); case of a sale or transfer of
assets or a purchase of assets
- an amendment to the for stock.
corporation's articles to add,
change or remove any Under Delaware law, no dissent
provisions restricting or or appraisal rights are
constraining the issue or available if the shares are
transfer of that class of listed on a national securities
shares; exchange or are designated as a
national market system security
- an amendment to the on an interdealer quotation
corporation's articles to add, system by the National
change or remove any Association of Securities
restriction upon the business Dealers,
or
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GLOBAL SHAREHOLDER RIGHTS FUELCELL STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
businesses that the Inc. or are held of record by
corporation may carry on; more than 2,000 stockholders,
unless the merger or
- a continuance under the laws consolidation converts the
of another jurisdiction; shares into something other
than:
- a sale, lease or exchange of
all or substantially all the - stock of the surviving
property of the corporation corporation; or
other than in the ordinary
course of business; - stock of another corporation
that is either listed on a
- a court may permit national securities exchange
shareholders to dissent in or designated as a national
connection with an application market system security on an
to the court for an order interdealer quotation system
approving an arrangement; and by the National Association of
Securities Dealers, Inc. or
- amendments to the articles of held of record by more than
a corporation which require a 2,000 stockholders;
separate class or series vote,
- cash in lieu of fractional
shares; or
- some combination of the above.
provided that a shareholder is
not entitled to dissent if an
amendment to the articles is
effected by a court order
approving a reorganization or by
a court order made in connection
with an action for an oppression
remedy.
Alberta law provides these
dissent rights for both listed
and unlisted shares.
OPPRESSION REMEDY Alberta law provides an Delaware law does not provide
oppression remedy that allows a for a similar remedy.
complainant who is:
- a present or former
shareholder;
- a present or former director
or officer of the corporation or
its affiliates; and
- any other person who in the
discretion of the court is a
proper person to make the
application,
to apply to court for relief
where:
- any act or omission of the
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GLOBAL SHAREHOLDER RIGHTS FUELCELL STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
corporation or an affiliate
effects a result;
- the business or affairs of the
corporation or any of its
affiliates are or have been
carried on or conducted in a
manner; or
- the powers of the directors of
the corporation or any of its
affiliates are or have been
exercised in the manner,
that is oppressive or unfairly
prejudicial to or that unfairly
disregards the interest of a
shareholder, creditor, director
or officer.
DERIVATIVE ACTION Under Alberta law, a complainant Under Delaware law, a
may not bring an action in the stockholder may bring a
name and on behalf of a derivative action on behalf and
corporation, or intervene in an for the benefit of the
existing action on behalf of the corporation, subject to certain
corporation, unless the limitations, including that:
complainant has given reasonable
notice to the directors of the - the stockholder must state in
corporation and the complainant his complaint that he was a
satisfies the court that: stockholder of the corporation
at the time of the transaction
- the directors of the that is the subject of the
corporation will not bring, complaint; and
diligently prosecute or defend
or discontinue the action; - the stockholder must first
make demand on the corporation
- the complainant is acting in that it bring the action and
good faith; and the demand be refused, unless
it is shown that the demand
- it appears to be in the would have been futile.
interest of the corporation that
the action be brought,
prosecuted, defended or
discontinued.
SHAREHOLDER CONSENT IN LIEU OF Under Alberta law, a written Under Delaware law, unless
MEETING resolution signed by all the otherwise provided in the
shareholders of the corporation corporation's certificate of
who would have been entitled to incorporation, a written consent
vote on the resolution at a signed by holders of stock
meeting, is effective to approve having sufficient votes to
the resolution. approve the matter at a meeting
is effective to approve the
matter.
The FuelCell Charter and bylaws
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GLOBAL SHAREHOLDER RIGHTS FUELCELL STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
expressly prohibit stockholder
action by written consent.
DIRECTOR QUALIFICATIONS Under Alberta law, at least half Delaware law does not have
of the directors of a comparable requirements.
corporation governed by the
Business Corporations Act
(Alberta) must be resident
Canadians. Alberta law also
requires that a corporation
whose securities are publicly
traded must have not fewer than
three directors, at least two of
whom are not officers or
employees of the corporation or
any of its affiliates.
FIDUCIARY DUTIES OF DIRECTORS Under Alberta law, directors Under Delaware law, directors
have a duty of care and loyalty have a duty of care and loyalty
to the corporation. The duty of to the corporation and its
care requires that the directors shareholders. The duty of care
exercise the care, diligence and requires that the directors act
skill that a reasonably prudent in an informed and deliberative
person would exercise in manner and inform themselves,
comparable circumstances. The prior to making a business
duty of loyalty requires decision, of all material
directors to act honestly and in information reasonably available
good faith with a view to the to them. The duty of loyalty is
best interests of the the duty to act in good faith in
corporation. a manner which the directors
reasonably believe to be in the
best interest of the
stockholders.
INDEMNIFICATION OF OFFICERS AND Under Alberta law, except in Delaware law provides that a
DIRECTORS respect of an action by or on corporation may indemnify its
behalf of a corporation to present and former directors,
procure a judgment in its favor, officers, employees and agents
which would require court against all reasonable expenses
approval, a corporation may (including attorneys' fees) and,
indemnify present and former except in actions initiated by
directors and officers against or in the right of the
costs, charges and expenses corporation where such person
(including settlements and has been found liable to the
judgments) provided that: corporation, against all
judgments, fines and amounts
- they acted honestly and in paid in settlement of actions
good faith with a view to the brought against them, provided
best interests of the that they:
corporation; and
- acted in good faith and in a
- in the case of a criminal or manner which he or she
administrative action they had reasonably believed to be in,
reasonable grounds for or not opposed to, the best
believing that their conduct interests of the corporation;
was lawful. and
The Global bylaws provide for - in the case of a criminal
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GLOBAL SHAREHOLDER RIGHTS FUELCELL STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
indemnification of directors and proceeding, had no reasonable
officers to the fullest extent cause to believe his or her
authorized by Alberta law. conduct was unlawful.
Delaware law allows for the
advance payment of an
indemnitee's expenses prior to
the final disposition of an
action, provided that the
indemnitee undertakes to repay
any such amount advanced if it
is later determined that the
indemnitee is not entitled to
indemnification with regard to
the action for which the
expenses were advanced.
Global has entered into The FuelCell Charter generally
indemnity agreements with all of requires FuelCell to indemnify
its directors and executive its directors and officers to
officers which provide for the fullest extent permissible
advance payment of any expenses. under Delaware law.
Neither Alberta law nor the
Global bylaws expressly provide
for advance payment of an
indemnitee's expenses.
DIRECTOR LIABILITY Alberta law does not permit the Delaware law provides that the
limitation of a director's charter of a corporation may
liability as Delaware law does. include a provision which limits
or eliminates the liability of
directors to the corporation or
its stockholders for monetary
damages for breach of a
fiduciary duty, provided such
liability does not arise from
prescribed conduct, including
acts or omissions not in good
faith or which involve
intentional misconduct or which
involve a knowing violation of
the law.
The FuelCell Charter limits the
liability of FuelCell's
directors to the fullest extent
permitted by Delaware law.
ANTI-TAKEOVER PROVISIONS AND Alberta law does not contain FuelCell is subject to Section
INTERESTED STOCKHOLDER specific anti-takeover 203 of the Delaware General
TRANSACTIONS provisions with respect to Corporation Law, which generally
business transactions. However, provides that, if a person owns
the policies of Canadian 15% or more of the stock of a
securities regulatory Delaware corporation and
authorities,
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GLOBAL SHAREHOLDER RIGHTS FUELCELL STOCKHOLDER RIGHTS
-------------------------------- --------------------------------
including Rule 61-501 of the is thereby considered an
Ontario Securities Commission "interested stockholder," that
and Policy Q-27 of the Quebec person may not engage in a
Securities Commission contain business combination with the
requirements in connection with corporation for a period of
any transaction by which an three years after acquiring such
issuer, directly or indirectly: status, unless one of the
following three exceptions
- acquires or transfers an applies:
asset;
- prior to the time the
- acquires or issues securities; interested stockholder acquires
his status as such, the board
- assumes or transfers a of directors approves either the
liability; or business combination or the
transaction by which the
- borrows or lends monies, stockholder becomes an
interested stockholder;
from or to, as the case may be,
a director, senior officer, - in the transaction by which
holder of 10% or more of the the interested stockholder
voting securities of the issuer acquired such status, such
or a holder of sufficient stockholder accumulates 85% of
securities to affect materially the outstanding voting power
the control of the issuer. of the corporation not owned
by (i) the corporation, (ii)
Rule 61-501 and Policy Q-27 directors of the corporation
require more detailed disclosure who are also officers and
in the proxy material sent to (iii) certain employee stock
security holders in connection plans; or
with a transaction as described
above, including, subject to - the business combination is
certain exceptions, the approved by the board of
inclusion of a formal valuation directors and by the
of the subject matter of the affirmative vote of two-
transaction and any non-cash thirds of the outstanding
consideration offered therefor. voting stock which is not
Rule 61-501 and Policy Q-27 also owned by the interested
require, subject to certain stockholder.
exceptions, that the minority
shareholders of the issuer
separately approve the
transaction.
SHAREHOLDER RIGHTS PLANS Global does not have a FuelCell does not have a
shareholder rights plan. stockholder rights plan.
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CHAPTER FOUR -- INFORMATION ABOUT TAX CONSIDERATIONS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS TO SHAREHOLDERS
INTRODUCTION
Subject to the qualifications and assumptions contained herein, in the
opinion of Bennett Jones LLP, Canadian counsel to Global, the following is, as
of the date of this Joint Proxy Statement, a fair and adequate summary of the
material Canadian federal income tax considerations generally applicable to
Global common shareholders who, at all relevant times up to and including the
completion of the Combination, for purposes of the Income Tax Act (Canada): (i)
hold their Global common shares and will hold their exchangeable shares and
shares of FuelCell common stock as capital property, and (ii) deal at arm's
length with, and are not affiliated with, Global, FuelCell, CallCo or
ExchangeCo. This discussion does not apply to a holder with respect to whom
FuelCell is a foreign affiliate within the meaning of the Income Tax Act
(Canada) nor to a person who is a financial institution, as defined in the
Income Tax Act (Canada), which is subject to the "mark-to-market" rules in the
Income Tax Act (Canada).
All Global common shareholders should consult their own tax advisors as to
whether, as a matter of fact, they hold their Global common shares and will hold
their exchangeable shares and shares of FuelCell common stock as capital
property for the purposes of the Income Tax Act (Canada). Certain provisions of
the Income Tax Act (Canada) may permit a holder of Global common shares to make
an irrevocable election to deem such shares and every "Canadian Security" (as
defined in the Income Tax Act (Canada)) owned by such holder in the taxation
year of the election and all subsequent taxation years to be capital property,
subject to certain conditions.
This discussion is based upon the current provisions of the Income Tax Act
(Canada), the regulations thereunder (the "Regulations"), all specific proposals
to amend the Income Tax Act (Canada) and the Regulations publicly announced by
the Canadian Minister of Finance prior to the date hereof (the "Proposed
Amendments"), counsel's understanding of the current published administrative
practices of the Canada Customs and Revenue Agency (the "CCRA"), and an
officer's certificate from FuelCell as to certain factual matters. This summary
assumes that all Proposed Amendments will be enacted in their present form,
although there is no certainty that any of the Proposed Amendments will be so
enacted, if at all. This summary does not otherwise take into account or
anticipate any changes in law, whether by way of judicial decision or
legislative action, nor any changes in the administrative or assessing practices
of the CCRA, nor does it take into account tax legislation of countries other
than Canada or any provincial or territorial tax legislation.
THE FOLLOWING DISCUSSION IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO
BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR
GLOBAL COMMON SHAREHOLDER. ACCORDINGLY, GLOBAL COMMON SHAREHOLDERS SHOULD
CONSULT THEIR OWN INDEPENDENT TAX ADVISORS FOR ADVICE WITH RESPECT TO THE INCOME
TAX CONSEQUENCES TO THEM OF THE COMBINATION, HAVING REGARD TO THEIR OWN
PARTICULAR CIRCUMSTANCES.
For purposes of the Income Tax Act (Canada), all amounts relating to the
acquisition, holding or disposition of shares of FuelCell common stock,
including the receipt of dividends and the calculation of any adjusted cost base
amounts and proceeds of disposition, must be converted into Canadian dollars
based on the prevailing United States dollar exchange rate at the time such
amounts arise.
SHAREHOLDERS RESIDENT IN CANADA
The following portion of this discussion is generally applicable to Global
common shareholders who, for the purposes of the Income Tax Act (Canada) and any
applicable income tax treaty or convention, are resident or deemed to be
resident in Canada at all relevant times.
EXCHANGE OF GLOBAL COMMON SHARES FOR EXCHANGEABLE SHARES. A Global common
shareholder who disposes of Global common shares to ExchangeCo in exchange for
exchangeable shares will, unless such Global common shareholder makes a joint
election with ExchangeCo under subsection 85(1) or 85(2) of the Income Tax Act
(Canada) as discussed below, be considered to have disposed of such Global
common shares
133
for proceeds of disposition equal to the sum of: (i) any cash received in
respect of a fractional exchangeable share; (ii) the aggregate fair market value
at the effective time of the Combination of the exchangeable shares received by
the Global common shareholder on the exchange; and (iii) the fair market value
at the effective time of the Combination of the ancillary rights associated with
the exchangeable shares, such as the voting rights available under the voting
and exchange trust agreement and the right of the holder to require FuelCell to
purchase the exchangeable shares in certain circumstances (the "Ancillary
Rights"), received by the Global common shareholder on the exchange. As a
result, the Global common shareholder will, in general, realize a capital gain
(or capital loss) to the extent that the proceeds of disposition, net of any
reasonable costs of disposition, exceed (or are less than) the adjusted cost
base to the Global common shareholder of the Global common shares. See "Taxation
of Capital Gains and Capital Losses" below. The cost to a holder of exchangeable
shares and Ancillary Rights acquired on the exchange will be equal to the fair
market value of such shares and rights at the time of disposition.
A Global common shareholder who disposes of Global common shares to
ExchangeCo and who receives exchangeable shares may obtain a full or partial tax
deferral by making a joint tax election with ExchangeCo under subsection 85(1)
of the Income Tax Act (Canada) (or, in the case of a Global common shareholder
that is a partnership, pursuant to subsection 85(2) of the Income Tax Act
(Canada)) and the corresponding provision of any applicable provincial tax
legislation in respect of such Global common shares and specifying therein an
elected transfer price within the limits described below.
The joint tax election must specify the elected transfer price in respect
of the Global common shares transferred to ExchangeCo. By choosing an elected
transfer price which does not exceed the adjusted cost base of a holder's Global
common shares, the holder will be entitled to defer the amount of any capital
gain that would otherwise be realized on the disposition of such Global common
shares.
The elected transfer price may not:
- be less than the aggregate of: (i) the fair market value at the time of
disposition of the Ancillary Rights acquired on the exchange and (ii) any
cash received in respect of a fractional exchangeable share;
- be less than the lesser of the Global common shareholder's adjusted cost
base of those Global common shares at the time of disposition and the
fair market value of those shares at that time; or
- exceed the fair market value of those Global common shares at the time of
disposition.
Elected transfer prices which do not otherwise comply with the foregoing
limitations will be automatically adjusted under the Income Tax Act (Canada) so
that they are in compliance.
Where a Global common shareholder and ExchangeCo make an election, the tax
treatment to the Global common shareholder generally will be as follows:
- the Global common shareholder's Global common shares will be deemed to
have been disposed of for proceeds of disposition equal to the elected
transfer price;
- if the deemed proceeds of disposition of the Global common shareholder's
shares, net of any reasonable costs of disposition, are equal to the
adjusted cost base to the Global common shareholder of such shares,
determined immediately before the time of disposition, no capital gain or
capital loss will be realized by the Global common shareholder;
- to the extent that the deemed proceeds of disposition of the Global
common shares, net of any reasonable costs of disposition, exceed the
aggregate of the adjusted cost base thereof to the Global common
shareholder, the Global common shareholder will, in general, realize a
capital gain;
- the cost to the Global common shareholder of Ancillary Rights received on
the exchange will be equal to the fair market value thereof at the time
of disposition; and
- the cost to the Global common shareholder of exchangeable shares received
on the exchange will be equal to the amount by which the deemed proceeds
of disposition of the Global common shares exchanged by the Global common
shareholder exceeds the aggregate of: (i) any cash received in
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respect of a fractional exchangeable share; and (ii) the fair market
value at the time of disposition of the Ancillary Rights received on the
exchange.
ExchangeCo will execute a joint tax election under subsection 85(1) or (2)
of the Income Tax Act (Canada) and the corresponding provisions of any
applicable provincial tax legislation forwarded to it by a Global common
shareholder. Global common shareholders wishing to make such elections must
provide two signed copies of the necessary election forms to ExchangeCo at
4908 -- 52nd Street S.E., Calgary, Alberta, T2B 3R2 within 90 days following the
effective date of the Combination, duly completed with the details of the number
of Global common shares transferred and the applicable elected transfer price
for the purposes of such elections. Further information concerning the
completion of the necessary election forms may be posted on FuelCell's or
Global's website. Thereafter, subject to the election forms complying with the
provisions of the Income Tax Act (Canada) (and any applicable provincial
legislation), the forms will be completed by ExchangeCo as to its information,
signed by ExchangeCo, and returned to such Global common shareholders for filing
with the CCRA (and any applicable provincial taxation authority). ExchangeCo
agrees only to execute and to forward such tax elections by mail to Global
common shareholders for filing with the CCRA and any applicable provincial tax
authorities. Compliance with the requirements to ensure the validity of a joint
tax election on a timely basis will be the sole responsibility of the Global
common shareholder making the election and none of FuelCell, Global, or
ExchangeCo assumes any liability for taxes, interest, penalties, damages or
expenses resulting from the failure to execute and file a valid election or the
late filing of any election.
GLOBAL COMMON SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN ADVISORS AS SOON
AS POSSIBLE REGARDING THE DEADLINES AND PROCEDURES FOR MAKING THE ELECTIONS
WHICH ARE APPROPRIATE TO THEIR CIRCUMSTANCES. UNLESS A GLOBAL COMMON SHAREHOLDER
CHOOSES TO ACCEPT EXCHANGEABLE SHARES AND FILES A JOINT TAX ELECTION UNDER
SECTION 85 OF THE INCOME TAX ACT (CANADA), A TAX DEFERRAL WILL NOT BE AVAILABLE
FOR THE GLOBAL COMMON SHAREHOLDER.
For purposes of the joint tax election, a Global common shareholder will be
required to determine the fair market value of the Ancillary Rights received on
the exchange on a reasonable basis for purposes of the Income Tax Act (Canada).
Management of Global, ExchangeCo, and FuelCell are of the view that the
Ancillary Rights have nominal value. The tax election forms will be executed by
ExchangeCo on the basis that the fair market value of the Ancillary Rights is a
nominal amount per exchangeable share issued on the exchange. Such
determinations of value are not binding on the CCRA and counsel expresses no
opinion on such matters of factual determination.
Exchange of Global common shares for shares of FuelCell common stock. The
Combination has been structured so that each Global common shareholder will be
considered to have transferred all of his/her Global common shares, other than
those shares exchanged for exchangeable shares, to FuelCell in consideration for
shares of FuelCell common stock.
Such Global common shareholders will not qualify for a tax-deferred
exchange by making an election under section 85 of the Income Tax Act (Canada).
Consequently, where a Global common shareholder exchanges Global common shares
for shares of FuelCell common stock, the Global common shareholder will be
considered to have disposed of all of the holder's Global common shares so
exchanged for proceeds of disposition equal to the sum of: (i) any cash received
in respect of a fractional share of FuelCell common stock; and (ii) the
aggregate fair market value at the effective time of the Combination of the
shares of FuelCell common stock received on the exchange. Such Global common
shareholder will be considered to have acquired the shares of FuelCell common
stock at a cost equal to such fair market value. This cost will be averaged with
the adjusted cost base of any other shares of FuelCell common stock held at that
time by the Global common shareholder for the purposes of determining the Global
common shareholder's adjusted cost base of such shares of FuelCell common stock.
The Global common shareholder will realize a capital gain (or a capital loss) on
such exchange to the extent that the holder's proceeds of disposition, net of
any reasonable costs of disposition, exceed (or are less than) the adjusted cost
base of that holder's Global common shares immediately before the exchange.
135
The consequences to a Global common shareholder of realizing a capital gain
or capital loss are described below under the heading "Taxation of Capital Gains
and Capital Losses".
Dividends on Exchangeable Shares. In the case of a Global common
shareholder who is an individual, dividends received or deemed to be received on
the exchangeable shares will be included in computing the Global common
shareholder's income, and will be subject to the gross-up and dividend tax
credit rules normally applicable to taxable dividends received from taxable
Canadian corporations.
In the case of a Global common shareholder that is a corporation other than
a "specified financial institution", as defined in the Income Tax Act (Canada),
dividends received or deemed to be received on the exchangeable shares normally
will be included in the corporation's income and will be deductible in computing
its taxable income.
A Global common shareholder that is a "private corporation", as defined in
the Income Tax Act (Canada), or any other corporation resident in Canada and
controlled or deemed to be controlled by or for the benefit of an individual
(other than a trust) or a related group of individuals (other than trusts) may
be liable under Part IV of the Income Tax Act (Canada) to pay a refundable tax
of 33 1/3% of dividends received or deemed to be received on the exchangeable
shares to the extent that such dividends are deductible in computing the Global
common shareholder's taxable income.
The exchangeable shares will be "term preferred shares" as defined in the
Income Tax Act (Canada). Consequently, in the case of a Global common
shareholder that is a specified financial institution, a dividend will be
deductible in computing its taxable income only if:
- the specified financial institution did not acquire the exchangeable
shares in the ordinary course of the business carried on by such
institution; or
- in any case, at the time the dividend is received by the specified
financial institution, the exchangeable shares are listed on a prescribed
stock exchange in Canada (which currently includes the Toronto Stock
Exchange) and the specified financial institution, either alone or
together with persons with whom it does not deal at arm's length, does
not receive (or is not deemed to receive) dividends in respect of more
than 10% of the issued and outstanding exchangeable shares.
A Global common shareholder that is throughout the relevant taxation year a
"Canadian-controlled private corporation", as defined in the Income Tax Act
(Canada), may be liable to pay an additional refundable tax of 6 2/3% on its
"aggregate investment income" for the year which will include dividends or
deemed dividends that are not deductible in computing taxable income.
To the extent that there is United States non-resident withholding tax on
any dividends paid on the exchangeable shares, a Global common shareholder
should generally be eligible for foreign tax credit or deduction treatment,
where applicable, under the Income Tax Act (Canada). See "United States Federal
Tax Considerations to Shareholders -- Non-United States Holders -- Distributions
on the Exchangeable Shares and FuelCell Common Stock" below.
Redemption of Exchangeable Shares. On the redemption (including a
retraction) of an exchangeable share by ExchangeCo, the holder of an
exchangeable share will be deemed to have received a dividend equal to the
amount, if any, by which the redemption proceeds exceed the paid-up capital of
the share at the time the exchangeable share is redeemed. For these purposes,
the redemption proceeds will be the fair market value at the time of the
redemption of any shares of FuelCell common stock received from ExchangeCo plus
the amount, if any, of all then declared but unpaid dividends on the
exchangeable shares. The amount of such deemed dividend generally will be
subject to the same tax treatment accorded to dividends on the exchangeable
shares as described above. On the redemption, the holder of an exchangeable
share will also be considered to have disposed of the exchangeable share for
proceeds of disposition equal to the redemption proceeds less the amount of the
deemed dividend. A holder will, in general, realize a capital gain (or a capital
loss) equal to the amount by which the adjusted cost base to the holder of the
exchangeable shares is less than (or exceeds) such proceeds of disposition, net
of any reasonable costs of disposition. In the case of a Global common
shareholder that is a corporation, in some circumstances, the amount of any such
deemed dividend
136
may be treated as proceeds of disposition and not as a dividend. The taxation of
capital gains and capital losses is described below under the heading "Taxation
of Capital Gains and Capital Losses".
Exchange of Exchangeable Shares. On the exchange of an exchangeable share
with FuelCell or CallCo for shares of FuelCell common stock, the holder will
generally realize a capital gain (or a capital loss) equal to the amount by
which the proceeds of disposition of the exchangeable share, net of any
reasonable costs of disposition, exceed (or are less than) the adjusted cost
base to the holder of the exchangeable share immediately before the exchange.
For these purposes, the proceeds of disposition will be the fair market value at
the time of exchange of the shares of FuelCell common stock plus any other
amount received by the holder from FuelCell or CallCo as part of the exchange
consideration (other than amounts paid by ExchangeCo in satisfaction of declared
but unpaid dividends owed to the holder by ExchangeCo). The taxation of capital
gains and capital losses is described below under the heading "Taxation of
Capital Gains and Capital Losses".
Dividends on shares of FuelCell common stock. Dividends on shares of
FuelCell common stock will be included in the recipient's income for the
purposes of the Income Tax Act (Canada). Such dividends received by an
individual Global common shareholder will not be subject to the gross-up and
dividend tax credit rules in the Income Tax Act (Canada). A Global common
shareholder that is a corporation will include such dividends in computing its
income and generally will not be entitled to deduct the amount of such dividends
in computing its taxable income. A Global common shareholder that is throughout
the relevant taxation year a "Canadian-controlled private corporation", as
defined in the Income Tax Act (Canada), may be liable to pay an additional
refundable tax of 6 2/3% on its "aggregate investment income" for the year which
will include such dividends. United States non-resident withholding tax on such
dividends received by Canadian residents will be generally eligible for foreign
tax credit or deduction treatment, where applicable, under the Income Tax Act
(Canada). See "United States Federal Tax Considerations to
Shareholders -- Non-United States Holders -- Distributions on the Exchangeable
Shares and FuelCell Common Stock" below.
Disposition of shares of FuelCell common stock. The cost of any shares of
FuelCell common stock received on a retraction, redemption or exchange of
exchangeable shares will be equal to the fair market value of such shares at the
time of such event and will be averaged with the adjusted cost base of all other
shares of FuelCell common stock held by such holder as capital property
immediately before the retraction, redemption or exchange, as the case may be,
for the purpose of determining the holder's adjusted cost base of such shares of
FuelCell common stock. A disposition or deemed disposition of shares of FuelCell
common stock by a holder will generally result in a capital gain (or a capital
loss) equal to the amount by which the proceeds of disposition, net of any
reasonable costs of disposition, exceed (or are less than) the adjusted cost
base to the holder of such shares immediately before the disposition. The
taxation of capital gains and capital losses is described below under the
heading "Taxation of Capital Gains and Capital Losses".
Foreign Property Information Reporting. With some exceptions, a taxpayer
resident in Canada is a "specified Canadian entity" (as defined in the Income
Tax Act (Canada)) and is required to file an annual information return
disclosing prescribed information concerning the ownership of "specified foreign
property" (as defined in the Income Tax Act (Canada)) where the cost amount of
such property to the taxpayer exceeds Cdn.$100,000. Specified foreign property
is defined in the Income Tax Act (Canada) to include shares of the capital stock
of a non-resident corporation and property that, under the terms or conditions
thereof or any agreement related thereto, is convertible into, is exchangeable
for or confers a right to acquire, property that is a share of the capital stock
of a non-resident corporation.
The exchangeable shares and the shares of FuelCell common stock will be
specified foreign property. As a result, if the aggregate cost amount of any
specified foreign property held by a holder (including any exchangeable shares
and shares of FuelCell common stock) at any time in a taxation year or fiscal
period exceeds Cdn.$100,000, the holder will be required to file an information
return for the year or period disclosing prescribed information, such as the
cost amount of the specified foreign property and the amount of any dividends,
interest and gains or losses realized in the year in respect of such specified
foreign property. Global common shareholders should consult their own advisors
to determine whether they will be subject to these rules with respect to their
ownership of exchangeable shares and shares of FuelCell common stock.
137
Dissenting Global shareholders. Global common shareholders are permitted
to dissent from the Combination. A dissenting Global common shareholder will be
entitled, in the event the transaction is consummated, to be paid by FuelCell,
the fair value of the Global common shares held by such holder determined as of
the appropriate date. See "Chapter One -- The Combination -- Description of the
Combination -- Dissenting Shareholder Rights". Such dissenting shareholder will
be considered to have realized a capital gain (or a capital loss) to the extent
that the proceeds of disposition, net of reasonable costs associated with the
disposition, exceed (or are less than) the adjusted cost base of the Global
common shares to the holder immediately before the payment. Additional income
tax considerations may be relevant to dissenting shareholders who fail to
perfect or withdraw their claims pursuant to the right of dissent. Dissenting
shareholders should consult their own tax advisors.
Taxation of Capital Gains and Capital Losses. One-half of any capital gain
(a taxable capital gain) realized on a disposition of Global common shares,
exchangeable shares or shares of FuelCell common stock must be included in a
Global common shareholder's income for the year of disposition. One-half of any
capital loss (an allowable capital loss) generally may be deducted by the holder
against taxable capital gains for the year of disposition. Any allowable capital
losses in excess of taxable capital gains for the year of disposition generally
may be carried back up to three taxation years or carried forward indefinitely
and deducted against taxable capital gains in such other years to the extent and
under the circumstances described in the Income Tax Act (Canada).
Capital gains realized by an individual or trust, other than certain
specified trusts, may give rise to alternative minimum tax under the Income Tax
Act (Canada).
A Global common shareholder that is throughout the relevant taxation year a
"Canadian-controlled private corporation", as defined in the Income Tax Act
(Canada), may be liable to pay an additional refundable tax of 6 2/3% on its
"aggregate investment income" for the year which will include an amount in
respect of taxable capital gains.
If the holder of Global common shares or exchangeable shares is a
corporation, the amount of any capital loss arising from a disposition or deemed
disposition of such shares may be reduced by the amount of dividends received or
deemed to have been received by it on such shares to the extent and under
circumstances prescribed by the Income Tax Act (Canada). Similar rules may apply
where a corporation is a member of a partnership or a beneficiary of a trust
that owns Global common shares or exchangeable shares or where a trust or
partnership of which a corporation is a beneficiary or a member, respectively,
owns Global common shares or exchangeable shares. Global common shareholders to
whom these rules may be relevant should consult their own tax advisors.
SHAREHOLDERS NOT RESIDENT IN CANADA
The following portion of this discussion is applicable to Global common
shareholders who, for purposes of the Income Tax Act (Canada) and any applicable
tax treaty or convention, have not been and will not be resident or deemed to be
resident in Canada at any time while they have held Global common shares and
will hold shares of FuelCell common stock and who have not and will not use or
hold the Global common shares or shares of FuelCell common stock in the course
of carrying on a business (including an insurance business) in Canada and,
except as specifically discussed below, to whom such shares are not "taxable
Canadian property", as defined in the Income Tax Act (Canada).
Global common shares will generally not be taxable Canadian property at a
particular time provided that such shares are listed on a prescribed stock
exchange (which currently includes the Toronto Stock Exchange) and the holder,
persons with whom such holder does not deal at arm's length, or the holder and
such persons, has not owned 25% or more of the issued shares of any class or
series of the capital stock of Global at any time within 60 months preceding the
particular time. Shares of FuelCell common stock will generally not constitute
taxable Canadian property.
138
A holder of Global common shares that are not taxable Canadian property to
the holder will not be subject to tax under the Income Tax Act (Canada) on a
capital gain recognized on the exchange of Global common shares for shares of
FuelCell common stock.
In the event that the Global common shares constitute taxable Canadian
property to a particular non-resident holder, the exchange of such shares for
shares of FuelCell common stock will be a taxable transaction as described above
under "Shareholders Resident in Canada-Exchange of Global common shares for
shares of FuelCell common stock" subject to any relief available pursuant to the
provisions of an applicable income tax treaty or convention.
GLOBAL COMMON SHAREHOLDERS WHOSE GLOBAL COMMON SHARES CONSTITUTE TAXABLE
CANADIAN PROPERTY TO THEM ARE URGED TO CONSULT THEIR OWN TAX ADVISORS.
Global common shareholders are permitted to dissent from the Combination. A
dissenting shareholder will be entitled, in the event the transaction is
consummated, to be paid by the FuelCell, the fair value of the Global common
shares held by such holder determined as of the appropriate date. See "Chapter
One -- The Combination -- Description of the Combination -- Dissenting
Shareholder Rights". Such dissenting shareholder will be considered to have
realized a capital gain (or a capital loss) to the extent that the proceeds of
disposition, net of reasonable costs associated with the disposition, exceed (or
are less than) the adjusted cost base of the Global common shares to the holder
immediately before the payment. Any capital gain realized by a dissenting
shareholder will not be taxed under the Income Tax Act (Canada) unless the
Global common shares in respect of which the right of dissent is exercised are
taxable Canadian property, as described above. Additional income tax
considerations may be relevant to dissenting shareholders who fail to perfect or
withdraw their claims pursuant to the right of dissent. Dissenting shareholders
should consult their own tax advisors.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS TO OPTIONHOLDERS
Subject to the qualifications and assumptions contained herein, in the
opinion of Bennett Jones LLP, Canadian counsel to Global, the following is, as
of the date of this Joint Proxy Statement, a fair and adequate summary of the
material Canadian federal income tax considerations generally applicable to the
holders of options to purchase Global common shares who at all relevant times,
for purposes of the Income Tax Act (Canada) and any applicable income tax treaty
or convention, are resident or deemed to be resident in Canada, who are current
or former employees, officers or directors of Global and who received the
options in respect of, in the course of, or by virtue of their positions as
employees, officers or directors of Global.
This discussion is based on the current provisions of the Income Tax Act
(Canada) and the Regulations and counsel's understanding of the current
published administrative practices of the CCRA. This discussion does not take
into account or anticipate any changes in law, whether by legislative,
administrative or judicial decision or action, nor does it take into account
provincial, territorial or foreign income tax legislation or considerations
which may differ from the Canadian federal income tax considerations described
herein.
THE FOLLOWING DISCUSSION IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO
BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR
OPTIONHOLDER. ACCORDINGLY, OPTIONHOLDERS SHOULD CONSULT THEIR OWN INDEPENDENT
TAX ADVISORS FOR ADVICE WITH RESPECT TO THE INCOME TAX CONSEQUENCES TO THEM OF
THE COMBINATION, HAVING REGARD TO THEIR OWN PARTICULAR CIRCUMSTANCES.
On the assumption that, at the time of the exchange of any options to
purchase Global common shares for options to purchase shares of FuelCell common
stock pursuant to the Combination, the difference between the value of the
shares of FuelCell common stock under the options to purchase shares of FuelCell
common stock and the amount payable under such options to purchase the shares of
FuelCell common stock does not exceed the difference between the value of the
Global common shares available under the options and the amount payable under
such options to purchase Global common shares, the holders of the options will
not realize any immediate tax consequences as a result of exchanging their
options to purchase Global common
139
shares for options to purchase shares of FuelCell common stock. Instead, for the
purposes of the Income Tax Act (Canada):
- the optionholders will be deemed not to have disposed of their options to
purchase Global common shares and not to have acquired the options to
purchase shares of FuelCell common stock;
- the options to purchase shares of FuelCell common stock will be deemed to
be the same as, and a continuation of, the options to purchase Global
common shares; and
- FuelCell will be deemed to be the same corporation as Global for the
purposes of the rules in the Income Tax Act (Canada) relating to employee
stock options.
UNITED STATES FEDERAL TAX CONSIDERATIONS TO SHAREHOLDERS
In the opinion of Robinson & Cole LLP, United States counsel to FuelCell,
and Dorsey & Whitney LLP, United States counsel to Global ("Counsel"), the
following is a summary of the principal U.S. federal income tax consequences
generally applicable to a U.S. Holder (as defined below) of Global common shares
who receives shares of FuelCell's common stock pursuant to the Combination. As
used herein, "U.S. Holder" means a holder of Global common shares or shares of
FuelCell common stock, as the case may be, who or that is for U.S. federal
income tax purposes (i) a citizen or resident of the United States, (ii) a
corporation or other entity taxable as a corporation organized under the laws of
the United States or any political subdivision thereof (including the States and
the District of Columbia), (iii) an estate or trust defined in Section
7701(a)(30) of the Internal Revenue Code of 1986, as amended (the "Code") or
(iv) any other person that is subject to U.S. federal income tax on its
worldwide income (each of the foregoing, a "U.S. Holder"). A "Non-U.S. Holder"
is any holder of Global common shares, exchangeable shares or shares of FuelCell
common stock, as the case may be, other than a U.S. Holder. If an entity that is
treated as a partnership for U.S. federal income tax purposes holds Global
common shares, the tax treatment of a partner in the partnership will generally
depend upon the status of the partner and the activities of the partnership. If
you are a partner of a partnership holding Global common shares, you should
consult your tax advisor regarding the tax consequences of the Combination to
you, including the acquisition, ownership and disposition of exchangeable shares
or FuelCell common stock.
This summary is based upon existing U.S. federal income tax law, including
the Code, administrative pronouncements, judicial decisions and Treasury
Regulations, as in effect as of the date hereof, all of which are subject to
change, possibly with retroactive effect. This summary assumes that each of the
Global common shares has been held as a capital asset as defined in Section 1221
of the Code in the hands of the U.S. Holder at all relevant times and that the
shares of FuelCell common stock to be received by such U.S. Holder as a result
of the Combination will also be held as capital assets. This summary assumes
that Global is not, but may become, a "controlled foreign corporation" and that
Global may be or may become a "passive foreign investment company" for U.S.
federal income tax purposes. This summary does not discuss aspects of U.S.
federal income taxation that may be applicable to holders of options as a result
of the Combination, nor does it address any aspects of foreign, state or local
taxation. Furthermore, this summary does not discuss all the tax consequences
that may be relevant to a U.S. Holder in light of such holder's particular
circumstances or to U.S. Holders subject to special rules including certain
financial institutions, regulated investment companies, insurance companies,
dealers in securities, tax-exempt organizations, persons who hold Global common
shares or shares of FuelCell common stock, as the case may be, as part of a
position in a "straddle" or "appreciated financial position" or as part of a
"hedging" or "conversion" transaction, persons that own or have owned, actually
or constructively, 10% or more of the Global common shares, persons who acquired
their Global common shares through the exercise or cancellation of employee
stock options or otherwise as compensation for services, and U.S. Holders whose
functional currency is not the U.S. dollar.
No advance income tax ruling has been sought or obtained from the Internal
Revenue Service ("IRS") with respect to the tax consequences of the Combination
and, as a result, there can be no assurance that the IRS will agree with, or
that a court will uphold, any of the conclusions set forth herein.
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HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE U.S.
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, THE FOREIGN TAX CONSEQUENCES AND THE
NON-TAX CONSEQUENCES OF THE COMBINATION, INCLUDING THE RECEIPT, OWNERSHIP AND
DISPOSITION OF SHARES OF FUELCELL COMMON STOCK AND ANCILLARY RIGHTS AND CALL
RIGHTS.
UNITED STATES HOLDERS
The following discussion applies only to U.S. Holders who receive shares of
FuelCell common stock in exchange for their Global common shares. This
discussion does not address U.S. Holders who are residents of Canada for
purposes of the Income Tax Act (Canada) and who elect to receive exchangeable
shares pursuant to the Combination. Such U.S. Holders should consult their tax
advisers concerning the tax consequences of the Combination. This discussion
also assumes that the holder of the Global Series 2 Preferred Shares will not
exercise its right to convert all or part of such shares into Global common
shares prior to the Combination or into exchangeable shares or shares of
FuelCell common stock in connection with the Combination.
EXCHANGE OF GLOBAL COMMON SHARES FOR FUELCELL COMMON STOCK
The exchange of Global common shares for shares of FuelCell common stock
pursuant to the Combination will be a taxable event for United States federal
income tax purposes. Consequently, a U.S. Holder will recognize gain or loss
equal to the difference between (i) the sum of (a) the fair market value on the
date of the exchange of the shares of FuelCell common stock received in the
exchange and (b) any cash received in lieu of the fractional shares and (ii)
such U.S. Holder's tax basis in its Global common shares. Generally, such gain
or loss will be capital gain or loss and will be long-term capital gain or loss
if the U.S. Holder had held its Global common shares for more than one year at
the time of the exchange. Gain or loss, if any, realized by a U.S. Holder in
connection with the Combination generally will be treated as having a U.S.
source. For U.S. federal income tax purposes, a U.S. Holder's basis in the
shares of FuelCell common stock received pursuant to the Combination will be
equal to the fair market value of such shares on the date of exchange and a U.S.
Holder's holding period with respect to such shares will begin on the day after
the date of the exchange. The foregoing discussion is subject to the application
of the "Passive Foreign Investment Company Considerations" below.
DISSENTING SHAREHOLDERS
A U.S. Holder who exercises the right to dissent from the Combination will
recognize gain or loss on the exchange of such holder's Global common shares for
cash in an amount equal to the difference between the amount of cash received
(other than amounts, if any, which are or are deemed to be interest for United
States federal income tax purposes, which amounts will be taxed as ordinary
income) and such holder's adjusted tax basis in its Global common shares. Such
gain or loss generally will be U.S. source income, will be capital gain or loss
if the Global common shares were held as capital assets at the time of the
exchange and will be long-term capital gain or loss if the U.S. Holder's holding
period for the Global common shares is more than one year at such time. The
foregoing discussion is subject to the application of the "Passive Foreign
Investment Company Considerations" below.
NON-UNITED STATES HOLDERS
The following discussion is applicable to a Non-U.S. Holder.
RECEIPT, EXCHANGE OR OTHER DISPOSITION OF EXCHANGEABLE SHARES AND FUELCELL
COMMON STOCK
Subject to the discussion below under "Foreign Investment in Real Property
Tax Act", a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain realized on the receipt of exchangeable shares or FuelCell
common stock in exchange for Global common shares, on the sale or exchange of
the exchangeable shares, or on the sale or exchange of shares of FuelCell common
stock, unless (i) such gain (A) in the absence of an applicable tax treaty, is
effectively connected with a trade or business of the Non-U.S. Holder in the
United States, or (B) if a tax treaty applies, is attributable to a permanent
establishment maintained by the Non-U.S. Holder in the United States or (ii)
unless an applicable tax treaty
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provides otherwise the Non-U.S. Holder is an individual who holds the Global
common shares, the exchangeable shares or the shares of FuelCell common stock,
as the case may be, as a capital asset and is present in the United States for
183 days or more in the taxable year of disposition, and certain other
conditions are satisfied. The foregoing discussion is subject to the application
of the "Passive Foreign Investment Company Considerations" below.
DISTRIBUTIONS ON THE EXCHANGEABLE SHARES AND FUELCELL COMMON STOCK
FuelCell may take the position that the dividends, if any, received by a
Non-U.S. Holder in respect of the exchangeable shares should be treated as
dividends from FuelCell and, in that case, FuelCell anticipates that ExchangeCo
will withhold from such amounts U.S. withholding tax at a rate of 30 percent
unless reduced by applicable treaty. For U.S. federal income tax purposes, in
general, dividends received by a Non-U.S. Holder with respect to shares of
FuelCell common stock that are not effectively connected with the conduct by
such holder of a trade or business in the United States will also be subject to
U.S. withholding tax at a rate of 30 percent. The withholding rate may be
reduced by an applicable income tax treaty in effect between the United States
and the Non-U.S. Holder's country of residence (currently 15%, generally, on
dividends paid to residents of Canada under the current Canada-United States
Income Tax Convention).
FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT
Notwithstanding the discussion above, under the Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"), gain or loss recognized by a Non-U.S.
Holder on the sale or exchange of shares of FuelCell common stock, as well as
any gain or loss recognized on the sale or exchange of exchangeable shares (if
such shares are treated by the IRS as representing stock of FuelCell), will be
subject to U.S. federal income tax as if such gain or loss were effectively
connected with a United States trade or business if such shares are treated as
"United States real property interests" ("USRPIs") (as defined below) and the
Non-U.S. Holder is a greater than 5% Shareholder as defined under applicable
regulations.
A USRPI generally includes any interest (other than an interest solely as a
creditor) in a "United States real property holding corporation" (a "USRPHC").
Exchangeable shares (if treated as stock of FuelCell) and shares of FuelCell
common stock will be USRPIs unless it is established under specific procedures
that FuelCell is not (and was not for the prior five-year period) a USRPHC. A
corporation is a USRPHC if the fair market value of its interests in United
States real property equals or exceeds 50% of the sum of the fair market value
of all of its interests in real property and all of its other assets used or
held for use in a trade or business (as defined in applicable regulations),
after applying certain look-through rules. FuelCell cannot give any assurance as
to whether it is, at any time within the past five years, it has been, or will
in the future become a USRPHC.
If it is determined that FuelCell is, has been in the past five years or in
the future becomes, a USRPHC, so long as FuelCell's stock is regularly traded on
an established securities market, an exemption should apply, except with respect
to a Non-U.S. Holder whose beneficial and/or constructive ownership of common
stock in FuelCell exceeds 5% of the total fair market value of the total
outstanding shares of FuelCell common stock (including exchangeable shares to
the extent they are treated as FuelCell common stock). This exception should
apply to both the shares of FuelCell common stock and to the exchangeable shares
(if treated as FuelCell stock). Any investor that may approach or exceed the 5%
ownership threshold discussed above, either alone or in conjunction with related
persons, should consult its own tax advisor concerning the United States tax
consequences that may result. A Non-U.S. Holder who sells or otherwise disposes
of exchangeable shares or shares of FuelCell common stock may be required to
inform its transferee whether such shares constitute a United States real
property interest.
The foregoing discussion of the possible application of the FIRPTA rules to
Non-U.S. Holders is only a summary of certain material aspects of these rules.
Because the United States federal income tax consequences to a Non-U.S. Holder
under FIRPTA may be significant and are complex, Non-U.S. Holders are urged to
discuss those consequences with their tax advisors.
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CONTROLLED FOREIGN CORPORATION CONSIDERATIONS
FuelCell may be subject to U.S. federal income taxation on Global's
earnings before receiving distributions from Global attributable to such
earnings. In general, if a U.S. person, directly or indirectly, holds an equity
interest representing 10% or greater of the total combined voting power in a
non-U.S. entity and, together with other U.S. persons who directly or indirectly
own 10% or more of the non-U.S. entity, hold more than 50% of the outstanding
equity of the non-U.S. entity, measured by vote or value, the non-U.S. entity
will be treated as a "controlled foreign corporation" with respect to such U.S.
persons. Following the Combination, FuelCell should itself own, directly or
indirectly, more than 50% of the outstanding equity of Global, measured by vote
or value, and therefore, Global should be a controlled foreign corporation with
respect to FuelCell. As a result, FuelCell could be required to include in its
income for U.S. federal income tax purposes on a current basis all or a portion
of its share of the undistributed "earnings and profits," as determined for such
purposes, of Global, depending on Global's sources of income and other
considerations. In general, FuelCell must include its share of undistributed
earnings and profits of Global where the earnings and profits are attributable
to Global's "subpart F income," which generally is income from passive and
certain other sources, or are invested by Global in "U.S. property," as
determined for U.S. federal income tax purposes.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
The general rules described above relating to the character and timing for
recognition of any gain realized in the Combination may not apply to a U.S.
Holder if Global is, or has been at any time during the U.S. Holder's holding
period for its Global common shares, a "passive foreign investment company."
Global will be classified as a passive foreign investment company for any
taxable year as to which, after the application of "look through" rules, either
(a) 75% or more of its gross income in such taxable year is passive income, or
(b) the average percentage of its assets in such taxable year that produce or
are held for the production of passive income (which includes cash) is at least
50%.
Although Global has not completed its analysis of whether or not it is or
has been a passive foreign investment company, Global believes it is likely to
be treated as a passive foreign investment company for the current tax period in
view of its cash position and the consideration payable to Global shareholders
in the Combination. Global may have qualified as a passive foreign investment
company in prior tax periods. However, each U.S. Holder, particularly a U.S.
Holder whose tax basis in Global common shares is less than the consideration to
be received in exchange therefore pursuant to the Combination (i.e., FuelCell
common stock and the amount of any cash), should consult its own financial and
tax advisors regarding the potential application of the passive foreign
investment company rules to the exchange of Global common shares pursuant to the
Combination.
Special U.S. federal income tax rules apply to a U.S. Holder if Global is
or has been a passive foreign investment company at any time during such U.S.
Holder's holding period for its Global common shares. Under those rules, subject
to the discussion below as to the mark-to-market and qualified electing fund
elections, if such a U.S. Holder realizes a gain upon the disposition of its
Global common shares pursuant to the Combination:
- the gain would be allocated ratably over the U.S. Holder's holding period
for the Global common shares;
- the amount allocated to the current taxable year and any taxable year
prior to the first taxable year in which Global was a passive foreign
investment company would be treated as ordinary income includible in
income for the current taxable year;
- the amount allocated to each other prior taxable year would be taxed as
ordinary income at the highest tax rate in effect for that year; and
- the interest charge applicable to underpayments of U.S. federal income
tax would be imposed with respect to the resulting tax attributable to
each prior year commencing with the first year in which
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Global was a passive foreign investment company, to recover the deemed
benefit from the deferred payment of the tax attributable to each such
year.
Under certain circumstances, a U.S. Holder of stock in a passive foreign
investment company may elect tax treatment that differs from the foregoing.
First, a U.S. Holder of "marketable" stock in a passive foreign investment
company is allowed to make a mark-to-market election with respect to such stock.
Stock that is listed on a non-U.S. exchange, such as the Global common shares,
will be treated as marketable where the exchange is regulated or supervised by a
governmental authority of the country in which the market is located and has the
following characteristics:
- the exchange has trading volume, listing, financial disclosure,
surveillance, and other requirements designed to prevent fraudulent and
manipulative acts and practices, to remove impediments to and perfect the
mechanism of a free and open, fair and orderly, market, and to protect
investors; and
- the laws of the country in which the exchange is located and the rules of
the exchange ensure that such requirements are actually enforced; and
- the rules of the exchange effectively promote active trading of listed
stocks.
Global has not determined whether the Toronto Stock Exchange, the exchange
upon which the Global common shares are listed, satisfies the foregoing
requirements. If a U.S. Holder has determined that its Global shares are
marketable and has properly made a mark-to-market election with respect to its
Global common shares, the special gain allocation rules described above would
not apply to such U.S. Holder. Instead, the U.S. Holder would be required to
mark its Global common shares to market each taxable year. The U.S. Holder would
recognize ordinary income as a result of any increase in market value for a
taxable year, and would be allowed to recognize an ordinary loss for any
decrease in market value for a taxable year (but only to the extent of the net
amount previously included in income as a result of the mark-to-market
election). The adjusted tax basis in the U.S. Holder's Global common shares
would be adjusted to reflect any such gain or loss amounts. The mark-to-market
election is effective for the taxable year for which the election is made and
all subsequent taxable years, unless the Global common shares cease to be
marketable or the U.S. Internal Revenue Service consents to the revocation of
the election.
The special gain allocation rules and the mark-to-market rules described
above will not apply to a U.S. Holder that has made a "qualified electing fund"
election, that is, a U.S. Holder that has elected to treat Global as a qualified
electing fund and to include such U.S. Holder's share of Global's income on a
current basis. However, even if Global is or has been a passive foreign
investment company, the qualified electing fund election is not available to
Global's U.S. Holders because certain requirements for the election have not
been and will not be satisfied.
If Global has been a passive foreign investment company in any year, a U.S.
Holder would be required to file an annual return on Internal Revenue Service
Form 8621 regarding distributions received with respect to the Global common
shares and any gain realized on the disposition of the Global common shares.
The foregoing is only a summary of certain material aspects of the
potential application of the passive foreign investment company rules to Global
and U.S. Holders of Global common shares. Because the U.S. federal income tax
consequences to a U.S. Holder of Global common shares under the passive foreign
investment company provisions are significant and are complex, U.S. Holders of
Global common shares are urged to discuss those consequences with their tax
advisors.
BACKUP WITHHOLDING AND INFORMATION REPORTING
UNITED STATES HOLDERS
Payments of dividends made on, or the proceeds of the sale or other
disposition of, the shares of FuelCell common stock, as the case may be, may be
subject to information reporting and United States federal backup withholding
tax at the rate of 28% if the recipient of such payment fails to supply an
accurate taxpayer identification number or otherwise fails to comply with
applicable United States information reporting or certification requirements.
Any amount withheld from a payment to a U.S. Holder under the backup
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withholding rules is allowable as a credit against the holder's U.S. federal
income tax, provided that the required information is furnished to the IRS.
NON-UNITED STATES HOLDERS
A Non-U.S. Holder may be required to comply with certification procedures
to establish that such holder is not a U.S. person in order to avoid backup
withholding tax requirements with respect to distributions on, or the proceeds
of the sale or other disposition of, the exchangeable shares and shares of
FuelCell common stock, as the case may be. In addition, FuelCell must report
annually to the IRS and to each Non-U.S. Holder the amount of any dividends paid
to and the tax withheld with respect to, such holder, regardless of whether any
tax was actually withheld. Copies of these information returns may also be made
available under the provisions of a specific treaty or agreement to the tax
authorities of the country in which the Non-U.S. Holder resides.
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CHAPTER FIVE -- INFORMATION ABOUT THE MEETINGS AND VOTING
THE GLOBAL SPECIAL MEETING -- INFORMATION FOR GLOBAL COMMON SHAREHOLDERS
SOLICITATION AND VOTING OF PROXIES
The accompanying Global proxy is solicited on behalf of management of
Global for use at the Global Meeting to be held at 10:00 a.m. on October 31,
2003 in Rooms 105 and 106 in the North Building of the TELUS Convention Centre,
136 - 8th Avenue S.E., Calgary, Alberta, Canada. Global anticipates that it will
solicit proxies from Global common shareholders for use at the Global Meeting to
help ensure that the requisite approval from Global common shareholders is
obtained. The solicitation of proxies will be primarily by mail but proxies may
also be solicited personally or by telephone by regular employees of Global and
FuelCell without special compensation. Global and FuelCell will each bear their
own costs of solicitation of proxies. Global may also pay brokers or nominees
holding Global common shares in their names or in the names of their principals
for their reasonable expenses in sending solicitation material to their
principals. Global may retain a soliciting dealer to aid in the solicitation of
proxies and verify records related to the solicitation. In such event, Global
anticipates that it will pay the investment dealer or broker the fees customary
for such a solicitation, subject to mutually agreed upon minimum and maximum
amounts.
Only registered shareholders at the close of business on October 1, 2003
will be entitled to vote at the Global Meeting, subject to the provisions of the
Business Corporations Act (Alberta) law regarding transfers of common shares
after October 1, 2003. Please see the "Notice of Special Meeting of Common
Shareholders" accompanying this Joint Proxy Statement for more information
regarding voting and other shareholder rights. At the close of business on
September 24, 2003, there were 29,201,450 common shares outstanding.
A quorum for the transaction of business at the Global Meeting requires at
least two persons present in person, each being a shareholder entitled to vote
or a duly appointed proxy or representative for any absent shareholder so
entitled, and representing in the aggregate not less than 20% of the outstanding
shares of Global carrying voting rights at the Global Meeting.
To be effective, proxies must be received by Computershare Trust Company of
Canada not later than 10:00 a.m. (Calgary time) on October 29, 2003, or, if the
Global Meeting is adjourned or postponed, not later than 48 hours (excluding
Saturdays, Sundays and bank holidays) before the time of the adjourned or
postponed Global Meeting or any further adjournment or postponement thereof.
ADVICE TO BENEFICIAL HOLDERS OF GLOBAL COMMON SHARES
The information set forth in this section is important to shareholders who
do not hold their Global common shares in their own name (referred to in this
Joint Proxy Statement as "beneficial shareholders"). Beneficial shareholders
should note that only proxies deposited by shareholders whose names appear on
the records of Global as registered shareholders can be recognized and acted
upon at the Global Meeting. If Global common shares are listed in an account
statement provided to a shareholder by a broker, then in almost all cases those
Global common shares will not be registered in the shareholder's name on the
records of Global. Such Global common shares will more likely be registered
under the name of the shareholder's broker or a nominee of that broker. In
Canada, the vast majority of these shares are registered under the name of CDS &
Co. (the registration name for the Canadian Depository for Securities), which
acts as nominee for many Canadian brokerage firms. In the United States, shares
are often registered under the name of CEDE & Co. (the registration name for The
Depository Trust Company), which acts as nominee for many U.S. brokerage firms.
Global common shares held by brokers or their nominees can only be voted (for or
against resolutions) upon the instructions of the beneficial shareholder.
Applicable regulatory policy requires brokers to seek voting instructions
from beneficial shareholders in advance of shareholders' meetings. Every
intermediary/broker has its own mailing procedures and provides its own return
instructions, which should be carefully followed by beneficial shareholders in
order to ensure that
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their Global common shares are voted at the Global Meeting. Often the form of
proxy supplied to a beneficial shareholder by his/her broker is identical to the
form of proxy provided by Global to the registered shareholders. However, its
purpose is limited to instructing the registered shareholder how to vote on
behalf of the beneficial shareholder. The majority of brokers now delegate
responsibility for obtaining instructions from clients to Independent ADP
Investor Communications in Canada and ADP Proxy Services in the United States
(collectively, "ADP"). ADP typically prepares a machine-readable proxy form,
mails those forms to the beneficial shareholders and asks beneficial
shareholders to return the proxy forms to ADP. ADP then tabulates the results of
all instructions received and provides appropriate instructions respecting the
voting of common shares at the Global Meeting.
A beneficial shareholder receiving a proxy form from ADP cannot use that
proxy to vote Global common shares directly at the Global Meeting. The proxy
must be returned to the respective ADP well in advance of the Global Meeting in
order to have the Global common shares represented by such proxy voted.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Global's board of directors has unanimously determined that the Combination
is fair to holders of Global common shares and preferred shares and is in the
best interests of Global and unanimously recommends that Global common
shareholders vote "FOR" the special resolution to approve the Combination
attached to this Joint Proxy Statement as Annex A.
APPOINTMENT OF PROXY AND DISCRETIONARY AUTHORITY
AS A GLOBAL COMMON SHAREHOLDER YOU HAVE THE RIGHT TO APPOINT A PERSON WHO
NEED NOT BE A SHAREHOLDER OF GLOBAL, OTHER THAN PERSONS DESIGNATED IN THE FORM
OF PROXY ACCOMPANYING THIS JOINT PROXY STATEMENT, AS NOMINEE TO ATTEND AND ACT
FOR AND ON YOUR BEHALF AT THE GLOBAL MEETING AND MAY EXERCISE SUCH RIGHT BY
INSERTING THE NAME OF SUCH PERSON IN THE BLANK SPACE PROVIDED ON THE FORM OF
PROXY.
THE FORM OF PROXY ACCOMPANYING THIS JOINT PROXY STATEMENT CONFERS
DISCRETIONARY AUTHORITY UPON THE PROXY NOMINEES WITH RESPECT TO AMENDMENTS OR
VARIATIONS TO THE MATTERS IDENTIFIED IN THE ACCOMPANYING NOTICE OF THE GLOBAL
MEETING AND OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE GLOBAL MEETING.
YOUR COMMON SHARES REPRESENTED BY PROXIES AT THE GLOBAL MEETING WILL BE
VOTED IN ACCORDANCE WITH YOUR INSTRUCTIONS WHERE YOU HAVE SPECIFIED A CHOICE
WITH RESPECT TO ANY MATTER TO BE VOTED UPON. IN THE ABSENCE OF SUCH
SPECIFICATION, YOUR PROXY WILL BE COUNTED AS A VOTE IN FAVOR OF THE SPECIAL
RESOLUTION TO APPROVE THE COMBINATION ATTACHED TO THIS JOINT PROXY STATEMENT AS
ANNEX A AT THE GLOBAL MEETING.
Management of Global knows of no matters to come before the Global Meeting
other than the matters referred to in the accompanying notice of the Global
Meeting. However, if any other matters which are not now known to management
should properly come before the Global Meeting, the common shares represented by
proxies granted to the proxy nominees will be voted on such matters in
accordance with the best judgment of the proxy nominee.
REVOCATION OF PROXIES
PROXIES GIVEN BY GLOBAL COMMON SHAREHOLDERS FOR USE AT THE GLOBAL MEETING
MAY BE REVOKED AT ANY TIME PRIOR TO THEIR USE. A Global common shareholder
giving a proxy may revoke the proxy (i) by instrument in writing executed by the
shareholder or by his or her attorney authorized in writing, or, if the
shareholder is a corporation, under its corporate seal by an officer or attorney
thereof duly authorized indicating the capacity under which such officer or
attorney is signing, and deposited either at the registered office of Global (as
set forth in this Joint Proxy Statement) or with Computershare Trust Company of
Canada at 9th Floor, 100 University Avenue, Toronto, Ontario M5J 2YI at any time
up to and including 5:00 p.m. (Calgary time) on the last business day preceding
the day of the Global Meeting, or any adjournment or postponement thereof, or
with the chairman of the Global Meeting on the day of the Global Meeting or
adjournment or postponement thereof, (ii) by a duly executed proxy bearing a
later date or time than the date or time of the proxy being revoked, (iii) by
voting in person at the Global Meeting (although attendance at the Global
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Meeting will not in and of itself constitute a revocation of a proxy) or (iv) in
any other manner permitted by law.
REQUIRED VOTES
Global common shareholders are entitled to one vote for each common share
held. The special resolution, in the form of Annex A to this Joint Proxy
Statement, in respect of the proposed Plan of Arrangement set forth in full in
Annex D to this Joint Proxy Statement, must be approved by the affirmative
approval of at least 66 2/3% of the aggregate of the votes cast by the Global
common shareholders present (in person or by proxy) and entitled to vote at the
Global Meeting.
PRINCIPAL HOLDERS OF COMMON SHARES
To the knowledge of the directors and senior officers of Global, there are
no persons who beneficially own, directly or indirectly, or exercise control or
direction over Global common shares carrying more than 10% of the voting rights
attached to all outstanding Global common shares, as of September 24, 2003.
THE FUELCELL SPECIAL MEETING -- INFORMATION FOR FUELCELL STOCKHOLDERS
GENERAL
The accompanying FuelCell proxy is solicited on behalf of FuelCell's board
of directors for use at the FuelCell Meeting to be held at 10:00 a.m. on Friday,
October 31, 2003 at the Sheraton Danbury Hotel, 18 Old Ridgebury Road, Danbury,
Connecticut. FuelCell's board of directors has fixed the close of business on
September 16, 2003 as the record date for determining FuelCell stockholders
entitled to notice of and to vote at the FuelCell Meeting. As of September 16,
2003, there were 39,374,633 shares of FuelCell common stock outstanding and
entitled to vote. This Joint Proxy Statement and the accompanying form of proxy
were first mailed to FuelCell stockholders on or about October 2, 2003.
PURPOSE OF THE FUELCELL MEETING
The purpose of the FuelCell Meeting is to:
1. consider and vote upon a proposal to approve the Combination
Agreement and the Combination, as described in this Joint Proxy Statement;
and
2. transact such other business as may properly be presented to the
FuelCell Meeting or any adjournment or postponement thereof.
Copies of the Combination Agreement and the Plan of Arrangement are
attached to this Joint Proxy Statement as Annexes B and D. FuelCell stockholders
should review the Combination Agreement, all related exhibits thereto and this
Joint Proxy Statement carefully and in their entirety before deciding how to
vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS
FuelCell's board of directors believes that the Combination is fair to the
FuelCell stockholders and in the best interests of FuelCell and unanimously
recommends that FuelCell stockholders vote "FOR" approval of the Combination
Agreement and the transactions contemplated thereby.
VOTING PROXIES AT THE FUELCELL MEETING AND REVOKING PROXIES
FuelCell requests that you complete, date and sign the accompanying proxy
and promptly return it in the accompanying envelope. Alternatively, you can
simplify your voting and save FuelCell expense by voting via the Internet (by
visiting the website shown on your proxy card and following the instructions
listed there) or calling the toll-free telephone number listed on your proxy
card. Internet and telephone voting information is provided on your proxy card.
A control number, which is located on your proxy card, is designed to verify
your identity as a FuelCell stockholder and allow you to vote your shares and
confirm that your voting instructions
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have been recorded properly. If you vote via the Internet or by telephone,
please do not return a signed proxy card.
Brokers holding voting shares in "street name" may vote the shares only if
you provide them with instructions on how to vote. Brokers will direct you on
how to instruct them to vote your shares. Please note, however, that if the
holder of record of your shares is your broker, bank or other nominee and you
wish to vote at the FuelCell Meeting, you must bring a letter from the broker,
bank or other nominee confirming that you are the beneficial owner of the
shares. All properly-executed proxies that FuelCell receives prior to the vote
at the FuelCell Meeting, and that are not revoked, will be voted in accordance
with the instructions indicated on the proxy card. If no direction is indicated
on a proxy, the proxy will be voted in favor of approval of the proposals
(except for broker non-votes, which are discussed below).
A FuelCell stockholder may revoke its proxy at any time prior to its use:
- by delivering to the Secretary of FuelCell a later-dated notice of
revocation;
- by delivering to the Secretary of FuelCell a later-dated signed proxy
(which will automatically supercede any earlier-dated proxy that such
stockholder returned); or
- by attending the FuelCell Meeting and voting in person (attendance at the
FuelCell Meeting does not, by itself, constitute revocation of a proxy).
If your shares are held in "street name," your broker or nominee may permit
you to vote by telephone or electronically. Please check your proxy card or
contact your broker or nominee to determine whether these methods of voting are
available to you.
QUORUM, VOTING RIGHTS, ABSTENTIONS AND BROKER NON-VOTES
A majority of all issued and outstanding voting shares of FuelCell common
stock as of the record date, represented in person or by proxy, will constitute
a quorum for the transaction of business at the FuelCell Meeting. If a quorum is
not present, the FuelCell Meeting may be postponed or adjourned to allow
additional time for obtaining additional proxies or votes. At any subsequent
reconvening of the FuelCell Meeting, all proxies will be voted in the same
manner as the proxies would have been voted at the original convening of the
FuelCell Meeting, except for any proxies that have been effectively revoked or
withdrawn prior to the subsequent meeting.
Each share of FuelCell common stock entitles its owner to one vote on all
matters presented at the FuelCell Meeting. Approval of the Combination Agreement
and the Combination requires the affirmative vote of a majority of the total
votes cast on the proposal, either by person or by proxy.
If any FuelCell stockholder submits a proxy that indicates an abstention
from voting in all matters, such stockholder's shares will be counted as present
in determining the existence of a quorum at the FuelCell Meeting, but they will
not be voted on any matter at the meeting. Abstentions are included in
determining the number of shares voted on the proposals submitted to
stockholders, however, and will therefore have the same effect as a vote against
such proposals.
Under the rules that govern brokers who have record ownership of shares
that are held in "street name" for their clients (who are the beneficial owners
of the shares), brokers have discretion to vote the shares on routine matters
but not on non-routine matters. The proposal to be presented at the FuelCell
Meeting is a non-routine matter. Accordingly, brokers will not have
discretionary voting authority to vote your shares at the FuelCell Meeting. A
"broker non-vote" occurs when brokers do not have discretionary voting authority
and have not received instructions from the beneficial owners of the shares.
Under Delaware case law, broker non-votes are counted for purposes of
determining whether a quorum is present at the meeting, but are not counted for
purposes of determining whether a proposal has been approved.
Broker non-votes will not count as shares voting "for" or "against" with
respect to approval of the Combination Agreement and the Combination and will
not be considered as shares entitled to vote on the proposal for purposes of
determining whether such proposal has been approved.
149
Failing to return your proxy or attend the FuelCell Meeting will reduce the
number of votes cast at the FuelCell Meeting and may contribute to a lack of a
quorum. Consequently, you are urged to return the enclosed proxy card with your
vote marked.
REASONS FOR SEEKING STOCKHOLDER APPROVAL
FuelCell is submitting the Combination Agreement and the Combination for
approval by FuelCell stockholders in accordance with the Nasdaq Marketplace
Rules. The Nasdaq Marketplace Rules require stockholder approval prior to
issuing securities in connection with the acquisition of stock of another
company if the number of shares to be issued in the transaction exceeds 20% or
more of the outstanding common stock or voting power outstanding prior to the
transaction. Under the terms of the Combination Agreement and the Plan of
Arrangement, FuelCell will issue its common stock or exchangeable shares of
ExchangeCo exchangeable into shares of FuelCell's common stock to Global common
shareholders in exchange for their Global common shares, and Global common
shareholders will own between approximately 17% and 20% of the outstanding
shares of FuelCell common stock, on a fully-diluted basis, immediately following
completion of the Combination. In addition, FuelCell will assume all outstanding
Global stock options and the obligation to issue its common stock or
exchangeable shares of ExchangeCo exchangeable into shares of FuelCell's common
stock upon the conversion of the outstanding Global Series 2 Preferred Shares
after completion of the Combination, which will result in FuelCell issuing
additional shares of its common stock. For a description of the number of shares
of FuelCell common stock that may be issued upon conversion of the Global Series
2 Preferred Shares, please see "Chapter One -- The Combination -- Description of
the Combination -- Mechanics for Implementing the Combination and Description of
the Exchange Shares -- Global Series 2 Preferred Shares."
If FuelCell were to consummate the Combination without FuelCell stockholder
approval, FuelCell common stock could not remain listed on the Nasdaq National
Market. Approval of the Combination is not required by Delaware law, by the
FuelCell Charter or by FuelCell's bylaws.
SOLICITATION OF PROXIES AND EXPENSES
FuelCell will bear its own expenses in connection with the solicitation of
proxies for the FuelCell Meeting, except that Global and FuelCell will share
equally all out-of-pocket expenses (other than fees and expenses of attorneys,
accountants, investment bankers and other advisors) incurred in connection with
the printing and filing of this Joint Proxy Statement and any filings or
applications with any governmental entity relating to the Combination. Please
see "Chapter One -- the Combination -- Description of the
Combination -- Business Combination Costs."
In addition to solicitation by mail, FuelCell's directors, officers and
employees may solicit proxies by telephone, facsimile, e-mail or in person. They
will not receive additional compensation for their services. Record holders such
as brokerage houses, nominees, fiduciaries and other custodians will be
requested to forward soliciting materials to beneficial owners and to request
authority for the exercise of proxies, and, upon request of such record holders,
they will be reimbursed for their reasonable expenses incurred in sending proxy
materials to beneficial owners.
INDEPENDENT AUDITORS
Representatives of KPMG LLP, FuelCell's independent auditors, plan to
attend the FuelCell Meeting and will be available to answer questions. Its
representatives will also have an opportunity to make a statement at the
FuelCell Meeting if they so desire.
STOCKHOLDER PROPOSALS AT THE 2004 ANNUAL MEETING
FuelCell stockholders may submit proposals on matters appropriate for
stockholder action at FuelCell's annual meeting of stockholders consistent with
Rule 14a-8 promulgated under the United States Securities Exchange Act of 1934
and no later than October 29, 2003.
150
DISSENTERS' APPRAISAL RIGHTS
FuelCell common stockholders are not entitled to demand appraisal of, or to
receive payment for, their shares of common stock under the Delaware General
Corporation Law.
THE MATTERS TO BE CONSIDERED AT THE FUELCELL MEETING ARE VERY IMPORTANT TO
FUELCELL AND ITS STOCKHOLDERS. ACCORDINGLY, YOU ARE URGED TO READ AND CAREFULLY
CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY STATEMENT, AND TO
COMPLETE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY.
151
CHAPTER SIX -- FUELCELL EXECUTIVE COMPENSATION AND RELATED INFORMATION
Information concerning FuelCell, including information relating to
executive compensation, is set forth in Annex H to this Joint Proxy Statement.
CHAPTER SEVEN--GLOBAL EXECUTIVE COMPENSATION AND RELATED INFORMATION
EXECUTIVE COMPENSATION
The following table sets out the compensation for the current and former
President and Chief Executive Officer ("CEO") of Global and the four other most
highly compensated officers (the "Global Named Executive Officers") of Global
who received in excess of Cdn.$100,000 in aggregate compensation (bonus and
salary) in the fiscal years ended December 31, 2002, 2001 and 2000. ALL DOLLAR
AMOUNTS SHOWN IN THIS CHAPTER ARE EXPRESSED IN CANADIAN DOLLARS.
LONG-TERM COMPENSATION
---------------------------------
AWARDS PAYOUTS
----------------------- -------
SECURITIES RESTRICTED
ANNUAL COMPENSATION UNDER SHARES OR
------------------------------- OPTIONS/ RESTRICTED
OTHER ANNUAL SARS SHARE LTIP ALL OTHER
SALARY BONUS COMPENSATION GRANTED UNITS PAYOUTS COMPENSATION
NAME AND PRINCIPAL OCCUPATION YEAR(1) ($) ($) ($)(2) (#) ($) ($) ($)
----------------------------- ------------ ------- ------ ------------ ---------- ---------- ------- ------------
Peter Garrett(3)........... Dec 31, 2002 232,917 99,930 -- 35,000 -- -- --
President and CEO Dec 31, 2001 22,615 5,733 -- 165,000 -- -- --
Jim Barker(4).............. Dec 31, 2002 180,000 39,752 -- 82,500 -- -- --
Former Vice President, Dec 31, 2001 150,000 28,125 -- 150,000 -- -- --
Business Development and
Marketing
Brian Borglum(5)........... Dec 31, 2002 149,792 32,023 -- 46,000 -- -- --
Vice President and Chief
Technology Officer
Paul Crilly(6)............. Dec 31, 2002 173,125 60,919 -- 96,250 -- -- --
Vice President, Dec 31, 2001 157,500 30,712 -- 25,000 -- -- --
Finance and CFO Dec 31, 2000 83,654 20,000 -- 150,000 -- -- --
Bernie LeSage.............. Dec 31, 2002 140,167 49,253 -- 24,750 -- -- --
Vice President, Dec 31, 2001 120,000 34,920 -- 25,000 -- -- --
Generator Division Dec 31, 2000 87,500 17,000 -- 20,000 -- -- --
James F. Perry(7).......... Dec 31, 2002 147,584 -- -- -- -- -- 660,000
Former President Dec 31, 2001 220,000 65,215 -- 30,000 -- -- --
and CEO Dec 31, 2000 121,250 37,125 -- 50,000 -- -- --
---------------
(1) Global changed its year end from March 31 to December 31 effective December
31, 2000. The December 31, 2000 figures are for the nine month period then
ended.
(2) Perquisites and other benefits in the aggregate equal less than 10% of the
annual salary and bonus for each named executive officer in the applicable
financial year.
(3) Mr. Garrett commenced employment with Global as Chief Operating Officer on
November 13, 2001 and was appointed President and CEO effective July 16,
2002.
(4) Mr. Barker commenced employment with Global on January 2, 2001.
(5) Dr. Borglum commenced employment with Global as Manager, Materials R&D on
July 3, 2001 and was appointed Vice President and Chief Technology Officer
effective August 13, 2002.
(6) Mr. Crilly commenced employment with Global on June 12, 2000.
(7) Mr. Perry resigned on July 16, 2002 and the amount included under All Other
Compensation consists of a termination payment.
152
STOCK OPTIONS
OPTION GRANTS DURING MOST RECENTLY COMPLETED FINANCIAL YEAR
The following table sets forth the details with respect to all options of
Global granted to the Global Named Executive Officers during the year ended
December 31, 2002.
MARKET VALUE
OF SECURITIES
SECURITIES % OF TOTAL EXERCISE OR UNDERLYING OPTIONS
UNDER OPTIONS GRANTED BASE PRICE ON DATE OF GRANT
NAME OPTIONS IN FISCAL 2002 ($/SECURITY) ($/SECURITY) EXPIRATION DATE
---- ---------- --------------- ------------ ------------------ ---------------
Peter Garrett................ 35,000 4% $3.35 $3.35 July 16, 2007
President and CEO
Jim Barker................... 82,500 10 2.35 2.35 July 26, 2007
Former Vice-President,
Business Development and
Marketing
Brian Borglum................ 4,500 1 2.35 2.35 July 26, 2007
Vice President and Chief 41,500 5 2.35 2.35 August 13, 2007
Technology Officer
Paul Crilly.................. 96,250 12 2.35 2.35 July 26, 2007
Vice President, Finance and
CFO
Bernie LeSage................ 24,750 3 2.35 2.35 July 26, 2007
Vice President, Generators
Division
James F. Perry............... -- -- -- -- --
Former President
and CEO
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
AND FINANCIAL YEAR END OPTION VALUES
The following table sets forth the details with respect to all options of
Global held by the Global Named Executive Officers that were outstanding as of
December 31, 2002.
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SECURITIES AGGREGATE DECEMBER 31, 2002 DECEMBER 31, 2002(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- --------- ----------- ------------- ----------- -------------
Peter Garrett........... -- $ -- 41,250 158,750 $ -- $ --
Jim Barker.............. -- -- -- 82,500 -- 2,475
Brian Borglum........... -- -- 7,500 68,500 -- 1,380
Paul Crilly............. -- -- -- 96,250 -- 2,887
Bernie LeSage........... -- -- 27,000 28,750 18,450 742
James F. Perry.......... 130,000 741,000 -- -- -- --
---------------
(1) The closing price of Global's common shares on the Toronto Stock Exchange on
December 31, 2002 was $2.38.
EMPLOYMENT CONTRACTS
Global entered into change of control agreements with Paul Crilly and
Bernie LeSage in September 2001 and with Peter Garrett and Brian McGurk in
August 2002. The agreements entered into with Messrs. Garrett, Crilly and LeSage
provide for them to receive certain severance benefits if their employment is
terminated (either voluntarily by the employee or involuntarily) within six
months of a change in control of Global. Under these agreements, Messrs.
Garrett, Crilly and LeSage shall be paid, within 30 days of termination, two and
153
one-half years' pay at their base salary, plus an amount equal to 1.25 times the
sum of the last two annual bonuses paid to them in the two previously completed
fiscal years of Global. In addition, all stock options that have not been
exercised shall become immediately exercisable for a period of 90 days from the
date of termination. The change of control agreement entered into with Mr.
McGurk provides for him to receive the same severance benefits if his employment
is involuntarily terminated within six months of a change in control of Global.
Global entered into an employment agreement with one officer, Mr. Garrett,
on August 4, 2003. This agreement is for an indefinite term and provides for the
payment to Mr. Garrett of a salary of Cdn.$260,000 per annum together with an
incentive bonus of up to 60% of his salary. The agreement can be terminated by
Global for cause, and by Mr. Garrett upon the occurrence of specified events
upon the payment to Mr. Garrett of a termination payment equal to eighteen
months salary and bonus. The agreement can also be terminated by Mr. Garrett
within six months of the occurrence of a "change of control", as defined in the
change of control agreement between Global and Mr. Garrett. Upon the occurrence
of a change of control, the obligations of Global to Mr. Garrett will be
governed solely by the change of control agreement, and in no event shall Mr.
Garrett be entitled to payments under both his employment agreement and his
change of control agreement.
COMPENSATION OF DIRECTORS
All directors of Global who are outside directors received a fee of $750
per board meeting and committee meeting attended and a quarterly retainer of
$1,250. In addition, committee chairmen received $375 per meeting. The Chairman
of the Board received an annual stipend of $60,000 and a bonus of $30,000 and
does not receive meeting fees. The total cash compensation received by outside
directors for the year ended December 31, 2002 was $223,625. Directors are also
entitled to participate in Global's Amended Incentive Stock Option Plan.
INDEBTEDNESS TO GLOBAL
No director, or senior officer of Global is, as of the date of this Joint
Proxy Statement, or was, since the commencement of the last completed financial
year, indebted to Global.
INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS
The directors, officers and principal shareholders of Global (and the known
associates and affiliates of such persons) have had no direct or indirect
interest in any material transaction involving Global since January 1, 2002,
which has not otherwise been disclosed herein.
154
CHAPTER EIGHT -- CERTAIN LEGAL AND OTHER INFORMATION
AUDITORS, TRANSFER AGENT AND REGISTRAR
The consolidated financial statements of Global Thermoelectric Inc. as of
December 31, 2002 and for the year ended December 31, 2002 included in this
Joint Proxy Statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent auditors, given on the authority of said
firm as experts in auditing and accounting.
Ernst & Young LLP, independent chartered accountants, has audited Global's
financial statements at December 31, 2001 and 2000, and for the year ended
December 31, 2001, and the nine-month period ended December 31, 2000 as set
forth in its report. Global has included its financial statements and schedule
elsewhere in this Joint Proxy Statement in reliance on Ernst & Young LLP's
report, given on the authority of such firm as experts in accounting and
auditing.
KPMG LLP, independent auditors, has audited the financial statements of
FuelCell Energy, Inc. for each of the three years in the period ended October
31, 2002, as set forth in its reports thereon appearing elsewhere in this Joint
Proxy Statement. FuelCell has included its financial statements and schedules in
reliance on KPMG LLP's report, given on the authority of such firm as experts in
accounting and auditing.
The transfer agent for the common shares of Global is Computershare Trust
Company of Canada at 600, 538 -- 8th Ave. S.W., Calgary, Alberta T2P 3S8. The
transfer agent for the common shares of FuelCell is Continental Stock Transfer &
Trust Company, New York, New York. Concurrently with the closing, Computershare
Trust Company of Canada will be appointed as transfer agent and registrar for
the exchangeable shares and will be appointed trustee under the voting and
exchange trust agreement.
LEGAL MATTERS
Bennett Jones LLP, Calgary, Alberta, and Dorsey & Whitney LLP, Seattle,
Washington, and New York, New York, have acted for Global in connection with the
Combination. The partners and associates, as a group, of each of Bennett Jones
LLP and Dorsey & Whitney LLP beneficially own less than 1% of the outstanding
Global common shares and less than 1% of the outstanding shares of FuelCell
common stock.
Robinson & Cole LLP, Stamford, Connecticut, and Stikeman Elliott LLP have
acted for FuelCell in connection with the Combination. The partners and
associates, as a group, of each of Robinson & Cole LLP and Stikeman Elliott LLP
beneficially own less than 1% of the outstanding Global common shares and less
than 1% of the outstanding shares of FuelCell common stock.
AVAILABLE INFORMATION
Global files reports, information circulars and other information with the
Canadian securities administrators in certain of the provinces of Canada. The
Canadian securities administrators maintain a web site that contains all public
information filed electronically with any Canadian securities administrator. The
address of this web site is www.sedar.com. The address of Global's web site is
www.globalte.com. The contents of Global's web site are not part of this Joint
Proxy Statement.
FuelCell files reports, proxy statements and other information with the
U.S. Securities and Exchange Commission (the "SEC"). Shareholders may read and
copy any reports, statements or other information FuelCell files at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Shareholders may call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Shares of FuelCell common stock are
listed on the Nasdaq National Market and reports, proxy statements and other
information regarding FuelCell can be inspected at the offices of the Nasdaq
National Market, 853 Key West Avenue, Rockville, Maryland 20850. The SEC
maintains a web site that contains all information filed electronically with the
SEC. The address of the SEC's web site is www.sec.gov. The address of FuelCell's
web site is www.fce.com. The contents of FuelCell's web site are not part of
this Joint Proxy Statement.
155
ANNEX A - FORM OF ARRANGEMENT RESOLUTION
RESOLUTION FOR CONSIDERATION AT
THE SPECIAL MEETING OF THE COMMON SHAREHOLDERS
OF
GLOBAL THERMOELECTRIC INC.
BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:
1. the arrangement (the "Arrangement") involving Global Thermoelectric
Inc. ("Global") and its holders of common shares and FuelCell Energy,
Inc. ("FuelCell") under Section 193 of the Business Corporations Act
(Alberta), as more particularly described in the Joint Management
Information Circular and Proxy Statement of Global and FuelCell (the
"Joint Proxy Statement") accompanying the notice of the special meeting
of the common shareholders of Global is hereby authorized, approved and
adopted;
2. the Plan of Arrangement, the full text of which is set out as Annex D
to the Joint Proxy Statement, is hereby approved and adopted;
3. notwithstanding the approval of this special resolution by the Global
common shareholders or the approval of the Court of Queen's Bench of
Alberta (the "Court"), the board of directors of Global, subject to the
provisions of the combination agreement dated as of August 4, 2003
between Global and FuelCell (the "Combination Agreement") and to the
final order of the Court, without further notice to or approval of
common shareholders, may amend the Arrangement or may decide not to
proceed with the Arrangement and the Combination Agreement or may
revoke this resolution at any time prior to the Arrangement becoming
effective pursuant to the Business Corporations Act (Alberta);
4. any one of the officers of Global is hereby authorized and directed for
and on behalf of Global to execute or cause to be executed and to
deliver or cause to be delivered all such documents, agreements and
instruments and to do or cause to be done all such other acts and
things as such officers, subject to the provisions of the Combination
Agreement and to the final order of the Court, of Global shall
determine to be necessary or desirable in order to carry out the intent
of the foregoing paragraphs of this resolution and the matters
authorized thereby, such determination to be conclusively evidenced by
the execution and delivery of such document, agreement or instrument or
the doing of any such act or thing; and
5. all actions heretofore taken by or on behalf of Global in connection
with any matter referred to in any of the foregoing paragraphs of this
resolution or in furtherance of the Arrangement are hereby approved,
ratified and confirmed in all respects.
A-1
ANNEX B - FORM OF COMBINATION AGREEMENT
COMBINATION AGREEMENT
BY AND BETWEEN
FUELCELL ENERGY, INC.
AND
GLOBAL THERMOELECTRIC INC.
DATED AS OF AUGUST 4, 2003
TABLE OF CONTENTS
ARTICLE 1 GENERAL...................................................................... 2
1.1. Plan of Arrangement........................................................ 2
1.2. Exchange Ratio............................................................. 2
1.3. Dissenting Shares.......................................................... 3
1.4. Other Effects of the Arrangement........................................... 3
1.5. Joint Proxy Statement; Registration Statements............................. 3
1.6. Support Agreement, Voting and Exchange Trust Agreement..................... 5
1.7. Material Adverse Effect; Material Adverse Change........................... 5
1.8. Knowledge.................................................................. 6
1.9. Currency................................................................... 6
1.10. ExchangeCo................................................................. 6
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................ 7
2.1. Organization and Standing.................................................. 7
2.2. Capitalization............................................................. 8
2.3. Agreement Authorized and its Effect on Other Obligations................... 8
2.4. Governmental and Third Party Consents...................................... 10
2.5. No Defaults................................................................ 11
2.6. Intellectual Property...................................................... 11
2.7. Securities Reports......................................................... 13
2.8. Financial Statements....................................................... 14
2.9. Absence of Certain Changes and Events...................................... 15
2.10. Material Contracts......................................................... 16
2.11. Customers and Suppliers.................................................... 16
2.12. Insurance.................................................................. 16
2.13. Books and Records.......................................................... 17
2.14. Litigation; Investigations................................................. 17
2.15. Environmental Matters...................................................... 18
2.16. Title to Properties........................................................ 19
2.17. Zoning and Other Matters Relating To Real Property......................... 19
2.18. No Hazardous Substances.................................................... 21
2.19. Taxes...................................................................... 21
2.20. Non-Arm's Length Transactions.............................................. 24
2.21. Employees.................................................................. 24
2.22. Employee Benefit Plans..................................................... 24
2.23. Labour Matters............................................................. 25
2.24. Information Supplied....................................................... 26
2.25. Compliance with Laws....................................................... 26
2.26. Restrictions on Business Activities........................................ 26
2.27. Disclosure................................................................. 26
2.28. The Company Assets and Revenues............................................ 27
2.29. Brokers and Finders........................................................ 27
2.30. Termination of Quantum Combination Agreement............................... 27
B-2
2.31. Company Net Working Capital; Cash Burn..................................... 27
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF FCE........................................ 28
3.1. Organization and Standing.................................................. 28
3.2. Capitalization............................................................. 29
3.3. Agreement Authorized and its Effect on Other Obligations................... 29
3.4. Governmental and Third Party Consents...................................... 31
3.5. No Defaults................................................................ 31
3.6. Intellectual Property...................................................... 31
3.7. Securities Reports......................................................... 32
3.8. Financial Statements....................................................... 33
3.9. Absence of Certain Changes and Events...................................... 34
3.10. Material Contracts......................................................... 34
3.11. Customers and Suppliers.................................................... 35
3.12. Insurance.................................................................. 35
3.13. Books and Records.......................................................... 35
3.14. Litigation; Investigations................................................. 36
3.15. Environmental Matters...................................................... 36
3.16. Title to Properties........................................................ 37
3.17. No Hazardous Substances.................................................... 38
3.18. Taxes...................................................................... 38
3.19. Non-Arm's Length Transactions.............................................. 39
3.20. Employees.................................................................. 40
3.21. Employee Benefit Plans..................................................... 40
3.22. Labour Matters............................................................. 42
3.23. Information Supplied....................................................... 42
3.24. Compliance with Laws....................................................... 42
3.25. Restrictions on Business Activities........................................ 42
3.26. FCE Common Stock........................................................... 43
3.27. Disclosure................................................................. 43
3.29. FCE Net Working Capital; Cash Burn......................................... 43
3.30. ExchangeCo and Callco...................................................... 44
ARTICLE 4 OBLIGATIONS PENDING EFFECTIVE DATE........................................... 44
4.1. Agreements of FCE and the Company.......................................... 44
4.2. Additional Agreements of the Company....................................... 45
4.3. Additional Agreements of FCE............................................... 47
4.4. No Company Solicitation.................................................... 49
4.5. No FCE Solicitation........................................................ 51
4.6. Public Announcements....................................................... 51
4.7. Comfort Letters............................................................ 52
4.8. Board of Directors......................................................... 52
4.9. Tax Matters................................................................ 52
ARTICLE 5 CONDITIONS PRECEDENT TO OBLIGATIONS.......................................... 53
5.1. Conditions Precedent to Obligations of Each Party.......................... 53
5.2. Conditions Precedent to Obligations of the Company......................... 55
B-3
5.3. Conditions Precedent to Obligations of FCE................................. 56
ARTICLE 6 TERMINATION.................................................................. 57
6.1. Termination................................................................ 57
6.2. Termination Date Extension................................................. 59
6.3. Notice of Termination...................................................... 59
6.4. Effect of Termination...................................................... 59
6.5. Termination Fee............................................................ 59
ARTICLE 7 ADDITIONAL AGREEMENTS........................................................ 61
7.1. Meetings................................................................... 61
7.2. The Closing................................................................ 62
7.3. Ancillary Documents/Reservation of Shares.................................. 62
7.4. Notice to Holders of Company Options....................................... 62
7.5. Indemnification and Related Matters........................................ 62
7.6. Affiliate Agreements....................................................... 64
7.7. Consents; Approvals........................................................ 64
7.8. Securities Compliance...................................................... 64
ARTICLE 8 MISCELLANEOUS................................................................ 65
8.1. No Survival of Representations and Warranties.............................. 65
8.2. Notices.................................................................... 65
8.3. Interpretation............................................................. 66
8.4. Severability............................................................... 66
8.5. Counterparts............................................................... 66
8.6. Miscellaneous.............................................................. 66
8.7. Governing Law.............................................................. 66
8.8. Amendment and Waivers...................................................... 67
8.9. Expenses................................................................... 67
8.10. Further Assurances......................................................... 67
B-4
COMBINATION AGREEMENT
THIS COMBINATION AGREEMENT (this "Agreement") is entered into as of
August 4, 2003, by and between FUELCELL ENERGY, INC., a Delaware corporation
("FCE") and GLOBAL THERMOELECTRIC INC., an Alberta corporation (the "Company")
(capitalized terms not otherwise defined herein shall have the meaning set forth
in the Appendix hereto).
RECITALS
WHEREAS, the Company was previously party to a certain Combination
Agreement (the "Quantum Combination Agreement") between Quantum Fuel Systems
Technologies Worldwide, Inc., a Delaware corporation ("Quantum"), and the
Company, dated as of April 8, 2003, as amended on June 27, 2003, pursuant to
which the parties thereto proposed to combine their businesses by Quantum
acquiring all of the outstanding Company Common Shares pursuant to a plan of
arrangement (such proposed arrangement, the "Quantum Combination");
WHEREAS, the board of directors of FCE believes that the combination of
the business of the Company with FCE's business is in the best interests of the
Company's shareholders;
WHEREAS, the Company's board of directors has determined that the
proposed Arrangement is a "Superior Proposal" under the Quantum Combination
Agreement and the Company has terminated the Quantum Combination Agreement;
WHEREAS, the board of directors of FCE deems it advisable and in the
best interests of its stockholders to combine its business with the Company's
business by FCE acquiring all of the outstanding Company Common Shares pursuant
to the Plan of Arrangement;
WHEREAS, the board of directors of the Company deems it advisable and
in the best interests of its common and preferred shareholders to combine its
business with FCE by FCE acquiring all of the outstanding Company Common Shares
pursuant to the Plan of Arrangement;
WHEREAS, in furtherance of such combination, the respective boards of
directors of FCE and the Company have approved the transactions contemplated by
this Agreement, the board of directors of the Company has agreed to submit the
Plan of Arrangement and the other transactions contemplated hereby to holders of
the Company Common Shares (the "Company Common Shareholders") and the Court of
Queen's Bench of Alberta (the "Court") for approval, and the board of directors
of FCE has agreed to submit its approval of the transactions contemplated hereby
and by the Plan of Arrangement, including the issuance of the shares of FCE
Common Stock issuable in connection with the transactions contemplated by this
Agreement and the Plan of Arrangement, to its stockholders for approval; and
WHEREAS, the parties intend that the acquisition of all of the
outstanding common shares of the Company hereunder be structured in a manner
that is expected to maximize present and future financial and tax benefits to
FCE and the Company.
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NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements herein contained, the
parties hereto, intending to be legally bound, agree as follows:
ARTICLE 1
GENERAL
1.1. PLAN OF ARRANGEMENT
(a) As promptly as practicable after the United States Securities
and Exchange Commission (the "SEC") has informed FCE that it has no further
comments with respect to or will not review ("SEC Clearance") the preliminary
Joint Proxy Statement, the Company will apply to the Court pursuant to Section
193 of the Business Corporations Act (Alberta) (the "ABCA") for an interim order
in form and substance reasonably satisfactory to FCE (the "Interim Order")
providing for, among other things, the calling and holding of the Company
Shareholders Meeting for the purpose of considering and, if deemed advisable,
approving the arrangement (the "Arrangement") under Section 193 of the ABCA and
pursuant to this Agreement and the Plan of Arrangement substantially in the form
of Exhibit A (the "Plan of Arrangement"). If the Company Common Shareholders
approve the Arrangement and all necessary approvals of FCE stockholders have
been obtained, the Company and FCE will take the necessary steps to submit the
Arrangement to the Court and apply for a final order of the Court approving the
Arrangement in such fashion as the Court may direct (the "Final Order"). At
12:01 a.m. (the "Effective Time") on the date (the "Effective Date") shown on
the articles of arrangement filed with the Registrar under the ABCA (which
articles of arrangement will not be filed with the Registrar under the ABCA
during any 15 Business Day cure period referred to in Section 6.1 (b) or (c)
hereof) giving effect to the Arrangement and other transactions set out in
Section 2.1 of the Plan of Arrangement, the Arrangement and such other
transactions shall occur and shall be deemed to occur in the order set out
therein without any further act or formality.
1.2. EXCHANGE RATIO
(a) As used herein, the term "Exchange Ratio" means, in respect of
FCE Common Stock and Exchangeable Shares (and the Ancillary Rights), as the case
may be, to be delivered upon the transfer of Company Common Shares (but
excluding the Company Series 2 Preferred Shares) to FCE pursuant to Section 2.1
of the Plan of Arrangement, a ratio of the number of shares of FCE Common Stock
or Exchangeable Shares (and the Ancillary Rights), as the case may be, per
Company Common Share. The Exchange Ratio shall be determined as follows:
$2.72
Exchange Ratio = -------------------
FCE Stock Price
(b) The Exchange Ratio as so determined in each case shall be
rounded to three decimal places (rounding up if the fourth decimal is five or
more and otherwise rounding down). The "FCE Stock Price" shall mean the Daily
Volume Weighted Average Price of the FCE Common Stock over the Measurement
Period; provided, however, that if the Daily Volume Weighted Average Price of
the FCE Common Stock over the Measurement Period is less than
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$7.96, then the FCE Stock Price shall be $7.96, and if Daily Volume Weighted
Average Price of the FCE Common Stock over the Measurement Period is greater
than $9.74, then the FCE Stock Price shall be $9.74. "Daily Volume Weighted
Average Price" shall mean the daily volume weighted average price based on
trading on the Nasdaq National Market between 9:30 a.m. and 4:00 p.m. Eastern
Time as reported by Bloomberg Financial L.P. FCE Stock Price as so determined
shall be rounded to three decimal places (rounding up if the fourth decimal is
five or more and otherwise rounding down).
(c) The Exchange Ratio shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into FCE Common Stock or Company
Common Shares), merger, reorganization, recapitalization or other like change
with respect to FCE Common Stock or Company Common Shares occurring after the
date hereof and prior to the Effective Time.
1.3. DISSENTING SHARES
Holders of Company Common Shares may exercise rights of dissent with
respect to such shares in connection with the Arrangement pursuant to and in the
manner set forth in Section 191 of the ABCA, as modified by Section 3.1 of the
Plan of Arrangement and the Interim Order (such holders referred to as
"Dissenters" or as "Dissenting Shareholders" when referring exclusively to
Company Common Shareholders). The Company shall give FCE (a) prompt notice of
any written demands for a right of dissent, withdrawals of such demands, and any
other instruments served pursuant to the ABCA and received by the Company and
(b) the opportunity to participate in all negotiations and proceedings with
respect to such rights. Without the prior written consent of FCE, except as
required by applicable law, the Company shall not make any payment with respect
to any such rights or offer to settle or settle any such rights.
1.4. OTHER EFFECTS OF THE ARRANGEMENT
At the Effective Time each Company Common Share outstanding immediately
prior to the Effective Time will be exchanged as provided in the Plan of
Arrangement and the Arrangement will, from and after the Effective Time, have
all of the effects provided by applicable law, including the ABCA.
1.5. JOINT PROXY STATEMENT; REGISTRATION STATEMENTS
(a) As promptly as practicable after execution of this Agreement,
FCE and the Company shall prepare and FCE shall file with the SEC a preliminary
joint management information circular and proxy statement, and one or more
supplements for the Company and FCE respectively (the "Joint Proxy Statement"),
together with any other documents required by the United States Securities Act
of 1933, as amended (the "Securities Act"), or the United States Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in connection with the
Arrangement and the other transactions contemplated hereby. The Joint Proxy
Statement shall constitute (i) the management information circular of the
Company with respect to the special meeting of the Company Common Shareholders
to consider and, if deemed advisable, to pass a special resolution approving the
Arrangement and the approval of certain matters in connection therewith (the
"Company Shareholders Meeting") and (ii) the proxy statement of FCE with
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respect to the meeting of stockholders of FCE with respect to the matters set
forth in Section 7.1(b) in connection with the transactions contemplated by this
Agreement and the Plan of Arrangement (the "FCE Stockholders Meeting"). As
promptly as practicable after FCE receives SEC Clearance with respect to the
preliminary Joint Proxy Statement, FCE and the Company shall cause the Joint
Proxy Statement to be mailed to each company's respective securityholders
entitled to vote.
(b) Each party shall promptly furnish to the other party all
information concerning such party and its securityholders as may be reasonably
required in connection with any action contemplated by this Section 1.5,
including any information requested by the SEC to be included in the Joint Proxy
Statement. The Joint Proxy Statement shall comply in all material respects with
all applicable requirements of law. Each of FCE and the Company will notify the
other promptly of the receipt of any comments from the SEC and of any request by
the SEC for amendments or supplements to the Joint Proxy Statement or for
additional information, and will supply the other with copies of all
correspondence with the SEC with respect to the Joint Proxy Statement. Whenever
any event occurs which should be set forth in an amendment or supplement to the
Joint Proxy Statement, FCE or the Company, as the case may be, shall promptly
inform the other of such occurrence and cooperate in filing with the SEC, and/or
mailing to securityholders entitled to vote of FCE and the Company, as the case
may be, such amendment or supplement.
(c) FCE shall: (i) file, as promptly as practicable after the
execution of this Agreement, a registration statement on Form S-3 (or other
applicable form) (the "Primary Registration Statement") in order to register
under the Securities Act the shares of FCE Common Stock issuable from time to
time after the Effective Time upon exchange of the Exchangeable Shares or upon
conversion of the Company Series 2 Preferred Shares and shall use its
commercially reasonable efforts to cause the Primary Registration Statement to
become effective and to maintain the effectiveness of such registration until
the date on which no Exchangeable Shares or Company Series 2 Preferred Shares
remain outstanding (other than those Exchangeable Shares held by FCE or any of
its Affiliates); and (ii) use commercially reasonable efforts to file, as
promptly as practicable after the execution of this Agreement, a registration
statement on Form S-3 (or other applicable form) (the "Resale Registration
Statement") in order to register for resale any shares of FCE Common Stock
issued pursuant to the Arrangement to any holder of Company Common Shares
(excluding officers or directors of the Company in their individual capacity)
who is an Affiliate of the Company immediately prior to the Effective Time (such
determination shall be made (A) by FCE in its reasonable judgment or (B)
pursuant to an opinion of counsel to any such holder reasonably acceptable to
FCE), and FCE shall use commercially reasonable efforts to cause the Resale
Registration Statement to become effective and to maintain the effectiveness of
the Resale Registration Statement for so long as any shares of such holders are
subject to the resale restrictions of Rule 145 under the Securities Act.
(d) FCE's obligations to include shares of FCE Common Stock
issuable upon conversion of the Company Series 2 Preferred Shares in the Primary
Registration Statement and to file the Resale Registration Statement pursuant to
this Section 1.5 shall be subject to the condition that each holder of Company
Series 2 Preferred Shares and each holder of securities to be included in the
Resale Registration Statement shall cooperate with FCE in all respects in
connection with the preparation and filing of such registration statements,
including (i) timely
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supplying all information reasonably requested by FCE (which shall include all
information regarding such holder and the proposed manner of sale of the FCE
Common Stock required to be disclosed in any such registration statement), (ii)
executing and returning all documents reasonably requested by FCE in connection
with the registration and sale of the shares subject to such registration
statement, and (iii) promptly furnishing such additional information as may be
requested by the Commission or as required to be disclosed in order to make the
information furnished to FCE by such holder not materially misleading.
(e) As promptly as practicable after the execution of this
Agreement, FCE shall file a registration statement on Form S-8 (the "S-8
Registration Statement" and, collectively with the Primary Registration
Statement and the Resale Registration Statement, the "Registration Statements")
with the SEC to register the FCE Common Stock to be issued from time to time
after the Effective Time upon exercise of Company Options assumed by FCE
pursuant to the terms of this Agreement. FCE will use its reasonable best
efforts to maintain the effectiveness of the S-8 Registration Statement for so
long as any Company Options remain outstanding or, in each case, until such
earlier time as FCE determines to be sufficient on the written advice of its
outside counsel.
(f) FCE and the Company shall take any action required to be taken
under any applicable provincial or state securities laws (including "blue sky"
laws) in connection with the issuance of the FCE Common Stock and the
Arrangement; provided, however, that with respect to the blue sky and Canadian
provincial qualifications, neither FCE nor the Company shall be required to
register or qualify as a foreign corporation or reporting issuer where any such
entity is not now so registered or qualified except as to matters and
transactions arising solely from the offer and sale of the FCE Common Stock or
the issuance of the Exchangeable Shares.
1.6. SUPPORT AGREEMENT, VOTING AND EXCHANGE TRUST AGREEMENT
On the Effective Date and subject to satisfaction or waiver of the
conditions herein contained in favour of each party, FCE shall, and shall cause
ExchangeCo to, execute and deliver the Support Agreement and the Voting and
Exchange Trust Agreement; and FCE shall create and issue to the Trustee the
Special Voting Share.
1.7. MATERIAL ADVERSE EFFECT; MATERIAL ADVERSE CHANGE
(a) In this Agreement, the term "Material Adverse Effect" used
with respect to any party means any change, effect, violation, inaccuracy,
circumstance, event or occurrence that is, or would reasonably be expected to
be, material and adverse to the business, assets, liabilities, financial
condition, results of operations or prospects of such party and its subsidiaries
taken as a whole.
(b) In this Agreement, the term "Material Adverse Change", when
used in connection with FCE or the Company, means any change, effect, violation,
inaccuracy, circumstance, event or occurrence that is, or would reasonably be
expected to be, material and adverse to the business, assets, liabilities,
financial condition, results of operations or prospects of such party and its
subsidiaries taken as a whole, other than any change, effect, violation,
inaccuracy, circumstance, event or occurrence (i) relating to the Canadian or
United States economy or
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securities markets in general, (ii) relating to any change in the trading price
of the FCE Common Stock or Company Common Shares, respectively, that arises from
the announcement of execution of this Agreement, or (iii) relating to any change
in the trading price of the FCE Common Stock or Company Common Shares,
respectively, unrelated to any change, effect, violation, inaccuracy,
circumstance, event or occurrence that is, or would reasonably be expected to
be, material and adverse to the business, assets, liabilities, financial
condition, results of operations or prospects of FCE or the Company, as the case
may be, and its subsidiaries taken as a whole.
1.8. KNOWLEDGE
In this Agreement, the phrase "to the knowledge of" means the actual
knowledge of any of the executive officers of the Company or FCE, as the case
may be, after reasonable inquiry, except where otherwise indicated, and such
executive officers shall have made such inquiry as is reasonable in the
circumstances.
1.9. CURRENCY
Unless otherwise specified, all references in this Agreement to
"dollars" or "$" shall mean United States dollars.
1.10. EXCHANGECO
(a) On or prior to the Effective Date, FCE shall incorporate a new
corporation under the ABCA ("ExchangeCo") and shall include the following
provisions in its articles of incorporation:
(i) a class of exchangeable shares (the "Exchangeable Shares"),
unlimited in number and having the terms and conditions set forth in Exhibit E;
and
(ii) the other provisions set forth in Exhibit E.
(b) FCE shall cause ExchangeCo to complete the transactions
contemplated herein.
1.11. APPENDIX AND EXHIBITS
The following Appendix and Exhibits attached hereto are incorporated
herein by reference:
(a) Appendix--Defined Terms;
(b) Exhibit A--Plan of Arrangement;
(c) Exhibit B--Company Affiliates Agreement;
(d) Exhibit C--Support Agreement;
(e) Exhibit D - Voting and Exchange Trust Agreement; and
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(f) Exhibits E-1 and E-2 - Share Capital and Other Provisions to
be included in the Articles of Incorporation of ExchangeCo.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as otherwise fully and fairly disclosed and set forth in a
corresponding paragraph of the Company Disclosure Letter, the Company hereby
represents and warrants to, and agrees with, FCE that:
2.1. ORGANIZATION AND STANDING
(a) Each of the Company and its subsidiaries has been duly
organized or formed under all applicable Laws, is validly existing and in good
standing under the laws of the jurisdiction in which it is organized and has
full corporate or other legal power, authority and capacity to own, lease and
operate its properties and conduct its businesses as currently conducted. All of
the outstanding shares of capital stock and other ownership interests of the
Company and its subsidiaries are duly authorized, validly issued, fully paid and
non-assessable, and all such shares and other ownership interests of the
Company's subsidiaries are owned directly or indirectly by the Company, free and
clear of all material liens, claims or encumbrances and there are no outstanding
options, rights, entitlements, understandings or commitments (pre-emptive,
contingent or otherwise) regarding the right to acquire any such shares of
capital stock or other ownership interests in any of its subsidiaries. The
Company and each of its subsidiaries is duly qualified or licensed to do
business in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed would not have a Material Adverse Effect. The Company has
disclosed in the Company Disclosure Letter the names and jurisdictions of
incorporation of each of its subsidiaries.
(b) The Company does not have any subsidiaries which are material
in relation to the business and financial condition of the Company on a
consolidated basis; for the purposes hereof, a subsidiary and its subsidiaries
shall be considered material in relation to the Company if: (i) the investments
in and advances to the subsidiary and its subsidiaries by the Company and its
other subsidiaries exceed five percent of the total assets of the Company and
its subsidiaries on a consolidated basis at December 31, 2002; or (ii) the
equity of the Company and its other subsidiaries in the income from continuing
operations before income taxes and extraordinary items of the subsidiary and its
subsidiaries exceeds five percent of such income of the Company and its
subsidiaries on a consolidated basis for the Company's fiscal year ended
December 31, 2002.
(c) The Company does not have any ownership interest in any other
Person, which interest is material in relation to the consolidated financial
position of the Company.
(d) The Company has delivered or made available to FCE a true and
correct copy of its charter documents and similar governing instruments of each
of its subsidiaries, each as amended as of the date hereof, and each such
instrument is in full force and effect. Neither the
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Company nor any of its subsidiaries is in violation of any of the provisions of
its charter documents or equivalent governing instruments.
2.2. CAPITALIZATION
(a) The authorized capital of the Company consists of an unlimited
number of preferred shares issuable in series and an unlimited number of Common
Shares (the "Company Common Shares"). As of August 1, 2003, there were 1,000,000
shares of Cumulative Redeemable Convertible Preferred Shares, Series 2 (the
"Company Series 2 Preferred Shares" and, together with the Company Common
Shares, being collectively referred to herein as the "Company Securities")
issued and outstanding and 29,200,850 Company Common Shares issued and
outstanding. As of August 1, 2003, 2,176,500 Company Common Shares were reserved
for issuance upon the exercise of stock options (the "Company Options") under
the Company's Amended Incentive Stock Option Plan (the "Company Incentive Plan")
and for the future grant of Company Options under the Company Incentive Plan. As
of August 1, 2003, 1,308,225 of the Company Options are outstanding, of which
503,700 have vested and are exercisable in accordance with their terms and
804,525 remain unvested. Except as described in this Section 2.2, there are no
options, warrants, conversion privileges, rights plans or other rights,
agreements, arrangements or commitments (pre-emptive, contingent or otherwise)
obligating the Company or any of its subsidiaries to issue or sell any
securities of the Company or any of its subsidiaries or obligations of any kind
convertible into or exchangeable for any securities of the Company, any of its
subsidiaries or any other Person, nor are there outstanding any stock
appreciation rights, phantom equity or similar rights, agreements, arrangements
or commitments based upon the book value, income or any other attribute of the
Company or any of its subsidiaries. All outstanding Company Securities have been
duly authorized and are validly issued and outstanding as fully paid and
non-assessable shares, free of pre-emptive rights. There are no outstanding
bonds, debentures or other evidences of indebtedness of the Company or any of
its subsidiaries having the right to vote (or that are convertible for or
exercisable into securities having the right to vote) with the holders of
Company Securities on any matter. There are no outstanding contractual
obligations of the Company or any of its subsidiaries to repurchase, redeem or
otherwise acquire any Company Securities or with respect to the voting or
disposition of any outstanding securities of any of its subsidiaries. No holder
of securities issued by the Company or any of its subsidiaries has any right to
compel the Company to register or otherwise qualify such securities for public
sale in Canada or the United States.
(b) The Company's Series 1 10% Cumulative Redeemable Convertible
Preferred Shares (the "Company Series 1 Preferred Shares") were redeemed or
converted by the Company in July 1999. There are no Company Series 1 Preferred
Shares issued and outstanding.
2.3. AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS
(a) The Company has the requisite corporate power and authority to
enter into this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement by the Company and the consummation of
the transactions contemplated by this Agreement have been duly authorized by its
board of directors, and no other corporate proceedings on its part are necessary
to authorize this Agreement or the transactions contemplated hereby other than,
with respect to the completion of the Arrangement, the approval
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of at least two-thirds of the votes cast by the holders of the Company Common
Shares present, in person or by proxy, at the Company Shareholders Meeting.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes its legal, valid and binding obligation, enforceable
against it in accordance with its terms, subject to bankruptcy, insolvency and
other similar Laws affecting creditors' rights generally, and to general
principles of equity.
(c) The Company's board of directors has: (i) determined in its
good faith judgment that the proposed Arrangement is a "Superior Proposal" under
the Quantum Combination Agreement; (ii) concluded in good faith (after
considering applicable law and receiving the advice of outside counsel) that
proceeding with the proposed Arrangement is reasonably necessary for the board
of directors to act in a manner consistent with fiduciary duties under
applicable law; (iii) determined unanimously that the Arrangement is fair to the
holders of Company Common Shares and is in the best interests of the Company;
(iv) received an opinion from Citigroup Global Markets Inc. (and has been
advised that they will receive a written opinion) that the Exchange Ratio is
fair from a financial point of view to the holders of the Company Common Shares;
(v) determined to recommend that the Company Common Shareholders vote in favour
of the Arrangement and the transactions contemplated hereby; and (vi) has
advised the Company and FCE that the members of the Company's board of directors
will vote the Company Common Shares held by them in favour of the Agreement, the
Arrangement, and the transactions contemplated hereby and the Company will so
represent in the Joint Proxy Statement, subject to Section 7.1(b).
(d) The approval of this Agreement by the Company, the execution
and delivery by the Company of this Agreement, and the performance by it of its
obligations hereunder and the completion by it of the Arrangement and the
transactions contemplated thereby, will not:
(i) result in a violation or breach of, require any
consent to be obtained under or give rise to any material termination
rights or material payment obligation under any provision of:
(A) its, or any of its subsidiaries' certificate
of incorporation, articles, bylaws or other charter documents;
(B) subject to obtaining the Appropriate
Regulatory Approvals relating to the Company, any Laws,
regulation, order, judgment or decree, applicable to the
Company or any of its subsidiaries or by which the Company or
any of its subsidiaries or any of their respective properties
is bound;
(C) any Material Contract or material licence,
franchise or permit to which the Company, or any of its
subsidiaries, is a party or by which it is bound; or
(D) the provisions of any of the Company
Property Permitted Encumbrances;
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(ii) give rise to any right of termination or acceleration
of indebtedness, or cause any third party indebtedness to come due
before its stated maturity or cause any available credit to cease to be
available;
(iii) result in the imposition of any Encumbrance upon any
of the Company's or any of its subsidiaries' assets, or restrict,
hinder, impair or limit the ability of the Company to carry on the
business of the Company as and where it is now being carried on, except
as would not, individually or in the aggregate, have a Material Adverse
Effect; or
(iv) result in any payment (including severance,
unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any director or employee of the Company or any of its
subsidiaries or increase any benefits otherwise payable under the
Company Incentive Plan or any Company Employee Plan or result in the
acceleration of time of payment or vesting of any such benefits.
(e) There are no anti-takeover statutes or regulations of any
Governmental Entity that are applicable to the Company in connection with the
transactions contemplated herein.
2.4. GOVERNMENTAL AND THIRD PARTY CONSENTS
(a) No consent, approval, order or authorization of, or
registration, declaration or filing with or notice to, any Governmental Entity
or other Person is required to be obtained by the Company or any of its
subsidiaries in connection with the execution and delivery of this Agreement or
the Plan of Arrangement by the Company or the consummation by the Company of the
transactions contemplated hereby or thereby, other than: (i) the filing with the
Commissions and the Court and the mailing to the securityholders of the Company
of the Joint Proxy Statement relating to the Company Shareholders Meeting; (ii)
any approvals and notices required by the Interim Order; (iii) the Final Order;
(iv) such filings, authorizations, decisions, orders and approvals as may be
required under state "control share acquisition," "anti-takeover" or other
similar statutes, any other applicable federal, provincial or state securities
laws and the rules of the TSX; (v) such filings and notifications as may be
necessary under the HSR Act; (vi) such notices and filings as may be necessary
under the Investment Canada Act and under the Competition Act (Canada); and
(vii) where the failure to obtain such consents, approvals, etc., would not
prevent or delay the consummation of the Arrangement or otherwise prevent the
Company from performing its obligations under this Agreement and would not
reasonably be expected to have a Material Adverse Effect.
(b) Other than as contemplated by Section 2.4(a), no consents,
assignments, waivers, authorizations or other certificates are necessary in
connection with the transactions contemplated hereby to provide for the
continuation in full force and effect of all of the Company's Material Contracts
or leases or for the Company to consummate the transactions contemplated hereby,
except when the failure to receive such consents or other certificates would not
have a Material Adverse Effect.
(c) The Company and its subsidiaries possesses such consents,
licences, certificates, authorizations, approvals, franchises, permits or other
rights as are currently necessary to
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conduct the business now operated by it, except where the failure to possess
such consents, licences, certificates, authorizations, approvals, franchises, or
permits would not have a Material Adverse Effect.
2.5. NO DEFAULTS
Neither the Company nor any of its subsidiaries is in default under and
there exists no event, condition or occurrence which, after notice or lapse of
time or both, would constitute such a default under any contract, agreement,
licence or franchise to which it is a party which would, if terminated due to
such default, cause a Material Adverse Effect.
2.6. INTELLECTUAL PROPERTY
(a) The Company Disclosure Letter lists all Registered
Intellectual Property Rights that are owned by, filed in the name of, or applied
for by the Company or its subsidiaries, specifying as to each the nature or
title of such right, any jurisdiction that has issued a registration with
respect thereto or in which an application for such registration is pending, and
any applicable registration or application number. All such Registered
Intellectual Property Rights are valid and in full force and were prosecuted in
good faith. All necessary registration, maintenance and renewal fees in
connection with each item of such Registered Intellectual Property Rights have
been paid and all necessary documents and certificates in connection with such
Registered Intellectual Property Rights have been filed with the relevant
patent, copyright, trademark or other authorities in the United States, Canada
or other jurisdictions, as the case may be, for the purposes of maintaining such
Registered Intellectual Property Rights.
(b) The Company Disclosure Letter sets forth an accurate and
complete list of all licences, sublicences and other agreements to which the
Company or any of its subsidiaries is a party or is otherwise bound and pursuant
to which any Person other than the Company or any of its subsidiaries is
authorized to use any material Company Intellectual Property Rights or Company
Technology and a true and correct copy of each such agreement has been delivered
or made available to FCE.
(c) Section 2.6(c)(i) of the Company Disclosure Letter sets forth
an accurate and complete list of all material licences, sublicences, and other
agreements to which the Company or any of its subsidiaries is a party or is
otherwise bound and pursuant to which the Company and any of its subsidiaries is
authorized to use any Intellectual Property Right or Technology that is held by
any Person other than the Company or any of its subsidiaries and a true and
correct copy of each such agreement has been delivered or made available to FCE,
other than end-user licences granted to the Company or any of its subsidiaries
relating to "off the shelf" personal computer software that is generally
available from Persons that are unaffiliated with the Company or any of its
subsidiaries. Section 2.6(c)(ii) of the Company Disclosure Letter sets forth an
accurate and complete list of all material licences granted to the Company or
any of its subsidiaries relating to "off the shelf" personal computer software
that is generally available from Persons that are unaffiliated with the Company
or any of its subsidiaries and that is incorporated into any product marketed,
sold, or licensed by, or used in the provision of any service provided by the
Company or any subsidiary of the Company.
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(d) The Company and its subsidiaries either exclusively own or
have the valid right to use all Company Intellectual Property Rights and all
Third Party Intellectual Property Rights used by the Company or any subsidiary
of the Company (and no third party, including any past or present employee or
contractor of the Company or any Governmental Entity, owns or has any ownership
interest in any Company Intellectual Property Rights that are not Third Party
Intellectual Property Rights of the Company). Upon Closing, all Company
Intellectual Property Rights and all Third Party Intellectual Property Rights
used by the Company or any subsidiary of the Company will be immediately
available for use on terms and conditions substantially identical to those under
which the Company and any subsidiaries of the Company presently uses or
reasonably contemplates using such rights, without any affirmative act by FCE or
any other Person.
(e) To the knowledge of the Company, there are (and upon Closing,
will be) no royalties, honoraria, fees, or other payments payable by the
Company, any subsidiary of the Company, or FCE to any Person by reason of the
ownership, use, licence, sale or disposition of any Company Intellectual
Property Rights or Company Technology.
(f) To the knowledge of the Company, neither the Company
Intellectual Property Rights nor the conduct of the Company business as
presently conducted or reasonably currently contemplated to be conducted uses or
discloses in an unauthorized manner, infringes, or constitutes a
misappropriation of any Intellectual Property Right of any Person. Neither the
Company nor any of its subsidiaries: (i) has any knowledge that any Company
Intellectual Property Right is the subject of any interference, reexamination,
cancellation, or opposition proceeding, or any currently pending or threatened
suit, action, or proceeding arising out of an alleged right of any Person with
respect to any Intellectual Property Right; (ii) has received any oral, written,
or other communication that the Company or any subsidiary of the Company is
using or disclosing in an unauthorized manner, infringing, or misappropriating
the alleged right of any Person with respect to any Intellectual Property Right;
or (iii) has any knowledge that any of the Company Intellectual Property Rights
is being used or disclosed in an unauthorized manner, infringed or
misappropriated by any Person.
(g) None of the Company Intellectual Property Rights are subject
to any Proceeding that restricts in any manner the use, transfer or licensing
thereof by the Company or that may affect the validity, use or enforceability of
the Company Intellectual Property Rights; provided that nothing herein applies
to the prosecution (except for any interference or opposition proceeding) of any
Company Intellectual Property Rights in the U.S. Patent and Trademark Office or
any other government patent or trademark office.
(h) To the knowledge of the Company, no party to any licence,
sublicence, or agreement listed in the Company Disclosure Letter is (or upon
Closing, will be) in material breach or default and no event has occurred (or,
upon Closing, will occur) which with notice or lapse of time would constitute a
material breach or default or permit termination, modification or acceleration
thereunder.
(i) The Company and its subsidiaries have maintained and continue
to maintain a system to safeguard and maintain the secrecy and confidentiality
of and its proprietary rights in all of the material Company Intellectual
Property Rights not otherwise protected by patents,
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patent applications, or copyright or trademark law. Without limitation on the
generality of the foregoing, to the knowledge of the Company, (i) any
disclosures to third parties of trade secrets that are material to the operation
of the Company business have been pursuant to executed written confidentiality
agreements substantially similar in effect to those included in the forms set
forth in the Company Disclosure Letter, (ii) the Company has obtained
confidentiality and inventions assignment agreements, in one or more forms, that
have protections and conditions substantially similar in effect to those
included in the forms set forth in the Company Disclosure Letter, from all of
the past and present employees and independent contractors of the Company and
subsidiaries of the Company involved in the creation or development of the
Company Intellectual Property Rights and Company Technology that are material to
the operation of the Company business, (iii) there has been no material breach
or violation of any secrecy or confidentiality commitments of any person in
respect of any material confidential information of the Company or its
subsidiaries, and (iv) the measures taken by the Company and its subsidiaries to
protect the proprietary and non-public aspects of the thermo-electric generator
and solid oxide fuel cell technology are reasonably designed to adequately
prevent third parties from using any such aspects of such technology without the
approval of the Company. No Person who has performed services related to the
Company business has (or upon Closing, will have) any right, title or interest
in any Company Intellectual Property Rights that are material to the operation
of the Company business.
(j) The execution, delivery, and performance of this Agreement,
and the consummation of the transactions contemplated hereby, will not (i)
breach, violate, or conflict with any agreement governing any Company
Intellectual Property Rights, (ii) cause the forfeiture or termination or give
rise to a right of forfeiture or termination of any Company Intellectual
Property Rights, or in any way impair the right of FCE to use or bring any
action for the unauthorized use or disclosure, infringement, or misappropriation
of any Company Intellectual Property Right, (iii) result in FCE granting to any
third party any right to, or with respect to, any Intellectual Property Right
owned by, or licensed to, FCE, (iv) result in FCE being bound by, or subject to,
any non-competition or other restriction on the operation or scope of its
businesses, or (v) result in FCE being obligated to pay any royalties or other
fees of any kind to any third party. The Company and its subsidiaries have not
entered into any agreements granting any exclusive right to any material Company
Intellectual Property Right.
(k) For purposes of this Section 2.6, "use" includes, without
limitation, make, have made, reproduce, display or perform, publicly or
otherwise, prepare derivative works based upon, offer for sale, sell,
distribute, import, disclose, licence, sublicence, dispose of and otherwise
exploit.
2.7. SECURITIES REPORTS
(a) The Company has furnished or made available to FCE true and
complete copies of each statement, form, schedule, report, prospectus, proxy
statement, or other documents filed with, or furnished to, the Commissions or
posted on SEDAR since December 31, 1999, and, prior to the Effective Time, the
Company will have furnished FCE with true and complete copies of any additional
documents filed with the Commissions or posted on SEDAR by the Company prior to
the Effective Time (such forms, reports, schedules, prospectuses, statements and
other documents, including any financial statements or other documents,
including any schedules
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included therein, are referred to as the "Company Documents"). The Company has
furnished to FCE true and complete copies of all written correspondence between
the Company and any securities regulatory bodies including the TSX.
(b) The Company has made available to FCE all exhibits to the
Company Documents filed prior to the date hereof, and will promptly make
available to FCE all exhibits to any additional Company Documents filed prior to
the Effective Time. All documents required to be filed as exhibits to the
Company Documents have been so filed, and all Material Contracts so filed as
exhibits are in full force and effect, except those which have expired in
accordance with their terms, and neither the Company nor any of its subsidiaries
is in default thereunder.
(c) The Company Documents include all forms, reports, schedules,
prospectuses, statements or other documents required to be filed by it with the
Commissions since December 31, 1999. The Company has timely filed all Company
Documents required to be filed by it with the Commissions since December 31,
1999. The Company Documents did not, at the time they were filed, or, if amended
or updated, as of the date of such amendment or update, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading, except to
the extent corrected by a subsequently-filed Company Document. None of the
Company's subsidiaries is required to file any forms, reports, schedules,
prospectuses, statements or other documents with the Commissions. The Company
Documents, at the time filed complied in all material respects with the
requirements of applicable securities Laws.
(d) The Company has not filed any confidential material change
report with the Commissions or any other securities authority or regulator or
any stock exchange or other self-regulatory authority which at the date hereof
remains confidential.
(e) The Company has publicly disclosed in the Company Documents
any information regarding any event, circumstance or action taken or failed to
be taken by the Company or its subsidiaries which could individually or in the
aggregate reasonably be expected to have a Material Adverse Effect.
2.8. FINANCIAL STATEMENTS
(a) The Company Financial Statements complied as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of applicable Governmental Entities and the Commissions
with respect thereto as of their respective dates, and have been prepared in
accordance with Canadian generally accepted accounting principles applied on a
basis consistent throughout the periods indicated and consistent with each other
(except as may be indicated in the notes thereto or in the case of unaudited
statements included in quarterly reports to shareholders). The Company Financial
Statements present fairly the consolidated financial position, results of
operations and cash flows of the Company and its subsidiaries at the dates and
during the periods indicated therein (subject, in the case of unaudited
statements, to normal, recurring year-end adjustments and the absence of notes
thereto) and reflect appropriate and adequate reserves in respect of all
liabilities, including contingent liabilities, if any, of the Company and its
subsidiaries on a consolidated basis. There
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has been no change in the Company's accounting policies, except as described in
the notes to the Company Financial Statements, since December 31, 2002.
(b) The Company has heretofore made available to FCE the
consolidated balance sheet of the Company and its consolidated subsidiaries at
December 31, 2002 (the "Company Balance Sheet"), as well as the consolidated
statements of operations of the Company and its consolidated subsidiaries for
the period ended December 31, 2002 (the "Company Statement of Operations") and
the consolidated statements of cash flows of the Company and its consolidated
subsidiaries for the period ended December 31, 2002 (the "Company Statement of
Cash Flows" and, together with the Company Balance Sheet and the Company
Statement of Operations, in each case including the notes thereto, being
collectively referred to herein as the "Company Financial Statements"). Except
as set forth in the Company Financial Statements, neither the Company nor any of
its subsidiaries has any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise), except for liabilities and obligations,
incurred in the ordinary course of business consistent with past practice since
December 31, 2002 and that would not have a Material Adverse Effect.
2.9. ABSENCE OF CERTAIN CHANGES AND EVENTS
Since December 31, 2002, the Company has conducted its business in the
ordinary and regular course consistent with past practice and there has not
occurred:
(a) Any Material Adverse Change with respect to the Company;
(b) Any acquisition, sale or transfer of any material asset of the
Company or any of its subsidiaries other than in the ordinary course of business
and consistent with past practice;
(c) Any change in accounting methods or practices (including any
change in depreciation or amortization policies or rates, or capitalized
software policies) by the Company or any revaluation by the Company of any of
its or any of its subsidiaries' assets;
(d) Any declaration, setting aside, or payment of a dividend or
other distribution with respect to the Company Securities, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
shares of capital stock;
(e) Any Material Contract entered into by the Company or any of
its subsidiaries, or any material amendment or termination of, or default under,
any Material Contract to which the Company or any of its subsidiaries is a party
or by which it is bound;
(f) Any change in the capital stock or in the number of shares or
classes of the Company's authorized or outstanding capital stock as described in
Section 2.2 (other than as a result of exercises of Company Options);
(g) Any agreement by the Company or any of its subsidiaries to do
any of the things described in the preceding clauses (a) through (f) (other than
negotiations with FCE and its representatives regarding the transactions
contemplated by this Agreement and negotiations with Quantum and its
representatives with respect to the Quantum Combination); or
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(h) Any agreement or arrangement to take any action which, if
taken prior to the date hereof, would have made any representation or warranty
set forth in this Agreement materially untrue or incorrect as of the date when
made.
2.10. MATERIAL CONTRACTS
None of the Company, its subsidiaries, nor, to the knowledge of the
Company, any of the other parties thereto is in default or breach of, in any
material respect, nor has the Company or its subsidiaries received any notice of
material default or termination under, any Material Contract and, to the
knowledge of the Company, there exists no state of facts which after notice or
lapse of time or both would constitute such a material default or breach. None
of the Company or its subsidiaries is a party to any Material Contract except
for those Material Contracts set forth on the Company Disclosure Letter. True
and complete copies of all of the Company's Material Contracts, or where such
Contracts are oral, true and complete written summaries of the terms thereof,
have been furnished to or made available to FCE.
2.11. CUSTOMERS AND SUPPLIERS
Since the period ended in the Company Balance Sheet, there has been no
termination or cancellation of, and no material modification or change in, the
business relationship with any customer or group of customers which singly or in
the aggregate provided more than 10% of the consolidated gross revenues of the
Company and its subsidiaries for the period ended on the Company Balance Sheet.
The Company has no reason to believe that the benefits of any relationship with
any of the customers or suppliers of the Company or its subsidiaries will not
continue on the terms identified in the agreements establishing such
relationships after the Effective Date in substantially the same manner as prior
to the date hereof, assuming the completion on the Effective Date of the
Arrangement. The Company has furnished or made available to FCE the Company's
standard form product warranty provided to customers and, except as set forth in
the Company Disclosure Letter, no such product warranty relating to a Contract
for the sale of goods or services worth more than $500,000 differs from the
standard form in any material respect.
2.12. INSURANCE
The Company and its subsidiaries are insured by insurers, reasonably
believed by the Company to be of recognized financial responsibility and
solvency, against such losses and risks and in such amounts as are customary in
the businesses in which the Company and its subsidiaries are engaged. The
Company has furnished or made available to FCE accurate particulars of the
policies of insurance maintained by the Company and its subsidiaries as of the
date hereof, including the name of the insurer, the risks insured against and
the amount of coverage, and all such policies will continue in effect without
alteration or loss in coverage in connection with the consummation of the
Arrangement. All such policies are in full force and effect. None of the Company
or its subsidiaries or, to the knowledge of the Company, any of the other
parties thereto, is in default or breach of, whether as to the payment of
premiums or otherwise, nor has the Company or its subsidiaries received any
notice of material default or termination under, any such policy and, to the
knowledge of the Company, there exists no state of facts which after notice or
lapse of time or both would constitute such a material default or
B-20
breach. There is no reason to believe that any of the existing insurance
policies of the Company and its subsidiaries will not be renewed by the insurer
upon the scheduled termination date of the policy or will be renewed by the
insurer only on the basis that there will be a material increase in the premiums
payable in respect of the policy. True and complete copies of all the existing
insurance policies of the Company and its subsidiaries have been provided to
FCE.
2.13. BOOKS AND RECORDS
(a) The books, records and accounts of the Company and its
subsidiaries, in all material respects:
(i) have been maintained in accordance with good business
practices on a basis consistent with prior years;
(ii) are stated in reasonable detail and accurately and
fairly reflect the transactions and dispositions of the assets of the
Company and its subsidiaries; and
(iii) accurately and fairly reflect the basis for the
Company Financial Statements.
(b) The Company has devised and maintains a system of internal
accounting controls sufficient to provide reasonable assurances that:
(i) transactions are executed in accordance with
management's general or specific authorization; and
(ii) transactions are recorded as necessary (A) to permit
preparation of financial statements in conformity with Canadian
generally accepted accounting principles or any other criteria
applicable to such statements and (B) to maintain accountability for
assets.
(c) The Company maintains a system of disclosure controls and
procedures that are designed to ensure that information required to be disclosed
by the Company in its reports or other documents filed with or furnished to the
Commissions is recorded, processed, summarized and reported within the time
periods required by the Commissions' rules and forms, including, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to the Company's senior management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
2.14. LITIGATION; INVESTIGATIONS
There is no claim, action, proceeding or investigation pending or, to
the knowledge of the Company, threatened against or relating to the Company or
any of its subsidiaries or affecting any of their properties, licences or assets
before any court or Governmental Entity or regulatory authority or body that, if
adversely determined, could reasonably be expected to have a Material Adverse
Effect, or prevent or delay consummation of the transactions contemplated by
this Agreement or the Arrangement, nor is the Company aware of any basis for any
such claim,
B-21
action, proceeding or investigation. Neither the Company nor any of its
subsidiaries, nor their respective assets and properties, is subject to any
outstanding judgment, order, writ, injunction or decree that has had or is
reasonably likely to have a Material Adverse Effect, that involves or may
involve, or restricts or may restrict, or requires or may require, the
expenditure of a material amount of money as a condition to or a necessity for
the right or ability of the Company or any of its material subsidiaries, as the
case may be, to conduct its business in any manner in which it has been carried
on prior to the date hereof, or prevent or delay consummation of the
transactions contemplated by this Agreement or the Arrangement.
2.15. ENVIRONMENTAL MATTERS
(a) There are no environmental conditions or circumstances, such
as the presence or Release of any Hazardous Substance, existing on, at, under,
to or from any property presently or previously owned, operated or leased by the
Company or any of its subsidiaries.
(b) The Company and its subsidiaries have in full force and effect
all material environmental permits, licences, approvals and other authorizations
required to conduct their operations and are operating in material compliance
thereunder, and, to the knowledge of the Company, each of such environmental
permits, licences, approvals and other authorizations shall continue in full
force and effect on and after the Closing.
(c) The Company's and its subsidiaries' operations and the
ownership, operation or use of their assets are currently, and have at all times
been, in compliance with all applicable United States, Canadian federal, state,
provincial or local law (including common law), statute, ordinance, rule,
regulation, code, policy, licence, permit, consent, approval, judgment, notice,
order, administrative order or decision, decree or injunction requirement
pertaining to (i) the condition or protection of air, groundwater, surface
water, soil, or other environmental media, (ii) the environment, including
natural resources or any activity which affects the environment or (iii) the
generation, treatment, manufacturing, use, storage, handling, recycling,
presence, release, disposal, transportation or shipment of any Hazardous
Substance (collectively the "Applicable Environmental Laws").
(d) Neither the Company nor its subsidiaries have arranged for any
other Person to handle or Release any Hazardous Substance at, on, under, from or
to any other location, except in each case (i) in full compliance with
Applicable Environmental Laws, (ii) in a manner that would not reasonably be
expected to give rise to any liability under any Applicable Environmental Law
and (iii) at a location that is (x) fully permitted for such Handling and
Release and (y) is not subject to any investigation or cleanup under any
Applicable Environmental Laws.
(e) No written notice has been served on the Company or any of its
subsidiaries from any Governmental Entity or individual regarding any existing,
pending or threatened investigation or inquiry related to alleged violations
under any Applicable Environmental Laws, or regarding any claims for remedial
obligations or contribution under any Applicable Environmental Laws.
B-22
(f) The Company does not know of any reason that would preclude it
from renewing or obtaining a reissuance of the material permits, licences or
other authorizations required pursuant to any Applicable Environmental Laws to
own, operate or use any of the Company's or any of its subsidiaries' assets for
their current purposes and uses.
(g) The Company has provided FCE with complete and correct copies
of all studies, reports, surveys, assessments (including all environmental site
assessments), audits, correspondence, investigations, analysis, laboratory data,
tests, soil and groundwater sampling results and other documents (whether in
hard copy or electronic form) in the Company's or the Company's counsel's or the
Company's consultant's possession or control (excluding documents which are
subject to solicitor-client privilege, the nature of which documents are
described in the Company Disclosure Letter) or to which the Company has access
relating to the presence or alleged presence of Hazardous Substances at, on or
affecting any real property currently or formerly owned, leased or operated by
the Company or its subsidiaries, or regarding the Company's compliance with any
Applicable Environmental Law.
(h) No environmental circumstance or condition exists, including
the presence or Release of any Hazardous Substance at, on, under, from or to any
property currently or previously owned, operated or leased by the Company or its
subsidiaries which could reasonably be expected to result in loss or liability
under Applicable Environmental Laws (including losses, liabilities or other
claims for or associated with remedial investigations or cleanup obligations)
greater than $1.5 (Cdn.) million.
2.16. TITLE TO PROPERTIES
Except for goods and other property sold, used or otherwise disposed of
since December 31, 2002 in the ordinary course of business for fair value, the
Company has good, defensible, and marketable title to all its properties,
including real property owned or leased, interests in properties and assets,
real and personal (the "Company Property"), reflected in the Company Financial
Statements, free and clear of any Encumbrance, except: (a) Encumbrances
reflected in the Company Balance Sheet, all of which Encumbrances are in good
standing; (b) liens for current taxes not yet due and payable; and (c) such
imperfections of title, easements and Encumbrances as would not have a Material
Adverse Effect (the "Company Property Permitted Encumbrances") and the Company
is the sole legal and beneficial owner of the Company Property. All leases
pursuant to which the Company or any of its subsidiaries leases (whether as
lessee or lessor) any real or personal property are in good standing, valid, and
effective; and there is not, under any such leases, any existing or prospective
default or event of default or event which with notice or lapse of time, or
both, would constitute a default by the tenants under such leases, or by the
Company or any of its subsidiaries which, individually or in the aggregate,
would have a Material Adverse Effect and in respect to which the Company or any
of its subsidiaries has not taken adequate steps to prevent a default from
occurring. The buildings and premises of the Company and each of its
subsidiaries that are used in its business are in good operating condition and
repair, subject only to ordinary wear and tear. All major items of operating
equipment of the Company and its subsidiaries are in good operating condition
and in a state of reasonable maintenance and repair, ordinary wear and tear
excepted, and are free from any known defects except as may be repaired by
routine maintenance and such minor defects as do not substantially interfere
with the continued use thereof in the conduct of normal operations.
B-23
2.17. ZONING AND OTHER MATTERS RELATING TO REAL PROPERTY
(a) The buildings and other structures located on the Company
Property and the operation and maintenance thereof, as now operated and
maintained, comply in all material respects with all applicable Laws, municipal
or otherwise; none of such buildings or other structures encroaches upon any
land not owned or leased by the Company or its subsidiaries; and there are no
restrictive covenants, municipal by-laws or other Laws which in any way restrict
or prohibit the use of the Company Property or such buildings or structures for
the purposes for which they are presently being used.
(b) The Company is not aware of any plans, studies, notices of
intent or pending bylaws which, if implemented, could change the land use
designation of the Company Property.
(c) There are no expropriation or similar proceedings, actual or
threatened, of which the Company or its subsidiaries has received notice against
any of the Company Property or any part thereof.
(d) No buildings or other structures located on the Company
Property contain any friable asbestos or any other substance containing asbestos
and deemed hazardous by any applicable Environmental Laws.
(e) There are no options to purchase, rights of first refusal, or
other preferential purchase rights or purchase agreements in favour of any third
party to purchase the Company Property or any part thereof nor any agreements or
arrangements capable of becoming any such option, right or agreement.
(f) Each and every outstanding development agreement or other
agreement with any Governmental Entity in relation to the Company Property, if
any, has been fully complied with and satisfied and, subject only to the passing
of time, shall be released or discharged without conditions.
(g) Other than financing against the Company Property disclosed in
the Company Balance Sheet, the Company does not have any indebtedness to any
person that might by operation of Law or otherwise constitute an Encumbrance
against the Company Property or any part thereof or which could affect the right
of either party, to own, occupy and obtain the revenue from the Company
Property.
(h) There are no contracts, agreements or employees associated
with the Company Property in respect of which the Company will incur any
liability whatsoever as a result of the transactions contemplated under this
Agreement, other than in connection with the Company Property Permitted
Encumbrances.
(i) There are no work orders, deficiency notices, notices of
violation or other written notices from any Governmental Entity, board of fire
insurance underwriters or anyone else advising of any violation or breach of any
Law or regulation or of any permit, license or approval or stating that any
repair, work or change is necessary, recommended or required to the Company
Property or any improvements thereon, nor stating that the Company is not
entitled to
B-24
carry out any of the activities carried out on the Company Property or any
improvements thereon in the manner that such are currently carried out.
(j) The Company holds no registered or beneficial interest,
directly or indirectly, in any lands adjoining or having a common boundary with
any of the Company Property.
(k) The Company Property or any part thereof is not subject to any
designation or pending designation or otherwise restricted in any manner
whatsoever pursuant to the Historical Resources Act (Alberta) (such restrictions
including, without limitation, designation of the Company Property as a
"Heritage Site" thereunder).
(l) The Company is not a "foreign controlled corporation" nor is
the Company Property or any part thereof controlled land as such phrase is
defined by the Foreign Ownership of Land Regulations and/or regulations from
time to time enacted under the Agricultural and Recreational Land Ownership Act
(Alberta).
(m) The Company is not a "non-resident" of Canada within the
meaning and intent of the Tax Act.
(n) There are no security deposits, damage deposits or prepaid
rents outstanding from or owing to any tenants of the Company Property and none
of the leases contain provisions pursuant to which tenants may be entitled to
occupy the premises demised to them, or any other premises, on a rent-free or
rent-reduced basis.
(o) The leases relating to the Company Property are in full force
and effect have not been surrendered and contain the entire and only agreement
between the Company or its subsidiaries, and the landlords or tenants, as the
case may be, with respect to the premises demised or any other portions of the
Company Property.
2.18. NO HAZARDOUS SUBSTANCES
The property presently or previously owned, operated or leased by the
Company or its subsidiaries has not been and is not now used as a landfill or
waste disposal site, nor are there any active or out-of-service underground
storage tanks or sites from which such tanks have been removed on any property
presently or previously owned, operated or leased by the Company or its
subsidiaries, nor has any Hazardous Substance been deposited in or disposed of
at, on, under, to or from any property presently or previously owned, operated
or leased by the Company or its subsidiaries, nor has there been any Release,
spill, emission or discharge of any Hazardous Substance at, on, under, to or
from any property presently or previously owned, operated or leased by the
Company or its subsidiaries or any other location which could reasonably be
expected to give rise, directly or indirectly, to any action or claim by a third
party or a Governmental Entity alleging any violation of, or liability under,
any Applicable Environmental Laws.
2.19. TAXES
(a) The Company and each of its subsidiaries have timely filed, or
caused to be filed, all Tax Returns required to be filed by them prior to the
date hereof (all of which returns were
B-25
correct and complete in all material respects) and have paid, or caused to be
paid, all Taxes, including any installments or prepayments of Taxes, that are
due and payable prior to the date hereof and the Company has provided adequate
accruals in accordance with generally accepted accounting principles in its most
recently published financial statements for any Taxes for the period covered by
such financial statements that have not been paid, whether or not shown as being
due on any Tax Returns. The Company and each of its subsidiaries have made
adequate provision in their respective books and records for any Taxes accruing
in respect of any period subsequent to the period covered by such financial
statements. Since such publication date, no material Tax liability not reflected
in such statements or otherwise provided for has been assessed, proposed to be
assessed, incurred or accrued other than in the ordinary course of business. The
Company and its subsidiaries have withheld from all payments made by them, or
otherwise collected, all material amounts in respect of Taxes required to be
withheld therefrom or collected by them prior to the date hereof, and have
remitted same to the applicable Governmental Entity within the required time
periods. Neither the Company nor any of its subsidiaries has any liability for
the Taxes of any other Person.
(b) Neither the Company nor any subsidiary has received any
written notification that any material issues have been raised (and are
currently pending) by Canada Customs and Revenue Agency, the United States
Internal Revenue Service (the "IRS") or any other taxing authority, including,
without limitation, any state, provincial, or local tax authority, in connection
with any of the Tax Returns referred to above. No waivers of statutes of
limitations have been given or requested with respect to the Company or any
subsidiary, and the relevant statute of limitations with respect to any
liability for Taxes is closed with respect to the Tax Returns of the Company and
its subsidiaries for all years through 1997. All Tax liability of the Company
and its subsidiaries has been assessed for all fiscal years up to and including
the fiscal year ended December 31, 2001. To the knowledge of the Company, there
are no material proposed (but unassessed) additional Taxes with respect to the
Company or any subsidiary and none has been asserted. No Tax liens have been
filed other than for Taxes not yet due and payable.
(c) Neither the Company nor any subsidiary (i) is or has been a
"controlled foreign corporation," "passive foreign investment company" or
"foreign personal holding company" for U.S. federal income tax purposes; (ii)
currently has or has had an active trade or business or "permanent
establishment" (as defined in an applicable treaty) in the United States for
U.S. federal income tax purposes; (iii) currently has or has had any employees,
officers or directors in the United States.
(d) Neither the Company nor any of its subsidiaries has
participated in any transactions with an affiliated United States person, as
defined in Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended
(the "Code"), other than on terms that are consistent with the principles of
Section 482 of the Code and U.S. Treasury Regulations promulgated thereunder.
(e) The Company and its subsidiaries have filed all reports and
have created and/or retained all records required under Section 6038A of the
Code with respect to ownership by and transactions with related foreign parties.
Each related foreign person required to maintain records under Section 6038A
with respect to transactions between any U.S. subsidiary of the Company and the
related foreign person has maintained such records. All documents that are
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required to be created and/or preserved by the related foreign person with
respect to transactions with any U.S. subsidiary of the Company are either
maintained in the United States, or the U.S. subsidiary of the Company is exempt
from the record maintenance requirements of Section 6038A with respect to such
transactions under U.S. Treasury Regulation Section 1.6038A-1. No U.S.
subsidiary of the Company is a party to any record maintenance agreement with
the IRS with respect to Section 6038A. Each related foreign person that has
engaged in transactions with a U.S. subsidiary of the Company has authorized
such U.S. subsidiary to act as its limited agent solely for purposes of Sections
7602, 7603, and 7604 of the Code with respect to any request by the IRS to
examine records or produce testimony related to any transaction with the U.S.
subsidiary, and each such authorization remains in full force and effect.
(f) There is no Contract to which the Company or any of its
subsidiaries is a party, including but not limited to the provisions of this
Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to Section 280G of the Code.
(g) Neither the Company nor any of its subsidiaries is a party to
any tax sharing, tax indemnity or tax allocation agreement or arrangement and
neither the Company nor any of its subsidiaries has any liability or obligation
under any such tax sharing, tax indemnity or tax allocation agreement. No
liability (or reasonable claim of liability) shall arise under any tax sharing,
tax indemnity or tax allocation agreement or arrangement as a result of this
transaction. Neither the Company nor any of its subsidiaries is the subject of
an advance income tax ruling.
(h) For Canadian federal, provincial, territorial or local Tax
purposes, the Company has not claimed a reserve in respect of an amount that
could be included in income for any period ending after the Effective Date.
(i) The Company will not be required to include any item of income
in, or exclude any item of deduction from, its taxable income for any period
ending after the Effective Date as a result of any change in method of
accounting for a taxable period beginning prior to the Effective Date, or
prepaid amounts received on or prior to the Effective Date.
(j) Except pursuant to this Agreement, for purposes of any
applicable Canadian federal, provincial, state or local statute imposing Taxes,
no Person or group of Persons has ever acquired or had the right to acquire
control of the Company after 1997.
(k) None of sections 78, 80, 80.01, 80.02, 80.03 or 80.04 of the
Tax Act, or any equivalent provision of the taxation legislation of any
applicable province of Canada, have applied to the Company or could apply as a
result of transactions that occurred prior to the Effective Date.
(l) For all transactions between the Company and any non-resident
Person with whom the Company does not deal at arm's length (within the reasoning
of the Tax Act) during a taxation year commencing after 1998, the Company has
made or obtained records or documents that meet the requirements of paragraphs
247(4)(a) to (c) of the Tax Act.
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(m) The Company is duly registered under subdivision (d) of
Division V of Part IX of the Excise Tax Act (Canada) with respect to the goods
and services tax and harmonized sales tax, and its registration number is
102120607-RT001.
(n) The Company Disclosure Letter sets out the estimated tax pools
of the Company for Canadian federal, provincial, state or local Tax purposes.
(o) No claim has ever been made by a Governmental Entity in
respect of Taxes in a jurisdiction where the Company does not file Tax Returns
that the Company is or may be subject to Tax by that jurisdiction.
2.20. NON-ARM'S LENGTH TRANSACTIONS
(a) None of the Company or its subsidiaries has made any payment
or loan to, or has borrowed any monies from or is otherwise indebted to, any
officer, director, employee or shareholder of such company or any Person not
dealing with such officer, director, employee or shareholder at arm's length or
any affiliate of any of the foregoing, except as disclosed in the Company
Financial Statements or in the Company Disclosure Letter and except for usual
compensation paid in the ordinary course of business consistent with past
practice.
(b) None of the Company or its subsidiaries has outstanding any
loan or other extension of credit, nor any agreement or commitment to make any
loan or extension of credit, in each case in the form of a personal loan, to any
director or senior officer of the Company or its subsidiaries.
(c) Except as disclosed in the Company Disclosure Letter and
except for Contracts made solely between the Company and its subsidiaries and
except for contracts of employment, options agreements under the Company
Incentive Plan, and agreements relating to employee benefits generally available
to employees of the Company, none of the Company or its subsidiaries is a party
to any Contract with any officer, director, employee or shareholder of such
company or any Person not dealing with such officer, director, employee or
shareholder at arm's length or any affiliate of any of the foregoing.
2.21. EMPLOYEES
The Company Disclosure Letter lists all employees employed by and all
individuals engaged on a contractual basis to provide employment or sales
services to the Company or any of its subsidiaries as of the date hereof (the
"Company Employees"). For each of the Company Employees, the Company Disclosure
Letter lists such employee's name, date of hire, title or classification, rate
of salary, commission or bonus entitlements (if any) and any other benefits
extended to, or circumstances unique to, each such employee. Except as described
in the Company Disclosure Letter, neither the Company nor any of its
subsidiaries is a party to or bound by any Contracts relating to employment,
severance, retention, bonus or confidentiality or any consulting Contracts with
any Company Employee or former employee of the Company or any of its
subsidiaries written or otherwise, as to which unsatisfied obligations of the
Company or any of its subsidiaries of greater than $50,000 remain outstanding.
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2.22. EMPLOYEE BENEFIT PLANS
(a) The Company Disclosure Letter lists all the employee benefit,
health, welfare, supplemental employment benefit, bonus, pension, profit
sharing, deferred compensation, stock compensation, stock option or purchase,
retirement, hospitalization insurance, medical, dental, legal, disability and
similar plans or arrangements or practices applicable to Company Employees or to
former employees of the Company or any of its subsidiaries which are currently
maintained or participated in by the Company or its subsidiaries, each loan to a
non-officer Company Employee in excess of $40,000, and each loan to an officer
or director of the Company (the "Company Employee Plans").
(b) All of the Company Employee Plans are registered where
required by, and are in good standing under, all applicable Laws or other
legislative, administrative or judicial promulgations applicable to Company
Employee Plans, and there are no actions, claims, proceedings or governmental
audits pending (other than routine claims for benefits) relating to the Company.
(c) All of the Company Employee Plans have been administered and
funded in material compliance with their terms and all applicable Laws or other
legislative, administrative or judicial promulgations applicable to the Company
Employee Plans, there are no unfunded liabilities in respect of the Company
Employee Plans, and all required contributions thereunder have been made in
accordance with all applicable Laws or other legislative, administrative or
judicial promulgations applicable to the Company Employee Plans and the terms of
such Company Employee Plan.
(d) No amendments to any Company Employee Plan have been promised
and no amendments to any Company Employee Plan will be made or promised prior to
the Effective Date which affect or pertain to the Company Employees.
(e) True and complete copies of all the Company Employee Plans, as
amended and, if available, current plan summaries and employee booklets in
respect thereof as are applicable to the Company Employees and all related
documents or, where oral, written summaries of the terms thereof, have been made
available to FCE; for the purpose of the foregoing, related documents means all
current plan documentation and amendments relating thereto, summary plan
descriptions and summaries of material modifications, if any, all related trust
agreements, funding agreements and similar agreements, the most recent annual
reports filed with any Governmental Entity, and the three most recent actuarial
reports, if any, related thereto.
(f) There are no agreements or undertakings by the Company or any
of its subsidiaries to provide post-retirement profit sharing, medical, health,
life insurance or other benefits to Company Employees or any former employee of
the Company or any of its subsidiaries.
(g) The assets of each Company Employee Plan which is a registered
pension plan are at least equal to the liabilities, contingent or otherwise of
such plan on a plan termination basis and each such plan is fully funded on a
going concern and solvency basis in accordance with its terms, applicable
actuarial assumptions and applicable laws.
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2.23. LABOUR MATTERS
Neither the Company nor any of its subsidiaries is bound by or a party
to any collective bargaining Contracts with any trade union, counsel of trade
unions, employee bargaining agent or affiliated bargaining agent (collectively,
"labour representatives"), and neither the Company nor any of its subsidiaries
has conducted any negotiations with respect to any such future Contracts; no
labour representatives hold bargaining rights with respect to any Company
Employees; no labour representatives have applied to have the Company or any of
its subsidiaries declared a common employer pursuant to the Alberta Labour
Relations Code; to the knowledge of the Company there are no current or
threatened attempts to organize or establish any trade union or employee
association with respect to the Company or any of its subsidiaries; there is no
strike, dispute, slowdown, lockout, shutdown, work stoppage, unresolved material
labour union grievance, labour arbitration, unfair labour practice, successor
rights or common employer proceeding or other concerted action or formal
grievance existing against the Company or any of its subsidiaries.
2.24. INFORMATION SUPPLIED
None of the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in the Joint Proxy Statement will, at
the time the Joint Proxy Statement is mailed to the securityholders of the
Company and at the time of the Company Shareholders Meeting, contain any untrue
statement which, at the time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact, or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not false or misleading or necessary to correct any
statement in any earlier communication with respect to the solicitation of a
proxy for the same meeting or subject matter which has become false or
misleading. The Joint Proxy Statement will comply as to form in all material
respects with the provisions of the ABCA and applicable United States and
Canadian securities laws and the rules and regulations promulgated thereunder.
2.25. COMPLIANCE WITH LAWS
Each of the Company and its subsidiaries have complied with and are not
in violation of any applicable Laws, orders, judgments and decrees, except for
such noncompliance that would not cause a Material Adverse Effect. Without
limiting the generality of the foregoing, all securities of the Company
(including, without limitation, all options, rights or other convertible or
exchangeable securities) have been issued in compliance with all applicable
securities Laws and all securities to be issued upon exercise of any such
options, rights and other convertible or exchangeable securities will be issued
in compliance with all applicable securities Laws.
2.26. RESTRICTIONS ON BUSINESS ACTIVITIES
There is no agreement, judgment, injunction, order or decree binding
upon the Company or any of its subsidiaries that has or could reasonably be
expected to have the effect of prohibiting, restricting or materially impairing
any business practice of the Company or any of its subsidiaries, any acquisition
of property by the Company or any of its subsidiaries or the conduct of business
by the Company or any of its subsidiaries as currently conducted.
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2.27. DISCLOSURE
No representation or warranty made by the Company in this Agreement or
the Company Disclosure Letter, nor any document, written information, statement,
financial statement, certificate or exhibit prepared and furnished or to be
prepared and furnished by the Company or its representatives pursuant hereto or
in connection with the transactions contemplated hereby, when taken together,
contains or contained (as of the date made) any untrue statement of a material
fact when made, or omits or omitted (as of the date made) to state a material
fact necessary to make the statements or facts contained herein or therein not
misleading, in any material way, in light of the circumstances under which they
were made.
2.28. THE COMPANY ASSETS AND REVENUES
The Company is its own Ultimate Parent Entity. The Company, together
with all entities Controlled by the Company, (a) does not for the fiscal year
represented in the Company Balance Sheet have aggregate sales in or into the
United States of $50 million or more, or (b) as of the period ended in the
Company Balance Sheet does not and as of the Effective Time will not hold assets
located in the United States having an aggregate total value of $50 million or
more, in each case determined in accordance with 16 C.F.R. Section 801.11. This
representation and warranty is made solely for the purpose of determining the
applicability of the HSR Act notification requirements to the transactions
contemplated by this Agreement.
2.29. BROKERS AND FINDERS
Other than Citigroup Global Markets Inc. (formerly known as Salomon
Smith Barney Inc.) in accordance with the terms of its engagement letter dated
November 19, 2002, a copy of which has been provided to FCE, none of the Company
or any of its subsidiaries nor any of their respective directors, officers or
employees has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or similar payments in
connection with the transactions contemplated by this Agreement.
2.30. TERMINATION OF QUANTUM COMBINATION AGREEMENT.
The Company has terminated the Quantum Combination Agreement pursuant
to the terms thereof.
2.31. COMPANY NET WORKING CAPITAL; CASH BURN
As of September 30, 2003, the projected Company Net Working Capital
shall equal or exceed Cdn. $72,500,000, and a detailed breakdown by each
component item contributing to such amount is set forth in detail in Schedule
2.31 of the Company Disclosure Letter. Solely for the purpose of calculating
Company Net Working Capital pursuant to this Section 2.31, Company Net Working
Capital shall also include a reasonable estimate of all costs and expenses
incurred or that will be incurred by the Company prior to the Effective Time in
connection with the Quantum Combination and the transactions contemplated by
this Agreement and the Plan of Arrangement. As of September 30, 2003, the
Company Net Cash as set forth in Schedule 2.31 of the Company Disclosure Letter
shall equal or exceed Cdn. $67,500,000. Solely for the purpose of calculating
Company Net Cash pursuant to this Section 2.31, Company Net Cash shall also
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include a reasonable estimate of all costs and expenses incurred or that will be
incurred by the Company prior to the Effective Time in connection with the
Quantum Combination and the transactions contemplated by this Agreement and the
Plan of Arrangement. For greater certainty, such estimate does not include an
estimate of the costs that may become payable pursuant to the Company's change
of control agreements with certain of its executive officers in the event of the
consummation of the transactions contemplated by this Agreement and the Plan of
Arrangement. On a per diem basis, between September 30, 2003, and the Effective
Date, the average amount by which the Company Net Working Capital will be
reduced shall not exceed Cdn. $29,500 and the average amount by which Company
Net Cash will be reduced shall not exceed Cdn. $22,000 (collectively, the
"Company Per Diem Burn Rate").
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF FCE
Except as otherwise fully and fairly disclosed and set forth in a
corresponding paragraph of the FCE Disclosure Letter, FCE hereby represents and
warrants to, and agrees with, the Company that:
3.1. ORGANIZATION AND STANDING
(a) Each of FCE and its subsidiaries has been duly organized or
formed under all applicable Laws, is validly existing and in good standing under
the laws of the jurisdiction in which it is organized and has full corporate or
other legal power, authority and capacity to own, lease and operate its
properties and conduct its businesses as currently conducted. All of the
outstanding shares of capital stock and other ownership interests of FCE and its
subsidiaries are duly authorized, validly issued, fully paid and non-assessable,
and all such shares and other ownership interests of FCE's subsidiaries are
owned directly or indirectly by FCE, free and clear of all material liens,
claims or encumbrances and there are no outstanding options, rights,
entitlements, understandings or commitments (pre-emptive, contingent or
otherwise) regarding the right to acquire any such shares of capital stock or
other ownership interests in any of its subsidiaries. FCE and each of its
subsidiaries is duly qualified or licenced to do business in each jurisdiction
where the character of the properties owned, leased or operated by it or the
nature of its activities makes such qualification or licensing necessary, except
where the failure to be so qualified or licenced would not have a Material
Adverse Effect. FCE has disclosed in the FCE Disclosure Letter the names and
jurisdictions of incorporation of each of its subsidiaries.
(b) FCE does not have any subsidiaries which are material in
relation to the business and financial condition of FCE on a consolidated basis;
for the purposes hereof, a subsidiary and its subsidiaries shall be considered
material in relation to FCE if: (i) the investments in and advances to the
subsidiary and its subsidiaries by FCE and its other subsidiaries exceed five
percent of the total assets of FCE and its subsidiaries on a consolidated basis
at April 30, 2003; or (ii) the equity of FCE and its other subsidiaries in the
income from continuing operations before income taxes and extraordinary items of
the subsidiary and its subsidiaries exceeds five percent of such income of FCE
and its subsidiaries on a consolidated basis for FCE's period ended April 30,
2003.
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(c) FCE does not have any ownership interest in any other Person,
which interest is material in relation to the consolidated financial position of
FCE.
(d) FCE has delivered or made available to the Company a true and
correct copy of its charter documents and similar governing instruments of each
of its subsidiaries, each as amended as of the date hereof, and each such
instrument is in full force and effect. Neither FCE nor any of its subsidiaries
is in violation of any of the provisions of its charter documents or equivalent
governing instruments.
3.2. CAPITALIZATION
The authorized capital of FCE consists of 150,000,000 shares of Common
Stock, $.0001 par value per share (the "FCE Common Stock"). As of July 31, 2003,
there were 39,374,633 shares of FCE Common Stock outstanding. As of July 31,
2003, 7,528,982 shares of FCE Common Stock were reserved for issuance upon the
exercise of stock options ("FCE Options") under FCE's 1988 Stock Option Plan
("1988 Stock Option Plan"), Section 423 Stock Purchase Plan (the "FCE Stock
Purchase Plan") and FCE's 1998 Equity Incentive Plan (the "FCE Incentive Plan")
and for the future grant of FCE Options under the FCE Stock Purchase Plan and
the FCE Incentive Plan. As of July 31, 2003, there were warrants to purchase an
aggregate of 2,140,000 shares of FCE Common Stock outstanding (the "FCE
Warrants"). As of July 31, 2003, 5,368,266 of the FCE Options are outstanding,
of which 3,340,390 are vested and are exercisable in accordance with their terms
and 2,027,876 remain unvested. Except as described in this Section 3.2, there
are no options, warrants, conversion privileges, rights plans or other rights,
agreements, arrangements or commitments (pre-emptive, contingent or otherwise)
obligating FCE or any of its subsidiaries to issue or sell any securities of FCE
or any of its subsidiaries or obligations of any kind convertible into or
exchangeable for any securities of FCE, any of its subsidiaries or any other
Person, nor are there outstanding any stock appreciation rights, phantom equity
or similar rights, agreements, arrangements or commitments based upon the book
value, income or any other attribute of FCE or any of its subsidiaries. All
outstanding shares of FCE Common Stock have been duly authorized and are validly
issued and outstanding as fully-paid and non-assessable shares, free of
pre-emptive rights. There are no outstanding bonds, debentures or other
evidences of indebtedness of FCE or any of its subsidiaries having the right to
vote (or that are convertible for or exercisable into securities having the
right to vote) with the FCE securityholders on any matter. There are no
outstanding contractual obligations of FCE or any of its subsidiaries to
repurchase, redeem or otherwise acquire any of FCE's securities or with respect
to the voting or disposition of any outstanding securities of any of its
subsidiaries. No holder of securities issued by FCE or any of its subsidiaries
has any right to compel FCE to register or otherwise qualify such securities for
public sale in the United States.
3.3. AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS
(a) FCE has the requisite corporate power and authority to enter
into this Agreement and to perform its obligations hereunder. The execution and
delivery of this Agreement by FCE and the consummation of the transactions
contemplated by this Agreement have been duly authorized by FCE's board of
directors, and no other corporate proceedings on its part are necessary to
authorize this Agreement or the transactions contemplated hereby, other than the
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requisite approval by the FCE stockholders of this Agreement and the issuance by
FCE of the FCE Common Stock issuable pursuant to the Arrangement.
(b) This Agreement has been duly executed and delivered by FCE and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms, subject to bankruptcy, insolvency and other similar
Laws affecting creditors' rights generally, and to general principles of equity.
(c) FCE's board of directors has (i) determined that the
Arrangement is fair to the holders of the FCE Common Stock and is in the best
interests of FCE, (ii) received an opinion from Lazard Freres & Co. (and has
been advised that they will receive a written opinion) that the Exchange Ratio
is fair from a financial point of view to the holders of the FCE Common Stock,
(iii) determined to recommend that the holders of the FCE Common Stock vote in
favour of the Agreement, and the transactions contemplated hereby, and (iv) has
advised FCE and the Company that the members of its board of directors will vote
the FCE Common Stock held by them in favour of the Agreement and the
transactions contemplated hereby and FCE will so represent in the Joint Proxy
Statement, subject to Section 7.1(b).
(d) The approval of this Agreement by FCE, the execution and
delivery by FCE of this Agreement and the performance by it of its obligations
hereunder and the completion by it of the Arrangement and the transactions
contemplated thereby, will not:
(i) result in a violation or breach of, require any
consent to be obtained under or give rise to any material termination
rights or material payment obligation under any provision of:
(A) its or any of its subsidiaries' certificate
of incorporation, articles, bylaws or other charter documents;
(B) subject to obtaining the Appropriate
Regulatory Approvals relating to FCE, any Laws, regulation,
order, judgment or decree applicable to FCE or any of its
subsidiaries or by which FCE or any of its subsidiaries or any
of their respective properties is bound;
(C) any Material Contract or material licence,
franchise or permit to which FCE, or any of its subsidiaries,
is party or by which it is bound; or
(D) the provisions of any of the FCE Property
Permitted Encumbrances;
(ii) give rise to any right of termination or acceleration
of indebtedness, or cause any third party indebtedness to come due
before its stated maturity or cause any available credit to cease to be
available;
(iii) result in the imposition of any Encumbrance upon any
of FCE's or any of its subsidiaries' assets, or restrict, hinder,
impair or limit the ability of FCE or any of its subsidiaries to carry
on the business of FCE as and where it is now being carried on, except
as would not, individually or in the aggregate, have a Material Adverse
Effect; or
B-34
(iv) result in any payment (including severance,
unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any director or employee of FCE or any of its
subsidiaries or increase any benefits otherwise payable under the FCE
Incentive Plan or the FCE Employee Plan or result in the acceleration
of time of payment or vesting of any such benefits, including the time
of exercise of stock options.
(e) There are no "fair price," "moratorium," "control share
acquisition" or other anti-takeover statutes or regulations of any Governmental
Entity that are applicable to FCE in connection with the transactions
contemplated herein.
3.4. GOVERNMENTAL AND THIRD PARTY CONSENTS
(a) No consent, approval, order or authorization of, or
registration, declaration or filing with or notice to, any Governmental Entity
or other Person is required to be obtained by FCE or any of its subsidiaries in
connection with the execution and delivery of this Agreement or the Plan of
Arrangement or the consummation of the transactions contemplated hereby or
thereby, except for: (i) the filing with the Commissions and the mailing to
stockholders of FCE of the Joint Proxy Statement relating to the FCE
Stockholders Meeting, (ii) the furnishing to the SEC of the SEC Filings; (iii)
approval by the Court of the Arrangement and the filings of the articles of
arrangement and other required arrangement or other documents as required by the
ABCA; (iv) such filings, authorizations, decisions, orders and approvals as may
be required under applicable federal, provincial or state securities laws and
the rules of The Nasdaq Stock Market Inc. ("Nasdaq"); (v) such filings and
notifications as may be necessary under the HSR Act; (vi) such notices and
filings as may be necessary under the Investment Canada Act and under the
Competition Act (Canada); and (vii) where the failure to obtain such consents,
approvals, etc., would not prevent or delay the consummation of the Arrangement
or otherwise prevent FCE from performing its obligations under this Agreement
and would not reasonably be expected to have a Material Adverse Effect.
(b) Other than as contemplated by Section 3.4(a), no consents,
assignments, waivers, authorizations or other certificates are necessary in
connection with the transactions contemplated hereby to provide for the
continuation in full force and effect of all of FCE's Material Contracts or
leases or for FCE to consummate the transactions contemplated hereby, except
when the failure to receive such consents or other certificates would not have a
Material Adverse Effect.
(c) FCE and its subsidiaries possesses such consents, licences,
certificates, authorizations, approvals, franchises, permits or other rights as
are currently necessary to conduct the business now operated by it, except where
the failure to posses such consents, licences, certificates, authorizations,
approvals, franchises, permits would not have a Material Adverse Effect.
3.5. NO DEFAULTS
Neither FCE nor any of its subsidiaries is in default under, and there
exists no event, condition or occurrence which, after notice or lapse of time or
both, would constitute such a
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default under any contract, agreement, licence or franchise to which it is a
party which would, if terminated due to such default, cause a Material Adverse
Effect.
3.6. INTELLECTUAL PROPERTY
(a) The FCE Disclosure Letter sets out an accurate and complete
list of all Registered Intellectual Property that is owned by FCE or any of its
subsidiaries.
(b) The FCE Disclosure Letter sets out an accurate and complete
list of all material licences, sublicences, consents or other agreements by
which FCE or any of its subsidiaries either grant any permission to use any
Intellectual Property or Technology that are owned by FCE or any of its
subsidiaries to other Persons or are permission from other Persons to use third
party Intellectual Property or Technology.
(c) Except as provided in the FCE Disclosure Letter, no licence,
sublicence, consent or other agreement FCE or any of its subsidiaries is a party
to or bound by or restricts in any manner the use, transfer or licensing by FCE
of any Intellectual Property or Technology that is owned or used by FCE or any
of its subsidiaries.
(d) To the knowledge of FCE, no party to any licence, sublicence,
consent or other agreement to which FCE or any of its subsidiaries is a party or
by which FCE or any of its subsidiaries is bound is in material breach or
default and no event has occurred (or upon Closing will occur) which with notice
or lapse of time would constitute a material breach or default or permit
termination, modification or acceleration thereunder.
(e) FCE and all of its subsidiaries have and continue to maintain
a system to safeguard the secrecy, confidentiality and unauthorized use of any
proprietary information or Trade Secrets in its possession or control, including
taking adequate measures to legally bind all Persons who may have any access to
any such proprietary information or Trade Secrets to maintain the secrecy,
confidentiality and not use any such proprietary information or Trade Secrets
and there has been no material breach or violation of such safeguards or
measures and all such measures and safeguards are enforceable.
(f) FCE owns or possesses the Intellectual Property and Technology
necessary to carry on the business now operated by it, and as proposed to be
operated by it, and FCE has not received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect to any
Intellectual Property or Technology or of any facts or circumstances that would
render any Intellectual Property or Technology invalid, unenforceable or
inadequate to protect the interest of FCE therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity, unenforceability, or inadequacy, singly or in the aggregate, would
result in a Material Adverse Effect.
3.7. SECURITIES REPORTS
(a) FCE has furnished or made available to the Company true and
complete copies of each statement, form, schedule, report, registration
statement (including any prospectus filed pursuant to Rule 424(b) of the 1933
Act), proxy statement and other filing filed with, or furnished to, the SEC by
FCE since October 31, 2002, and, prior to the Effective Time, FCE will
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have furnished the Company with true and complete copies of any additional
documents filed with the SEC by FCE prior to the Effective Time (such
statements, reports, registration statements, prospectuses, proxy statements,
other filings, including schedules included therein, are referred to as the "FCE
Documents"). FCE has furnished to the Company true and complete copies of all
written correspondence between FCE and any securities regulatory bodies
including the SEC and Nasdaq.
(b) FCE has made available to the Company all exhibits to the FCE
Documents filed prior to the date hereof, and will promptly make available to
the Company all exhibits to any additional FCE Documents filed prior to the
Effective Time. All documents required to be filed as exhibits to the FCE
Documents have been so filed, and all Material Contracts so filed as exhibits
are in full force and effect, except those which have expired in accordance with
their terms, and neither FCE nor any of its subsidiaries is in default
thereunder.
(c) The FCE Documents include all statements, reports,
registration statements, and other documents required to be filed by it with the
SEC since October 31, 2002. FCE has timely filed all FCE Documents required to
be filed by it with the SEC since October 31, 2002. The FCE Documents did not,
at the time they were filed, or, if amended or updated, as of the date of such
amendment or update, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading, except to the extent corrected by a subsequently-filed FCE
Document. None of FCE's subsidiaries is required to file any forms, reports,
schedules, prospectuses, statements or other documents with the SEC. The FCE
Documents, at the time they were filed with the SEC, complied in all material
respects with the requirements of the Exchange Act, the Securities Act, as
applicable, and the rules and regulations promulgated thereunder.
(d) FCE has publicly disclosed in the FCE Documents any
information regarding any event, circumstance or action taken or failed to be
taken by FCE or its subsidiaries which could individually or in the aggregate
reasonably be expected to have a Material Adverse Effect.
3.8. FINANCIAL STATEMENTS
(a) The FCE Financial Statements complied as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of applicable Governmental Entities and the SEC with
respect thereto as of their respective dates, and have been prepared in
accordance with United States generally accepted accounting principles applied
on a basis consistent throughout the periods indicated and consistent with each
other (except as may be indicated in the notes thereto or, in the case of
unaudited statements included in quarterly reports to shareholders). The FCE
Financial Statements present fairly the consolidated financial position, results
of operations and cash flows of FCE and its subsidiaries at the dates and during
the periods indicated therein (subject, in the case of unaudited statements, to
normal, recurring year-end adjustments and the absence of notes thereto) and
reflect appropriate and adequate reserves in respect of all liabilities,
including contingent liabilities, if any, of FCE and its subsidiaries on a
consolidated basis. There has been no change in FCE's accounting policies,
except as described in the notes to the FCE Financial Statements, since April
30, 2003.
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(b) FCE has heretofore made available to the Company the
consolidated balance sheet of FCE and its consolidated subsidiaries at October
31, 2002 (the "FCE Balance Sheet"), as well as the consolidated statements of
operations of FCE and its consolidated subsidiaries for the period ended October
31, 2002 (the "FCE Statement of Operations") and the consolidated statements of
cash flows of FCE and its consolidated subsidiaries for the period ended October
31, 2002 (the "FCE Statement of Cash Flows" and, together with the FCE Balance
Sheet and the FCE Statement of Operations, in each case including the notes
thereto, being collectively referred to herein as the "FCE Financial
Statements"). Except as set forth in the FCE Financial Statements, neither FCE
nor any of its subsidiaries has any liability or obligation of any nature
(whether accrued, absolute, contingent or otherwise), except for liabilities and
obligations, incurred in the ordinary course of business consistent with past
practice since October 31, 2002 and that would not have a Material Adverse
Effect.
3.9. ABSENCE OF CERTAIN CHANGES AND EVENTS
Since October 31, 2002, FCE has conducted its business in the ordinary
and regular course consistent with past practice and there has not occurred:
(a) Any Material Adverse Change with respect to FCE;
(b) Any acquisition, sale or transfer of any material asset of FCE
or any of its subsidiaries other than in the ordinary course of business and
consistent with past practice;
(c) Any change in accounting methods or practices (including any
change in depreciation or amortization policies or rates, or capitalized
software policies) by FCE or any revaluation by FCE of any of its or any of its
subsidiaries' assets;
(d) Any declaration, setting aside, or payment of a dividend or
other distribution with respect to the FCE Common Stock, or any direct or
indirect redemption, purchase or other acquisition by FCE of any of its shares
of capital stock;
(e) Any Material Contract entered into by FCE or any of its
subsidiaries, or any material amendment or termination of, or default under, any
Material Contract to which FCE or any of its subsidiaries is a party or by which
it is bound;
(f) Any change in the capital stock or in the number of shares or
classes of FCE's authorized or outstanding capital stock as described in Section
3.2 (other than as a result of exercises of FCE Options and the FCE Warrants);
(g) Any agreement by FCE or any of its subsidiaries to do any of
the things described in the preceding clauses (a) through (f) (other than
negotiations with the Company, and its representatives regarding the
transactions contemplated by this Agreement); or
(h) Any agreement or arrangement to take any action which, if
taken prior to the date hereof, would have made any representation or warranty
set forth in this Agreement materially untrue or incorrect as of the date when
made.
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3.10. MATERIAL CONTRACTS
None of FCE, its subsidiaries, nor, to the knowledge of FCE, any of the
other parties thereto is in default or breach of, in any material respect, nor
has FCE or its subsidiaries received any notice of material default or
termination under, any Material Contract and, to the knowledge of FCE, there
exists no state of facts which after notice or lapse of time or both would
constitute such a material default or breach. None of FCE or its subsidiaries is
a party to any Material Contract except for those Material Contracts set forth
on the FCE Disclosure Letter. True and complete copies of all of FCE's Material
Contracts, or where such Contracts are oral, true and complete written summaries
of the terms thereof, have been furnished to or made available to the Company.
3.11. CUSTOMERS AND SUPPLIERS
Since October 31, 2002, there has been no termination or cancellation
of, and no material modification or change in, the business relationship with
any customer or group of customers which singly or in the aggregate provided
more than 10% of the consolidated gross revenues of FCE and its subsidiaries for
the year ended October 31, 2002. FCE has no reason to believe that the benefits
of any relationship with any of the customers or suppliers of FCE or its
subsidiaries will not continue on the terms identified in the agreements
establishing such relationships after the Effective Date in substantially the
same manner as prior to the date hereof, assuming the completion on the
Effective Date of the Arrangement. FCE has furnished or made available to the
Company all of FCE's material product warranties provided to customers through
May 31, 2003.
3.12. INSURANCE
FCE and its subsidiaries are insured by insurers reasonably believed by
FCE to be of recognized financial responsibility and solvency against such
losses and risks and in such amounts as are customary in the businesses in which
FCE and its subsidiaries are engaged. FCE has furnished or made available to the
Company accurate particulars of the policies of insurance maintained by FCE and
its subsidiaries as of the date hereof, including the name of the insurer, the
risks insured against and the amount of coverage, and all such policies will
continue in effect without alteration or loss in coverage in connection with the
consummation of the Arrangement. All such policies are in full force and effect.
None of FCE or its subsidiaries or, to the knowledge of FCE, any of the other
parties thereto, is in material default or breach of, whether as to the payment
of premiums or otherwise, nor has FCE or its subsidiaries received any notice of
material default or termination under, any such policy and, to the knowledge of
FCE, there exists no state of facts which after notice or lapse of time or both
would constitute such a default or breach. There is no reason to believe that
any of the existing insurance policies of FCE and its subsidiaries will not be
renewed by the insurer upon the scheduled termination date of the policy or will
be renewed by the insurer only on the basis that there will be a material
increase in the premiums payable in respect of the policy. True and complete
copies of all the existing insurance policies of FCE and its subsidiaries have
been provided to the Company.
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3.13. BOOKS AND RECORDS
(a) The books, records and accounts of FCE and its subsidiaries,
in all material respects:
(i) have been maintained in accordance with good business
practices on a basis consistent with prior years;
(ii) are stated in reasonable detail and accurately and
fairly reflect the transactions and dispositions of the assets of FCE
and its subsidiaries; and
(iii) accurately and fairly reflect the basis for the FCE
Financial Statements.
(b) FCE has devised and maintains a system of internal accounting
controls sufficient to provide reasonable assurances that:
(i) transactions are executed in accordance with
management's general or specific authorization; and
(ii) transactions are recorded as necessary (A) to permit
preparation of financial statements in conformity with United States
generally accepted accounting principles or any other criteria
applicable to such statements and (B) to maintain accountability for
assets.
(c) FCE maintains a system of disclosure controls and procedures
that comply with Rules 13a-14 and 13a-15 of the Exchange Act and that are
designed to ensure that information required to be disclosed by FCE in its
reports or other documents filed with or furnished to the SEC is recorded,
processed, summarized and reported within the time periods required by the SEC's
rules and forms, including, without limitation, controls and procedures designed
to ensure that such information is accumulated and communicated to FCE's senior
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
3.14. LITIGATION; INVESTIGATIONS
There is no claim, action, proceeding or investigation pending or, to
the knowledge of FCE, threatened against or relating to FCE or any of its
subsidiaries or affecting any of their properties, licences or assets before any
court or Governmental Entity or regulatory authority or body that, if adversely
determined, could reasonably be expected to have a Material Adverse Effect, or
prevent or delay consummation of the transactions contemplated by this Agreement
or the Arrangement, nor is FCE aware of any basis for any such claim, action,
proceeding or investigation. Neither FCE nor any of its subsidiaries, nor their
respective assets and properties, is subject to any outstanding judgment, order,
writ, injunction or decree that has had or is reasonably likely to have a
Material Adverse Effect, that involves or may involve, or restricts or may
restrict, or requires or may require, the expenditure of a material amount of
money as a condition to or a necessity for the right or ability of FCE or any of
its material subsidiaries, as the case may be, to conduct its business in any
manner in which it has been carried on prior to the
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date hereof, or prevent or delay consummation of the transactions contemplated
by this Agreement or the Arrangement.
3.15. ENVIRONMENTAL MATTERS
(a) There are no environmental conditions or circumstances, such
as the presence or Release of any Hazardous Substance, existing on, at, under,
to or from any property presently or previously owned, operated or leased by FCE
or any of its subsidiaries.
(b) FCE and its subsidiaries have in full force and effect all
material environmental permits, licences, approvals and other authorizations
required to conduct their operations and are operating in material compliance
thereunder, and, to the knowledge of FCE, each of such environmental permits,
licences, approvals and other authorizations shall continue in full force and
effect on and after the Closing.
(c) FCE's and its subsidiaries' operations and the ownership,
operation or use of their assets are currently, and have at all times been, in
compliance with all Applicable Environmental Laws.
(d) Neither FCE nor its subsidiaries have arranged for any other
Person to handle or Release any Hazardous Substance at, on, under, from or to
any other location, except in each case (i) in full compliance with Applicable
Environmental Laws, (ii) in a manner that would not reasonably be expected to
give rise to a claim for damages under any Applicable Environmental Law and
(iii) at a location that is (x) fully permitted for such Handling and Release
and (y) is not subject to any investigation or cleanup under any Applicable
Environmental Laws.
(e) No written notice has been served on FCE or any of its
subsidiaries from any Governmental Entity or individual regarding any existing,
pending or threatened investigation or inquiry related to alleged violations
under any Applicable Environmental Laws, or regarding any claims for remedial
obligations or contribution under any Applicable Environmental Laws.
(f) FCE does not know of any reason that would preclude it from
renewing or obtaining a reissuance of the material permits, licences or other
authorizations required pursuant to any Applicable Environmental Laws to own,
operate or use any of FCE's or any of its subsidiaries' assets for their current
purposes and uses.
(g) FCE has made available to the Company complete and correct
copies of all studies, reports, surveys, assessments (including all Phase I and
Phase II environmental site assessments), audits, correspondence,
investigations, analysis, laboratory data, tests, soil and groundwater sampling
results and other documents (whether in hard copy or electronic form) in FCE's
or FCE's counsel's or FCE's consultant's possession or control (excluding
documents which are subject to attorney-client privilege, the nature of which
documents are described in the FCE Disclosure Letter) or to which FCE has access
relating to the presence or alleged presence of Hazardous Substances at, on or
affecting any real property currently or formerly owned, leased or operated by
FCE or its subsidiaries, or regarding FCE's compliance with any Applicable
Environmental Law.
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(h) No environmental circumstance or condition exists, including
the presence or Release of any Hazardous Substance at, on, under, from or to any
property currently or previously owned, operated or leased by FCE or its
subsidiaries which could reasonably be expected to result in loss or liability
under Applicable Environmental Laws (including losses, liabilities or other
claims for or associated with remedial investigations or cleanup obligations)
greater than $1 million.
3.16. TITLE TO PROPERTIES
Except for goods and other property sold, used or otherwise disposed of
since April 30, 2003 in the ordinary course of business for fair value, FCE has
good, defensible, and marketable title to all its properties, including real
property owned or leased, interests in properties and assets, real and personal
(the "FCE Property"), reflected in the FCE Financial Statements, free and clear
of any Encumbrance, except: (a) Encumbrances reflected in the FCE Balance Sheet,
all of which Encumbrances are in good standing; (b) liens for current taxes not
yet due and payable; and (c) such imperfections of title, easements and
Encumbrances as would not have a Material Adverse Effect (the "FCE Property
Permitted Encumbrances"), and FCE is the sole legal and beneficial owner of the
FCE Property. All leases pursuant to which FCE or any of its subsidiaries leases
(whether as lessee or lessor) any real or personal property are in good
standing, valid, and effective; and there is not, under any such leases, any
existing or prospective default or event of default or event which with notice
or lapse of time, or both, would constitute a default by the tenants under such
leases, or by FCE or any of its subsidiaries which, individually or in the
aggregate, would have a Material Adverse Effect and in respect to which FCE or
any of its subsidiaries has not taken adequate steps to prevent a default from
occurring.
3.17. NO HAZARDOUS SUBSTANCES
The property presently or previously owned, operated, or leased by FCE
or its subsidiaries has not been and is not now used as a landfill or waste
disposal site, nor are there any active or out-of-service underground storage
tanks or sites from which such tanks have been removed on any property presently
or previously owned, operated, or leased by FCE or its subsidiaries, nor has any
Hazardous Substance been deposited in or disposed of at, on, under, to or from
any property presently or previously owned, operated, or leased by FCE or its
subsidiaries, nor has there been any Release, spill, emission or discharge of
any Hazardous Substance at, on, under, to or from any property presently or
previously owned, operated, or leased by FCE or its subsidiaries or any other
location which could reasonably be expected to give rise, directly or
indirectly, to any action or claim by a third party or a Governmental Entity
alleging any violation of, or liability under, any Applicable Environmental
Laws.
3.18. TAXES
(a) FCE and each of its subsidiaries have timely filed, or caused
to be filed, all Tax Returns required to be filed by them prior to the date
hereof (all of which returns were correct and complete in all material respects)
and have paid, or caused to be paid, all Taxes, including any installments or
prepayments of Taxes, that are due and payable prior to the date hereof and FCE
has provided adequate accruals in accordance with generally accepted accounting
principles in its most recently published financial statements for any Taxes for
the period covered by such
B-42
financial statements that have not been paid, whether or not shown as being due
on any Tax Returns. FCE and each of its subsidiaries have made adequate
provision in their respective books and records for any Taxes accruing in
respect of any period subsequent to the period covered by such financial
statements. Since such publication date, no material Tax liability not reflected
in such statements or otherwise provided for has been assessed, proposed to be
assessed, incurred or accrued other than in the ordinary course of business. FCE
and its subsidiaries have withheld from all payments made by them, or otherwise
collected, all material amounts in respect of Taxes required to be withheld
therefrom or collected by them prior to the date hereof and have remitted same
to the applicable Governmental Entity within the required time periods. Neither
FCE nor any of its subsidiaries has any liability for the Taxes of any other
Person.
(b) Neither FCE nor any subsidiary has received any written
notification that any material issues have been raised (and are currently
pending) by the IRS, Canada Customs and Revenue Agency or any other taxing
authority, including, without limitation, any state, provincial or local tax
authority, in connection with any of the Tax Returns referred to above. No
waivers of statutes of limitations have been given or requested with respect to
FCE or any subsidiary, and the relevant statute of limitations with respect to
any liability for Taxes has not closed with respect to the Tax Returns of FCE
and its subsidiaries for all taxable years through the date hereof. To the
knowledge of FCE, there are no material proposed (but unassessed) additional
Taxes with respect to FCE or any subsidiary and none has been asserted. No Tax
liens have been filed other than for Taxes not yet due and payable.
(c) Neither FCE nor any of its subsidiaries that is a United
States person, as defined in Section 7701(a)(30) of the Code, has participated
in any transactions with an affiliated person, other than on terms that are
consistent with the principles of Section 482 of the Code and U.S. Treasury
Regulations promulgated thereunder.
(d) There is no Contract to which FCE or any of its subsidiaries
is a party, including but not limited to the provisions of this Agreement,
covering any employee or former employee of FCE that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to Section 280G of the Code.
(e) Neither FCE nor any of its subsidiaries is a party to any tax
sharing, tax indemnity or tax allocation agreement or arrangement and neither
FCE nor any of its subsidiaries has any liability or obligation under any such
tax sharing, tax indemnity or tax allocation agreement. No liability (or
reasonable claim of liability) shall arise under any tax sharing, tax indemnity
or tax allocation agreement or arrangement as a result of this transaction.
Neither FCE nor any of its subsidiaries is the subject of an advance income tax
ruling.
(f) FCE will not be required to include any item of income in, or
exclude any item of deduction from, its taxable income for any period ending
after the Effective Date as a result of any change in method of accounting for a
taxable period beginning prior to the Effective Date, or prepaid amounts
received on or prior to the Effective Date.
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3.19. NON-ARM'S LENGTH TRANSACTIONS
(a) None of FCE or its subsidiaries has made any payment or loan
to, or has borrowed any monies from or is otherwise indebted to, any officer,
director, employee or shareholder of such company or any Person not dealing with
such officer, director, employee or shareholder at arm's length or any affiliate
of any of the foregoing, except as disclosed in the FCE Financial Statements or
in the FCE Disclosure Letter and except for usual compensation paid in the
ordinary course of business consistent with past practice.
(b) None of FCE or its subsidiaries has outstanding any loan or
other extension of credit, nor any agreement or commitment to make any loan or
extension of credit, in each case in the form of a personal loan, to any
director or executive officer of FCE or its subsidiaries.
(c) Except as disclosed in the FCE Disclosure Letter and except
for Contracts made solely between FCE and its subsidiaries and except for
contracts of employment, options agreements under the FCE Incentive Plan, and
agreements relating to employee benefits generally available to employees of
FCE, none of FCE or its subsidiaries is a party to any Contract with any
officer, director, employee or shareholder of such company or any Person not
dealing with such officer, director, employee or shareholder at arm's length or
any affiliate of any of the foregoing.
3.20. EMPLOYEES
Except as described in the FCE Disclosure Letter, neither FCE nor any
of its subsidiaries is a party to or bound by any Contracts relating to
employment, severance, retention, bonus or confidentiality or any consulting
Contracts with any FCE Employee or former employee of FCE or any of its
subsidiaries written or otherwise, as to which unsatisfied obligations of FCE or
any of its subsidiaries of greater than $50,000 remain outstanding.
3.21. EMPLOYEE BENEFIT PLANS
(a) The FCE Disclosure Letter lists, with respect to FCE, any
subsidiary of FCE and any trade or business (whether or not incorporated) which
is treated as a single employer with FCE (an "ERISA Affiliate") within the
meaning of Section 414(b), (c), (m) or (o) of the Code, (i) all material
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), and (ii) any stock option or
stock purchase plans, programs or arrangements (together, the "FCE Employee
Plans").
(b) FCE has made available or furnished to the Company a copy of
all documents creating or evidencing all of the FCE Employee Plans (including
trust documents, insurance policies or contracts, summary plan descriptions and
to the extent still in its possession, any material employee communications
relating thereto) and has with respect to each FCE Employee Plan that is subject
to the reporting and disclosure requirements of Title I of ERISA, provided or
made available copies of all Forms 5500 required to be filed with any government
entity for the preceding two plan years and that have been filed, if applicable.
Each FCE Employee Plan intended to qualify under Section 401(a) of the Code has
either been determined by the IRS to so qualify with respect to the Code, has
applied or will apply to the IRS for such determination prior to the expiration
of the requisite remedial amendment period under applicable Treasury
B-44
Regulations or official guidance published by the IRS, or is entitled to rely on
a notification or opinion letter issued with respect to an IRS-approved master
and prototype or volume submitter plan document pursuant to IRS Announcement
2001-77. FCE has also furnished to the Company the most recent IRS
determination, notification, or opinion letter issued with respect to each such
FCE Employee Plan subject to the provisions of Section 401(a) of the Code. To
the best knowledge of FCE, nothing has occurred since the date of such letter
that could reasonably be expected to cause the loss of the tax-qualified status
of any FCE Employee Plan subject to Code Section 401(a).
(c) Except as set forth in the FCE Disclosure Letter, (i) none of
the FCE Employee Plans promises or provides retiree medical or other retiree
welfare benefits to any person, except as required by the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA"); (ii) no "prohibited transactions"
(as defined in Section 406 or 407 of ERISA or Section 4975 of the Code) have
occurred for which a statutory or administrative exemption is not available and
which could reasonably be expected to have, in the aggregate, a Material Adverse
Effect; (iii) each FCE Employee Plan has been administered in compliance with
its terms and, to the extent applicable, is in compliance with the requirements
prescribed by any and all statutes, rules and regulations (including ERISA and
the Code) except as would not have, in the aggregate, a Material Adverse Effect,
and FCE and each subsidiary or ERISA Affiliate has performed all obligations
required to be performed by it under, are not in any respect in default under or
violation of, and have no knowledge of any default or violation by any other
party to, any of the FCE Employee Plans, which default or violation could
reasonably be expected to have a Material Adverse Effect, (iv) to the best
knowledge of FCE, neither FCE nor any subsidiary or ERISA Affiliate is subject
to any liability or penalty under Sections 4976 through 4980 of the Code or
Title I of ERISA with respect to any of the FCE Employee Plans which have a
Material Adverse Effect on any such parties; (v) all material contributions
required to be made by FCE or any subsidiary or ERISA Affiliate to any FCE
Employee Plan have been made on or before their due dates and a reasonable
amount has been accrued for contributions to each FCE Employee Plan for the
current plan years; and (vi) no FCE Employee Plan is covered by, and neither FCE
nor any subsidiary of an ERISA Affiliate has incurred or expects to incur any
liability under Title IV of ERISA or Section 412 of the Code. With respect to
each FCE Employee Plan subject to ERISA, FCE has prepared in good faith and
timely filed all requisite governmental reports (which were true and correct as
of the date filed) and has properly and timely filed and distributed or posted
all notices and reports to employees required to be filed, distributed or posted
with respect to each such FCE Employee Plan. Except as set forth in the FCE
Disclosure Letter, no suit, administrative proceeding, action or other
litigation has been brought, or to the best knowledge of FCE is threatened,
against or with respect to any such FCE Employee Plan, including any audit or
inquiry by the IRS or United States Department of Labor. Neither FCE nor any of
its subsidiaries or other ERISA Affiliate is a party to, or has made any
contribution to or otherwise incurred any obligation under, any "multiemployer
plan" as defined in Section 3(37) of ERISA. Except as otherwise required by
applicable Law, each FCE Employee Plan can be amended or terminated or otherwise
discontinued after the Effective Time without liability to FCE or its
subsidiaries.
(d) There has been no amendment to, written interpretation or
announcement (whether or not written) by FCE, any FCE subsidiary or other ERISA
Affiliate relating to, or change in participation or coverage under, any FCE
Employee Plan which would materially
B-45
increase the expense of maintaining such Plan above the level of expense
incurred with respect to that Plan for the most recent fiscal year included in
the FCE Financial Statements.
(e) There has been no determination by any Governmental Entity
that any individual performing services for FCE or any of its ERISA Affiliates
and classified as an independent contractor constitutes a common law employee of
FCE or any ERISA Affiliates. The FCE Disclosure Letter lists each employment
agreement with respect to each current employee of FCE or an ERISA Affiliate who
performs services in the United States whose employment is not "at will" and
cannot be terminated by FCE or one of its ERISA Affiliates at any time, other
than employment agreements that would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect. The FCE Disclosure Letter
lists each outstanding loan to officers, directors or non-officer employees
other than loans that would not, individually or in the aggregate, be reasonably
expected to have a Material Adverse Effect.
(f) Neither FCE nor any of its ERISA Affiliates has violated
Sections 306 or 402 of the Sarbanes-Oxley Act of 2002, and, to the knowledge of
FCE and assuming the truthfulness of the representation by the Company pursuant
to Section 2.20(b), the execution of this Agreement and the consummation of the
transactions contemplated hereby will not cause such a violation.
3.22. LABOUR MATTERS
Neither FCE nor any of its subsidiaries is bound by or a party to any
collective bargaining Contracts with any trade union, counsel of trade unions,
employee bargaining agent or affiliated bargaining agent (collectively, "labour
representatives"), and neither FCE nor any of its subsidiaries has conducted any
negotiations with respect to any such future Contracts; no labour
representatives hold bargaining rights with respect to any FCE Employees; no
labour representatives have applied to have FCE or any of its subsidiaries
declared a related employer; to the knowledge of FCE, there are no current or
threatened attempts to organize or establish any trade union or employee
association with respect to FCE or any of its subsidiaries; there is no strike,
dispute, slowdown, lockout, shutdown, work stoppage, unresolved material labour
union grievance, labour arbitration, unfair labour practice, successor rights or
common employer proceeding or other concerted action or formal grievance
existing against FCE or any of its subsidiaries.
3.23. INFORMATION SUPPLIED
None of the information supplied or to be supplied by FCE for inclusion
or incorporation by reference in the Joint Proxy Statement will, at the time the
Joint Proxy Statement is mailed to the stockholders of FCE and at the time of
the FCE Stockholders Meeting, contain any untrue statement which, at the time
and in light of the circumstances under which it is made, is false or misleading
with respect to any material fact, or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
false or misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of a proxy for the same meeting
or subject matter which has become false or misleading. The Joint Proxy
Statement will comply as to form in all material respects with the provisions of
the ABCA and applicable United States and Canadian securities laws and the rules
and regulations promulgated thereunder.
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3.24. COMPLIANCE WITH LAWS
FCE and its subsidiaries have complied with and are not in violation of
any applicable Laws, orders, judgments and decrees, except for such
noncompliance that would not cause a Material Adverse Effect. Without limiting
the generality of the foregoing, all securities of FCE (including, without
limitation, all options, rights or other convertible or exchangeable securities)
have been issued in compliance with all applicable securities Laws and all
securities to be issued upon exercise of any such options, rights and other
convertible or exchangeable securities will be issued in compliance with all
applicable securities Laws.
3.25. RESTRICTIONS ON BUSINESS ACTIVITIES
There is no agreement, judgment, injunction, order or decree binding
upon FCE or any of its subsidiaries that has or could reasonably be expected to
have the effect of prohibiting, restricting or materially impairing any business
practice of FCE or any of its subsidiaries, any acquisition of property by FCE
or any of its subsidiaries or the conduct of business by FCE or any of its
subsidiaries as currently conducted.
3.26. FCE COMMON STOCK
The FCE Common Stock to be issued pursuant to this Agreement and the
Arrangement, will, in all cases, be duly authorized and validly issued by FCE,
fully paid and non-assessable and free of pre-emptive rights, encumbrances,
charges and liens on their respective dates of issue.
3.27. DISCLOSURE
No representation or warranty made by FCE in this Agreement or the FCE
Disclosure Letter, nor any document, written information, statement, financial
statement, certificate or exhibit prepared and furnished or to be prepared and
furnished by FCE or its representatives pursuant hereto or in connection with
the transactions contemplated hereby, when taken together, contains or contained
(as of the date made) any untrue statement of a material fact when made, or
omits or omitted (as of the date made) to state a material fact necessary to
make the statements or facts contained herein or therein not misleading, in any
material way, in light of the circumstances under which they were made.
3.28. BROKERS AND FINDERS
Other than Lazard Freres & Co. in accordance with the terms of its
engagement letter dated February 19, 2003, a copy of which has been provided to
the Company, none of FCE or any of its subsidiaries nor any of their respective
directors, officers or employees has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commissions or
similar payments in connection with the transactions contemplated by this
Agreement.
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3.29. FCE NET WORKING CAPITAL; CASH BURN
As of June 27, 2003, FCE Net Working Capital equaled or exceeded
$183,425,000, and a detailed breakdown by each component item contributing to
such amount is set forth in detail in Schedule 3.29 of the FCE Disclosure
Letter. Solely for the purpose of calculating FCE Net Working Capital pursuant
to this Section 3.29, FCE Net Working Capital shall also include a reasonable
estimate of all costs and expenses incurred or that will be incurred by FCE
prior to the Effective Time in connection with the Quantum Combination and the
transactions contemplated by this Agreement and the Plan of Arrangement. As of
June 27, 2003, the FCE Net Cash as set forth in Schedule 3.29 of the FCE
Disclosure Letter equaled or exceeded $168,641,000. Solely for the purpose of
calculating FCE Net Cash pursuant to this Section 3.29, FCE Net Cash shall also
include a reasonable estimate of all costs and expenses incurred or that will be
incurred by FCE prior to the Effective Time in connection with the transactions
contemplated by this Agreement and the Plan of Arrangement. On a per diem basis,
between June 27, 2003, and the Effective Date, the average amount by which each
of the FCE Net Working Capital and the FCE Net Cash will be reduced shall not
exceed $277,000 (the "FCE Per Diem Burn Rate").
3.30. EXCHANGECO AND CALLCO
ExchangeCo and Callco will each be incorporated solely for the purpose
of participating in the transactions contemplated herein and, through the
Effective Time, will carry on no other business (except that each of ExchangeCo
and Callco may own shares in other indirect Canadian subsidiaries of FCE), and,
except as contemplated herein or in any other document related to the
transactions contemplated herein, will not have any liabilities or obligations,
either accrued, absolute, contingent or otherwise as of the Effective Time.
ARTICLE 4
OBLIGATIONS PENDING EFFECTIVE DATE
4.1. AGREEMENTS OF FCE AND THE COMPANY
FCE and the Company agree to take the following actions after the date
hereof:
(a) Each party will promptly execute and file or join in the
execution and filing of any application or other document that may be necessary
in order to obtain the authorization, approval or consent of any Governmental
Entity which may be reasonably required, or which the other party may reasonably
request, in connection with the consummation of the transactions contemplated by
this Agreement. Each party will use its reasonable best efforts to promptly
obtain such authorizations, approvals and consents. Without limiting the
generality of the foregoing, as promptly as practicable after the execution of
this Agreement, each party shall make any required filings under the HSR Act and
shall make such filings as are necessary under the Investment Canada Act and the
Competition Act (Canada);
(b) Each party will allow the other and its agents reasonable
access to the files, books, records, offices and officers of itself and its
subsidiaries, including any and all information relating to such party's tax
matters, contracts, leases, licences and real, personal and intangible
B-48
property and financial condition. Each party will cause its accountants to
cooperate with the other in making available to the other party all financial
information reasonably requested, including the right to examine all working
papers pertaining to tax matters and financial statements prepared or audited by
such accountants. Any information provided pursuant to this Agreement shall be
subject to the provisions of the Confidentiality Agreement. Notwithstanding the
foregoing, except as expressly provided for herein, neither party shall be
obligated to make available to the other any of their respective board of
directors' materials relating to the assessment or evaluation of the
transactions contemplated hereby or any alternative transactions nor any
information supplied by any of their respective officers, directors, employees,
financial advisors, legal advisors, representatives and agents in connection
therewith;
(c) FCE and the Company shall cooperate in the preparation and
prompt filing by FCE of the Joint Proxy Statement and all amendments thereto,
with the SEC;
(d) Each of the Company and FCE will promptly notify the other in
writing: (i) of any event occurring subsequent to the date of this Agreement
which would render any representation and warranty of such party contained in
this Agreement untrue or inaccurate in any material respect; (ii) of any event
occurring subsequent to the date of this Agreement which would render any
representation and warranty of such party contained in Sections 2.9(f) and
2.15(h) (in the case of the Company) or Sections 3.9(f) and 3.15(h) (in the case
of FCE), untrue or inaccurate in any respect; (iii) of any Material Adverse
Change or any event, change or effect having a Material Adverse Effect on such
party; and (iv) of any breach by such party of any material covenant or
agreement contained in this Agreement; and
(e) During the term of this Agreement, each of FCE and the Company
will use its reasonable best efforts to satisfy or cause to be satisfied as soon
as reasonably practicable all the conditions precedent that are set forth in
Article 5 hereof, and each of FCE and the Company will use its reasonable best
efforts to cause the Arrangement and the other transactions contemplated by this
Agreement to be consummated as soon as reasonably practicable.
4.2. ADDITIONAL AGREEMENTS OF THE COMPANY
The Company agrees that, except as expressly contemplated by this
Agreement or as otherwise agreed to in writing by FCE or as set forth in the
Company Disclosure Letter, from the date hereof to the Effective Date it will,
and will cause each of its subsidiaries to:
(a) Other than as expressly set forth in this Agreement, operate
its business only in the usual, regular and ordinary manner and, to the extent
consistent with such operation, use all commercially reasonable efforts to
preserve intact its present business organization, keep available the services
of its present officers and employees, and preserve its relationships with
customers, suppliers, distributors and others having business dealings with it;
(b) Maintain all of its property and assets in customary repair,
order, and condition, reasonable wear and use and damage by fire or unavoidable
casualty excepted;
(c) Maintain its books of account and records in the usual,
regular and ordinary manner, in accordance with generally accepted accounting
principles applied on a consistent basis;
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(d) Duly comply in all material respects with all laws applicable
to it and to the conduct of its business;
(e) Not: (i) enter into any indemnification agreements; (ii) enter
into any contracts of employment which: (A) cannot be terminated on notice of 30
days or less; or (B) provide for any severance payments or benefits covering a
period beyond the termination date of such employment contract, except as may be
required by law; (iii) amend any employee benefit plan or stock option plan or
agreement, except as may be required for compliance with this Agreement or
applicable law; or (iv) accelerate, amend or change the period (or permit any
acceleration, amendment or change) of exercisability of options granted under
any employee benefit plan (including the Company Incentive Plan) or authorize
cash payments in exchange for any options granted under any of such plans;
(f) Except as forth in Section 4.2(f) of the Company Disclosure
Letter or as required by law, not increase the compensation payable or to become
payable to its officers or employees, except for increases in salary or wages of
employees of the Company or of any subsidiary who are not officers of the
Company in the ordinary course of business and in accordance with past
practices, or grant any bonus, severance or termination pay to, or enter into
any employment or severance agreement with any director, officer (except for
officers who are terminated on an involuntary basis and payments relating
thereto made pursuant to written agreements outstanding on the date hereof as
set forth on the Company Disclosure Letter) or other employee of the Company or
of any subsidiary thereof;
(g) Not incur any borrowings except: (i) the refinancing of
indebtedness now outstanding or additional borrowings under its existing
revolving credit facilities; (ii) the prepayment by customers of amounts due or
to become due for goods sold or services rendered or to be rendered in the
future; or (iii) trade payables incurred in the ordinary course of business;
(h) Not enter into commitments of a capital expenditure nature or
incur any contingent liability which would exceed $1,000,000 individually or on
a project basis and in aggregate in accordance with the fiscal year 2003 capital
budget of the Company, a true copy of which has been provided to FCE (and the
Company shall not amend such budget), except: (i) as may be necessary for the
maintenance of existing facilities, machinery and equipment in good operating
condition and repair in the ordinary course of business; (ii) as may be required
by law; or (iii) for the payment of any fees owing to Quantum pursuant to the
Quantum Combination Agreement;
(i) Not sell, dispose of, or encumber, any property or assets,
except for sales, dispositions or Encumbrances in the ordinary course of
business consistent with prior practice;
(j) Maintain insurance upon all its properties and with respect to
the conduct of its business of such kinds and in such amounts as is customary in
the type of business in which it is engaged, but not less than that presently
carried by it;
(k) Not amend its charter documents or bylaws or other
organizational documents, or acquire (by merger, consolidation, or acquisition
of stock or assets) any company, corporation, partnership or other business
organization or division thereof, or enter into or amend any
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contract, agreement, commitment or arrangement to effect any such acquisition,
or change in any manner the rights of its capital stock or the character of its
business;
(l) Not issue or sell (except upon the exercise of outstanding
options), or issue options (other than options to acquire not more than 2,000
Company Common Shares issued in the ordinary course of business consistent with
prior practice to employees at or below the manager level hired after the date
hereof) or rights to subscribe to, or enter into any contract or commitment to
issue or sell, any shares of its capital stock or combine, subdivide, split or
in any way reclassify any shares of its capital stock, reprice any outstanding
options or other securities convertible into or exchangeable for its capital
stock, or acquire, agree to acquire, or redeem any shares of its capital stock
or other securities convertible into or exchangeable for its capital stock;
(m) Except as permitted under Section 4.4, not engage in any
action or enter into any transaction or permit any action to be taken or
transaction to be entered into that could reasonably be expected to delay the
consummation of, or otherwise adversely affect, any of the transactions
contemplated by the Arrangement or this Agreement;
(n) Not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business and consistent with past practice of liabilities reflected or
reserved against in the financial statements of the Company or incurred since
the date of such financial statements;
(o) Not declare or pay any dividend on shares of its capital stock
or make any other distribution of assets to the holders thereof;
(p) Deliver to FCE, within 30 days after the end of each fiscal
quarter of the Company beginning June 30, 2003, and through the Effective Date,
unaudited consolidated balance sheets and related unaudited statements of income
and changes in financial position as of the end of each fiscal quarter of the
Company, and as of the corresponding fiscal quarter of the previous fiscal year.
The Company hereby represents and warrants that such unaudited consolidated
financial statements shall: (i) be complete in all material respects except for
the omission of notes and schedules contained in audited financial statements;
(ii) present fairly in all material respects the financial condition of the
Company at the dates indicated and the results of operations for the respective
periods indicated; (iii) shall have been prepared in accordance with Canadian
generally accepted accounting principles applied on a consistent basis, except
as noted therein; and (iv) shall contain all adjustments which the Company
considers necessary for a fair presentation of its results for each respective
fiscal period;
(q) Take all steps necessary to commence and diligently prosecute
the recommendations set forth in the "2002 Phase II Environmental Site
Assessment and Remediation Cost Estimate" prepared by Komex International Ltd.
and dated February 2003, including the completion of all necessary or
appropriate site characterization activities (including soil and groundwater
sampling and analysis) and the development of a remedial action plan for the
Bassano manufacturing facility that is satisfactory to the applicable
Governmental Entity; and
B-51
(r) Cooperate and assist FCE to cause the Exchangeable Shares to
be listed on the TSX or, in the event that a listing on TSX is not available, on
another recognized Canadian stock exchange.
4.3. ADDITIONAL AGREEMENTS OF FCE
FCE agrees that, except as expressly contemplated by this Agreement or
otherwise agreed to in writing by the Company or as set forth in the FCE
Disclosure Letter, from the date hereof to the Effective Date it will, and will
cause each of its subsidiaries to:
(a) Other than as expressly set forth in this Agreement, operate
its business only in the usual, regular and ordinary manner and, to the extent
consistent with such operation, use all commercially reasonable efforts to
preserve intact its present business organization, keep available the services
of its present officers and employees, and preserve its relationships with
customers, suppliers, distributors and others having business dealings with it;
(b) Maintain all of its property and assets in customary repair,
order, and condition, reasonable wear and use and damage by fire or unavoidable
casualty excepted;
(c) Maintain its books of account and records in the usual,
regular and ordinary manner, in accordance with generally accepted accounting
principles applied on a consistent basis;
(d) Duly comply in all material respects with all laws applicable
to it and to the conduct of its business;
(e) Not make: (i) any capital expenditure which would exceed
$10,000,000 individually or on a project basis or not in accordance with the
fiscal year 2003 capital budget of FCE, a true copy of which has been provided
to the Company (and FCE shall not amend such budget); or (ii) capital
expenditures in the aggregate in excess of $25,000,000 or not in accordance with
the fiscal year 2003 capital budget of FCE; except: (x) as may be necessary for
the maintenance of existing facilities, machinery and equipment in good
operating condition and repair in the ordinary course of business; or (y) as may
be required by law;
(f) Except as forth in Section 4.3(f) of the FCE Disclosure Letter
or as required by law, not increase the compensation payable or to become
payable to its officers or employees, except for increases in salary or wages of
employees of FCE or of any subsidiary who are not officers of FCE in the
ordinary course of business and in accordance with past practices, or grant any
bonus, severance or termination pay to, or enter into any employment or
severance agreement with any director, officer (except for officers who are
terminated on an involuntary basis and payments relating thereto made pursuant
to written agreements outstanding on the date hereof as set forth on the FCE
Disclosure Letter) or other employee of FCE or of any subsidiary thereof except
in compliance with FCE's employee handbook;
(g) Not incur any borrowings except: (i) the refinancing of
indebtedness now outstanding or additional borrowings under its existing
revolving credit facilities; (ii) the prepayment by customers of amounts due or
to become due for goods sold or services rendered or to be rendered in the
future; (iii) trade payables incurred in the ordinary course of business; or
B-52
(iv) shared cost or similar incentive arrangements in connection with the sale
of FCE products or services;
(h) Not sell, dispose of, or encumber, any property or assets,
except for sales, dispositions or Encumbrances in the ordinary course of
business consistent with prior practice;
(i) Maintain insurance upon all its properties and with respect to
the conduct of its business of such kinds and in such amounts as is customary in
the type of business in which it is engaged, but not less than that presently
carried by it;
(j) Not amend its charter documents or bylaws or other
organizational documents, or acquire (by merger, consolidation, or acquisition
of stock or assets) any company, corporation, partnership or other business
organization or division thereof, or enter into or amend any contract,
agreement, commitment or arrangement to effect any such acquisition, or change
in any manner the rights of its capital stock or the character of its business;
(k) Except for issuances of options to employees of FCE issued in
the ordinary course of business consistent with prior practice and issuances of
warrants in connection with FCE strategic alliances, not issue or sell (except
upon the exercise of outstanding options), or issue options or rights to
subscribe to, or enter into any contract or commitment to issue or sell, any
shares of its capital stock or combine, subdivide, split or in any way
reclassify any shares of its capital stock, reprice any outstanding options or
other securities convertible into or exchangeable for its capital stock, or
acquire, agree to acquire, or redeem any shares of its capital stock or other
securities convertible into or exchangeable for its capital stock;
(l) Except as permitted under Section 4.5, not engage in any
action or enter into any transaction or permit any action to be taken or
transaction to be entered into that could reasonably be expected to delay the
consummation of, or otherwise adversely affect, any of the transactions
contemplated by the Arrangement or this Agreement;
(m) Not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business and consistent with past practice of liabilities reflected or
reserved against in the financial statements of FCE or incurred since the date
of such financial statements;
(n) Not declare or pay any dividend on shares of its capital stock
or make any other distribution of assets to the holders thereof;
(o) Use its reasonable best efforts to cause: (i) the shares of
FCE Common Stock to be issued pursuant to the Arrangement to be approved for
listing on the Nasdaq National Market upon the Closing; and (ii) with the
cooperation and assistance of the Company, the Exchangeable Shares to be listed
on the TSX or, in the event that a listing on TSX is not available, on another
recognized Canadian stock exchange;
(p) Deliver to the Company, within 45 days after the end of each
fiscal quarter of FCE beginning July 31, 2003, and through the Effective Date,
unaudited consolidated balance sheets and related unaudited statements of income
and changes in financial position as of the end
B-53
of each fiscal quarter of FCE, and as of the corresponding fiscal quarter of the
previous fiscal year. FCE hereby represents and warrants that such unaudited
consolidated financial statements shall: (i) be complete in all material
respects except for the omission of notes and schedules contained in audited
financial statements; (ii) present fairly in all material respects the financial
condition of FCE at the dates indicated and the results of operations for the
respective periods indicated; (iii) shall have been prepared in accordance with
Canadian generally accepted accounting principles applied on a consistent basis,
except as noted therein; and (iv) shall contain all adjustments which FCE
considers necessary for a fair presentation of its results for each respective
fiscal period; and
(q) incorporate and organize ExchangeCo and Callco.
4.4. NO COMPANY SOLICITATION
The Company shall immediately cease and cause to be terminated any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by the Company, any subsidiary
thereof, or their respective officers, directors, employees, financial advisors,
representatives and agents ("Representatives") with respect to an Acquisition
Proposal in respect of the Company, and the Company shall exercise all rights to
require the return of information regarding the Company previously provided to
such parties and shall exercise all rights to require the destruction of all
materials including or incorporating any information regarding the Company. From
and after the date hereof, the Company and its subsidiaries will not, and will
not authorize or permit any of its Representatives to, directly or indirectly,
solicit, initiate or encourage (including by way of furnishing information) or
participate in or take any other action to facilitate any inquiries or the
making of any proposal which constitutes or may reasonably be expected to lead
to an Acquisition Proposal in respect of the Company from any person, or engage
in any discussion, negotiations or inquiries relating thereto or accept any such
Acquisition Proposal; provided, however, that notwithstanding any other
provision hereof, the Company may, at any time prior to the time the holders of
Company Common Shares shall have voted to approve the Plan of Arrangement and
the other transactions contemplated thereby, (i) engage in discussions or
negotiations with a third party who (without any solicitation, initiation or
encouragement, directly or indirectly, by the Company or any of its subsidiaries
or Representatives after the date hereof) seeks to initiate such discussions or
negotiations and may furnish such third party information concerning the Company
and its business, properties and assets which has previously been provided to
FCE if, and only to the extent that: (A) the third party has first made an
unsolicited bona fide written Acquisition Proposal that is, in the good faith
judgment of the board of directors of the Company, financially superior to the
transactions contemplated by this Agreement and has demonstrated that the funds
or other consideration necessary for the Acquisition Proposal are available (as
determined in good faith in each case by the Company's board of directors after
receiving the written advice of its financial advisors) and is subject only to
confirmatory due diligence conditions (a "Superior Proposal") and the Company's
board of directors has concluded in good faith (after considering applicable law
and receiving the advice of outside counsel) that such action is reasonably
necessary for the Company's board of directors to act in a manner consistent
with fiduciary duties under applicable law; (B) prior to furnishing such
information to or entering into discussions or negotiations with such person or
entity, the Company provides prompt notice orally and in writing to FCE
specifying the identity of such
B-54
person or entity and that it is furnishing information to or entering into
discussions or negotiations with such person or entity in respect of a Superior
Proposal and receives from such person or entity an executed confidentiality
agreement having confidentiality and standstill terms substantially similar to
those contained in the confidentiality agreement executed by the Company and
FCE, and the Company shall provide full details forthwith, and in any event
within 24 hours, of all material terms and conditions of such Superior Proposal
and any amendments thereto and confirming in writing the determination of the
Company's board that the Acquisition Proposal constitutes a Superior Proposal;
(C) the Company provides notice forthwith and in any event within 24 hours to
FCE at such time as it is terminating any such discussions or negotiations with
such person or entity; and (D) the Company promptly makes available to FCE any
information provided to any such person or entity not previously made available
to FCE, (ii) comply with rules under applicable Canadian securities laws
relating to the provision of directors' circulars and information circulars, and
make appropriate disclosure with respect thereto to the Company's shareholders
and (iii) accept, recommend, approve or implement a Superior Proposal from a
third party, but only (in the case of this clause (iii)) if prior to such
acceptance, recommendation, approval or implementation, the Company's board of
directors shall have concluded in good faith, after considering provisions of
applicable law and after giving effect to all proposals to adjust the terms and
conditions of this Agreement and the Arrangement which may be offered by FCE
during the three Business Day notice period set forth below and after receiving
the advice of outside counsel, that such action is, in the good faith judgment
of the board of directors of the Company, reasonably necessary for the Company
to act in a manner consistent with fiduciary duties under applicable law and the
Company terminates this Agreement in accordance with Section 6.1 (i) and
concurrently therewith has paid the fees payable under Section 6.5. The Company
shall give FCE orally and in writing at least three Business Days' notice prior
to any decision by its board of directors to accept, recommend, approve or
implement a Superior Proposal which notice shall identify the party making the
Superior Proposal and shall provide full details of all material terms and
conditions thereof and any amendments thereto. The Company shall inform FCE of
the status (including all terms and conditions thereof) of any discussions and
negotiations with such party. In addition, the Company shall, and shall cause
its financial and legal advisors to, negotiate in good faith with FCE to make
such adjustments in the terms and conditions of this Agreement and of the Plan
of Arrangement as would enable the Company and FCE to proceed with the
transactions contemplated hereby. Prior to executing any agreement to implement
a Superior Proposal, the Company shall provide FCE with copies of such final
documentation executed by the party making the Superior Proposal. In the event
that FCE proposes to amend this Agreement and the Arrangement, the board of
directors of the Company shall consider such proposed amendments and shall not
enter into any agreement regarding such Acquisition Proposal unless it has
provided FCE with written notice, at least twenty-four (24) hours in advance of
entering into such agreement, which notice shall indicate that the board of
directors has reconfirmed its view that such Acquisition Proposal remains a
Superior Proposal.
4.5. NO FCE SOLICITATION
Except as otherwise set forth herein, from and after the date hereof,
FCE and its subsidiaries will not, and will not authorize or permit any of its
Representatives to, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing information) or participate in or take any other
action to facilitate any inquiries or the making of any proposal
B-55
which constitutes or may reasonably be expected to lead to an Acquisition
Proposal in respect of FCE from any person, or engage in any discussion,
negotiations or inquiries relating thereto; provided, however, that
notwithstanding any other provision hereof, FCE may engage in discussions or
negotiations with a third party who (without any solicitation, initiation or
encouragement, directly or indirectly, by FCE or any of its subsidiaries or
Representatives after the date hereof) seeks to initiate such discussions or
negotiations. Notwithstanding the foregoing, in the event that FCE receives an
unsolicited Acquisition Proposal in respect of FCE, FCE shall be free to, and to
authorize or permit any of its Representatives to, directly or indirectly,
solicit, initiate or encourage (including by way of furnishing information) or
participate in or take any other action to facilitate any inquiries or the
making of any proposal which constitutes or may reasonably be expected to lead
to one or more Acquisition Proposals from any person, or engage in any
discussion, negotiations or inquiries relating thereto.
4.6. PUBLIC ANNOUNCEMENTS
Neither FCE nor the Company, nor any of their respective affiliates,
shall issue or cause the publication of any press release or other public
announcement with respect to this Agreement, the Arrangement or the other
transactions contemplated hereby without prior notice to and the opportunity for
review and comment by the other party, except with respect to the filing of the
Joint Proxy Statement and any current reports on Form 8-K with the SEC and
except as may be required by law or by any listing agreement with Nasdaq or any
national securities exchange or Canadian stock exchange.
4.7. COMFORT LETTERS
(a) Upon request of FCE, the Company shall use its reasonable best
efforts to cause to be delivered to FCE a letter (the "Company Comfort Letter")
of PricewaterhouseCoopers LLP, Chartered Accountants, addressed to FCE and dated
as of a date within five days before the date the Joint Proxy Statement is first
mailed to each company's respective securityholders, in form and substance
reasonably satisfactory to FCE and customary in scope and substance for
"comfort" letters delivered by independent public accountants in connection with
proxy statements similar to the Joint Proxy Statement.
(b) Upon request of the Company, FCE shall use its reasonable best
efforts to cause to be delivered to the Company a letter (the "FCE Comfort
Letter") of KPMG LLP, Independent Accountants, addressed to the Company and
dated as of a date within five days before the date the Joint Proxy Statement is
first mailed to each company's respective securityholders, in form and substance
reasonably satisfactory to the Company and customary in scope and substance for
"comfort" letters delivered by independent public accountants in connection with
proxy statements similar to the Joint Proxy Statement.
4.8. BOARD OF DIRECTORS
The board of directors of FCE will take action prior to the Effective
Time to cause the number of directors comprising the full board of directors of
FCE to be increased to not more than twelve voting members, which shall include
one (1) individual (the "Company Nominee") approved by the Company from the list
of individuals included in the Company Disclosure
B-56
Letter. The increase in the number of directors and the election of the Company
Nominee shall be subject to the consummation of the Closing. If, prior to the
Effective Time, the Company's designee for director shall decline or be unable
to serve as a director of FCE, the Company's board of directors shall designate
another person to serve in such person's stead, subject to the approval of a
majority of FCE's directors at that time. The director designated by the Company
shall provide FCE with his or her written consent to serve as a director of FCE
and to be named as a director in the Joint Proxy Statement. In addition, FCE may
in its sole discretion choose to appoint one (1) additional nominee of the
Company to FCE's board of directors in accordance with the foregoing terms and
conditions, in which case FCE would increase the number of directors comprising
its full board of directors accordingly.
4.9. TAX MATTERS
It is intended by the parties hereto that the transactions contemplated
under this Agreement and the Plan of Arrangement shall be implemented in a
manner that maximizes the present and future financial and tax benefits to the
FCE and the Company. Accordingly, the Company and FCE agree to consult, confer
and consider all steps reasonably necessary and mutually agreeable through and
including the Effective Date to ensure that the transactions contemplated under
this Agreement and the Plan of Arrangement shall be implemented consistent with
that intention as and to the extent that the same shall not prejudice any party
or its security holders. Except as may be necessary to reflect such change(s) in
the transaction structure, the terms of this Agreement shall continue to govern.
ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS
5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH PARTY
The obligations of each party to consummate and effect the transactions
contemplated hereunder shall be subject to the satisfaction or waiver on or
before the Effective Date of the following conditions:
(a) Securityholder Approval. (i) The Arrangement and the other
transactions contemplated hereby shall have been approved and adopted by the
Company Common Shareholders in accordance with applicable law and the Company's
Articles of Incorporation and bylaws; and (ii) the matters referred to in
Section 7.1 shall have been approved by the holders of shares of the FCE Common
Stock in accordance with the rules of Nasdaq, applicable law and FCE's
Certificate of Incorporation and bylaws;
(b) No Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the Arrangement shall have been issued by any Governmental Entity and remain in
effect, nor shall any proceeding seeking any of the foregoing be pending. There
shall be no order, decree or ruling by any governmental agency or threat
thereof, or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Arrangement, which would prohibit or render illegal the
transactions contemplated by this Agreement;
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(c) Court Approval. The Court shall have issued its Final Order
approving the Arrangement in form and substance reasonably satisfactory to FCE
and the Company (such approvals not to be unreasonably withheld or delayed by
FCE or the Company) and reflecting the terms hereof;
(d) Commissions, etc. All required orders shall have been obtained
from the Commissions and other relevant United States and Canadian securities
regulatory authorities in connection with the Arrangement. All waiting periods
required by HSR Act, if applicable, and other similar Laws shall have expired
with respect to the transactions contemplated by this Agreement, or early
termination with respect thereto shall have been obtained, without the
imposition of any governmental request or order requiring the sale or
disposition or holding separate (through a trust or otherwise) of a material
portion of the assets or businesses of the Company or FCE. FCE and the Company
shall each have filed all notices and information (if any) required under Part
IX of the Competition Act (Canada) and the applicable waiting periods and any
extensions thereof shall have expired or the parties shall have received an
Advance Ruling Certificate pursuant to Section 102 of the Competition Act
(Canada) setting out that the Director under such Act is satisfied he would not
have sufficient grounds on which to apply for an order in respect of the
Arrangement. The Arrangement shall have received the allowance or approval or
deemed allowance or approval by the responsible Minister under the Investment
Canada Act, to the extent such allowance or approval is required, on terms and
conditions satisfactory to the parties and all notice requirements shall have
been complied with;
(e) SEC Matters. On the Closing Date: (i) the Joint Proxy
Statement shall not be the subject of any stop-order or proceedings seeking a
stop-order, or any similar proceedings, commenced or threatened by the SEC or
the Commissions; and (ii) the Primary Registration Statement shall have been
declared effective with respect to the FCE Common Stock issuable upon the
exchange of the Exchangeable Shares and the S-8 Registration Statement shall
have been declared or become effective under the Securities Act and shall not be
the subject of any stop-order or proceedings seeking a stop-order, or any
similar proceedings, commenced or threatened by the SEC or the Commissions;
(f) Listings and Exchange Approvals
(i) The FCE Common Stock to be issued pursuant to the
Arrangement shall have been approved for listing on the Nasdaq National
Market, subject only to notice of issuance;
(ii) Nasdaq shall not have objected to the consummation of
the transactions contemplated by the Plan of Arrangement and this
Agreement; and
(iii) the Exchangeable Shares to be issued pursuant to the
Arrangement shall have been listed on the TSX or, in the event that a
listing on TSX is not available, on another recognized Canadian stock
exchange.
(g) Consents of Certain Parties in Privity. FCE and the Company
shall have received all written consents, assignments, waivers, authorizations
or other certificates necessary to provide for the continuation in full force
and effect of all their Material Contracts and leases
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and for them to consummate the transactions contemplated hereby, except when the
failure to receive such consents or other certificates would not have a Material
Adverse Effect on FCE or the Company, as the case may be;
(h) Valid Issuance. The issuance by FCE of FCE Common Stock
pursuant to the terms of this Agreement and the Arrangement shall be exempt from
the registration and qualification requirements of the Securities Act and
applicable state securities or "blue sky" laws, and FCE shall be reasonably
satisfied that all necessary approvals under applicable Laws and other
authorizations relating to the issuance by FCE of FCE Common Stock shall have
been obtained; and
(i) Notice of Dissent. The Company shall not have received on or
prior to the Effective Time notice from the holders of more than 5% of the
issued and outstanding Company Common Shares entitled to consent to, or vote on,
the matters presented at the Company Shareholders Meeting, in aggregate, of
their intention to exercise their rights of dissent hereunder.
5.2. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate and effect the
transactions contemplated hereunder shall be subject to the satisfaction or
waiver on or before the Effective Date of the following conditions:
(a) Representations and Warranties. The representations and
warranties of FCE contained in this Agreement shall be true and correct on the
date hereof and (except to the extent such representations and warranties speak
as of a date earlier than the date hereof, in which case such representations
and warranties shall be true and correct as of such date; and except to give
effect to the issuance of shares of FCE Common Stock on exercise of outstanding
options or warrants) shall also be true and correct on and as of the Effective
Date, with the same force and effect as if made on and as of the Effective Date,
except, other than the representations and warranties contained in Sections
3.9(f) and 3.15(h), where the failure of such representations and warranties to
be true and correct would not have a Material Adverse Effect on FCE;
(b) Covenants. FCE shall have (i) performed and complied in all
respects with the covenants and agreements set forth in Section 1.5(b), and (ii)
performed and complied in all material respects with all other covenants
required by this Agreement to be performed or complied with by FCE on or before
the Effective Date;
(c) Material Adverse Change. Between the date hereof and the
Effective Date, there shall not have occurred, in the reasonable judgment of the
Company, a Material Adverse Change to FCE;
(d) Certificate. FCE shall have delivered to the Company a
certificate, dated the Effective Date and signed by its chief executive officer
and its chief financial officer, to the effect set forth in Sections 5.2 (a),
(b) and (c) and stating the FCE Net Working Capital and FCE Net Cash amounts as
of the Effective Date, as determined in accordance with the principles reflected
in Section 3.29 of the FCE Disclosure Letter;
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(e) FCE Net Working Capital and Net Cash. The FCE Net Working
Capital and FCE Net Cash amounts set forth in the certificate delivered pursuant
to Section 5.2(d) hereof shall equal or exceed the total of the FCE Net Working
Capital and FCE Net Cash amounts, respectively, set forth in Section 3.29 hereof
minus (i) the product of the FCE Per Diem Burn Rate and the number of days
between June 27, 2003, and the Effective Date and (ii) the reasonable costs
incurred by FCE in connection with any litigation commenced by the holder of the
Company Series 2 Preferred Shares or by Quantum in connection with the
termination of the Quantum Combination Agreement; and
(f) Payment of FCE's Transaction Costs. Except for costs and
expenses not exceeding $10,000 in the aggregate, FCE shall have paid or
otherwise satisfied all costs and expenses incurred by FCE in connection with
the transactions contemplated by this Agreement and the Plan of Arrangement.
5.3. CONDITIONS PRECEDENT TO OBLIGATIONS OF FCE
The obligations of FCE to consummate and effect the transactions
contemplated hereunder shall be subject to the satisfaction or waiver on or
before the Effective Date of the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall be true and correct
on the date hereof and (except to the extent such representations and warranties
speak as of a date earlier than the date hereof, in which case such
representations and warranties shall be true and correct as of such date; and
except to give effect to the issuance of the Company Common Shares on exercise
of outstanding options) shall also be true and correct on and as of the
Effective Date, with the same force and effect as if made on and as of the
Effective Date, except, other than the representations and warranties contained
in Sections 2.9(f) and 2.15(h), where the failure of such representations and
warranties to be true and correct would not have a Material Adverse Effect on
the Company;
(b) Covenants. The Company shall have (i) performed and complied
in all respects with the covenants and agreements set forth in Section 1.5(b)
and (ii) performed and complied in all material respects with all other
covenants required by this Agreement to be performed or complied with by the
Company on or before the Effective Date;
(c) Material Adverse Change. Between the date hereof and the
Effective Date, there shall not have occurred, in the reasonable judgment of
FCE, a Material Adverse Change to the Company;
(d) Certificate. The Company shall have delivered to FCE a
certificate, dated the Effective Date and signed by its chief executive officer
and its chief financial officer, to the effect set forth in Sections 5.3 (a),
(b) and (c) and stating the Company Net Working Capital and Company Net Cash
amounts as of the Effective Date, as determined in accordance with the
principles reflected in Section 2.31 of the Company Disclosure Letter;
(e) Company Net Working Capital and Net Cash. The Company Net
Working Capital and Company Net Cash amounts set forth in the certificate
delivered pursuant to Section 5.3(d) hereof shall equal or exceed the total of
the Company Net Working Capital and Company
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Net Cash amounts, respectively, set forth in Section 2.31 hereof minus (i) the
product of the Company Per Diem Burn Rate and the number of days between the
date hereof and the Effective Date and (ii) the reasonable costs incurred by the
Company in connection with any litigation commenced by the holder of the Company
Series 2 Preferred Shares or by Quantum in connection with the termination of
the Quantum Combination Agreement;
(f) Payment of Fees to Quantum. The Company shall have paid any
and all fees owed to Quantum pursuant to the Quantum Combination Agreement; and
(g) Payment of the Company's Transaction Costs. Except for costs
and expenses not exceeding $10,000 in the aggregate, the Company shall have paid
or otherwise satisfied all costs and expenses incurred by the Company in
connection with the transactions contemplated by this Agreement and the Plan of
Arrangement
ARTICLE 6
TERMINATION
6.1. TERMINATION
This Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the transactions contemplated hereby
by the stockholders of FCE or the Company entitled to vote, as follows:
(a) by mutual agreement of the Company and FCE;
(b) by the Company, if there has been a breach by FCE of any
representation, warranty, covenant or agreement set forth in this Agreement on
the part of FCE, or if any representation or warranty of FCE shall have become
untrue, in either case if the conditions set forth in Sections 5.2(a) or (b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue and FCE fails to promptly
cure such breach of a covenant or agreement or inaccuracy of any representation
or warranty within 15 Business Days after written notice thereof from the
Company (except that no cure period shall be provided for a breach by FCE which
by its nature cannot be cured and in no event shall such cure period extend
beyond the Termination Date);
(c) by FCE, if there has been a breach by the Company of any
representation, warranty, covenant or agreement set forth in this Agreement on
the part of the Company, or if any representation or warranty of the Company
shall have become untrue, in either case if the conditions set forth in Sections
5.3(a) or (b) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue and the Company
fails to promptly cure such breach of a covenant or agreement or inaccuracy of
any representation or warranty within 15 Business Days after written notice
thereof from FCE (except that no cure period shall be provided for a breach by
the Company which by its nature cannot be cured and in no event shall such cure
period extend beyond the Termination Date);
(d) by either party, if all the conditions for Closing the
Arrangement for the benefit of such party shall not have been satisfied or
waived on or before 5:00 p.m., Calgary, Alberta time
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on December 31, 2003 (the "Termination Date"), other than as a result of a
breach of this Agreement by the terminating party;
(e) by either party, on or before 5:00 p.m., Calgary, Alberta time
on December 31, 2003, if: (i) the shareholders of the Company entitled to vote
at the Company Shareholders Meeting do not approve the Arrangement (and the
other matters to be approved at such meeting as provided in Section 7.1(a)
hereof) or the Court does not issue a Final Order; or (ii) the stockholders of
FCE entitled to vote at the FCE Stockholders Meeting do not approve the matters
set forth in Section 7.1(b) hereof;
(f) by either party if a final and non-appealable order shall have
been entered in any action or proceeding before any Governmental Entity that
prevents or makes illegal the consummation of the Arrangement;
(g) by FCE if the Company board of directors or any committee of
the Company board of directors shall (i) withdraw or modify in any adverse
manner its approval or recommendation in respect of the Arrangement and the
other transactions contemplated hereby or (ii) fail to reaffirm its approval or
recommendation upon request, from time to time, by FCE to do so or upon an
Acquisition Proposal in respect of the Company being publicly announced,
proposed, offered or made to the Company Common Shareholders or to the Company
(such reaffirmation to be made within 10 days of such request being made or such
Acquisition Proposal being publicly announced, proposed, offered or made or
immediately prior to the meeting of the Company Common Shareholders, whichever
occurs first);
(h) by the Company if the FCE board of directors or any committee
of the FCE board of directors shall (i) withdraw or modify in any adverse manner
its approval or recommendation in respect of this Agreement, the Arrangement and
the other transactions contemplated hereby or (ii) fail to reaffirm its approval
or recommendation upon request, from time to time, by the Company to do so or
upon an Acquisition Proposal in respect of FCE being publicly announced,
proposed, offered or made to the holders of stock of FCE or to FCE (such
reaffirmation to be made within 10 days of such request being made or such
Acquisition Proposal being publicly announced, proposed, offered or made or
immediately prior to the FCE Stockholders Meeting, whichever occurs first);
(i) by the Company, prior to the approval of this Agreement, the
Arrangement and the other transactions contemplated hereby by the shareholders
of the Company if, as a result of a Superior Proposal by a party other than FCE
or any of its Affiliates, the Company's board of directors determines in
accordance with Section 4.4 to accept, recommend, approve or implement such
Superior Proposal and has otherwise complied with the provisions of Section 4.4
and Section 6.4;
(j) by the Company if the FCE Stock Price (calculated in
accordance with Section 1.2(b) except using any 15 consecutive trading days as
the Measurement Period for such calculation and for this purpose shall be
calculated on a rolling basis for each trading day after the date of this
Agreement until the Effective Date) is less than $6.65 (subject to adjustment in
the manner as is set forth in Section 1.2(c)) (the "Company Walk-Away Price").
Upon the occurrence of any Company Walk-Away Price, then the Company may
terminate the Agreement
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within three days following the end of the relevant Measurement Period, and, if
not so terminated within such three day period, the Company shall have waived
its right to terminate the Agreement pursuant to this Section 6.1(j) for that
occurrence of such Company Walk-Away Price, but without prejudice to any
subsequent Company Walk-Away Price that may occur, if such subsequent Company
Walk-Away Price should occur. For greater certainty, no termination fee shall be
payable by the Company in the event the Company terminates this Agreement
pursuant to this Section 6.1(j);
(k) by FCE if the Court orders or requires any Persons, other than
the Company Common Shareholders, the right to consent to, approve, or vote in
connection with, the Arrangement, as a separate class;
(l) by the Company if the condition set forth in Section 5.2(e) is
not satisfied;
(m) by FCE if the condition set forth in Section 5.3(e) is not
satisfied; or
(n) by the Company, if FCE announces its intention to acquire (by
merger, consolidation, or acquisition of stock or assets) any company,
corporation, partnership or other business organization or division thereof for
a purchase price in excess of $10,000,000. For greater certainty, if the Company
terminates this Agreement pursuant to this Section 6.1(n), such termination
shall not be deemed to be a termination pursuant to Section 6.1(g), and no
termination fee, as contemplated by Section 6.5, shall be payable in such case.
6.2. TERMINATION DATE EXTENSION.
Notwithstanding the provisions of Section 6.1, if, at the Termination
Date, Section 5.1(b) is the sole condition remaining to be fulfilled in
connection with the Arrangement (other than such conditions the fulfillment of
which are dependent on the resolution of or fulfillment of the condition in
Section 5.1(b)) and the litigation which prevents the condition in Section
5.1(b) from being fulfilled is litigation initiated by: (i) Quantum in
connection with the Quantum Combination Agreement; or (ii) the holder of the
Company Series 2 Preferred Shares, then no party may terminate this Agreement
pursuant to Section 6.1(d) until the earlier of (i) a final, non-appealable
order from the appropriate court resolving such claim, suit or proceeding in a
manner which prevents the Arrangement and the transactions contemplated herein
from occurring, or (ii) January 31, 2004.
6.3. NOTICE OF TERMINATION
Any termination of this Agreement under Section 6.1 above will be
effected by the delivery of written notice by the terminating party to the other
party hereto.
6.4. EFFECT OF TERMINATION
Subject to Section 6.5, in the event of termination of this Agreement
by either the Company or FCE pursuant to Section 6.1, this Agreement shall
forthwith become void and have no effect, and there shall be no liability or
obligation on the part of FCE or the Company or their respective officers or
directors, except that: (i) the provisions of Section 6.5 shall survive such
termination; (ii) the provisions of the Confidentiality Agreement shall survive
any such
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termination; and (iii) no party shall be released or relieved from any liability
arising from a breach by such party of any of its representations, warranties,
covenants or agreements as set forth in this Agreement resulting from willful
misconduct or bad faith.
6.5. TERMINATION FEE
(a) If this Agreement is terminated:
(i) by the Company pursuant to Section 6.1(b), then FCE
shall pay to the Company a cash termination fee of $900,000 at the time
of such termination, it being agreed between the parties that such
amount is an estimate of the reasonable out of pocket expenses of the
Company, incurred in connection with the transactions contemplated
herein;
(ii) by either party pursuant to Section 6.1(e)(ii), then
FCE shall pay to the Company a cash termination fee of $900,000 at the
time of such termination, it being agreed between the parties that such
amount is an estimate of the reasonable out of pocket expenses of the
Company, incurred in connection with the transactions contemplated
herein; or
(iii) by the Company pursuant to Section 6.1(l), then FCE
shall pay to the Company a cash termination fee of $900,000 at the time
of such termination, it being agreed between the parties that such
amount is an estimate of the reasonable out of pocket expenses of the
Company, incurred in connection with the transactions contemplated
herein; provided, however, that under no circumstances shall FCE be
obligated to pay nor shall the Company be entitled to collect any
termination fee pursuant to Section 6.5(a)(i) if the Company has
received or will receive a termination fee pursuant to this Section
6.5(a)(iii).
(b) If this Agreement is terminated:
(i) by FCE pursuant to Section 6.1(c) then the Company
shall pay to FCE a cash termination fee of $900,000 at the time of such
termination, it being agreed between the parties that such amount is an
estimate of the reasonable out of pocket expenses of FCE, incurred in
connection with the transactions contemplated herein;
(ii) by either party pursuant to Section 6.1(e)(i), then
the Company shall pay to FCE a cash termination fee of $900,000 at the
time of such termination, it being agreed between the parties that such
amount is an estimate of the reasonable out of pocket expenses of FCE,
incurred in connection with the transactions contemplated herein;
(iii) by FCE pursuant to Section 6.1(k), then the Company
shall pay to FCE a cash termination fee of $900,000 at the time of such
termination, it being agreed between the parties that such amount is an
estimate of the reasonable out of pocket expenses of FCE, incurred in
connection with the transactions contemplated herein; or
(iv) by FCE pursuant to Section 6.1(m), then the Company
shall pay to FCE a cash termination fee of $900,000 at the time of such
termination, it being agreed between
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the parties that such amount is an estimate of the reasonable out of
pocket expenses of FCE, incurred in connection with the transactions
contemplated herein; provided, however, that under no circumstances
shall the Company be obligated to pay nor shall FCE be entitled to
collect any termination fee pursuant to Section 6.5(b)(i) if FCE has
received or will receive a termination fee pursuant to this Section
6.5(b)(iv).
(c) If a bona fide Acquisition Proposal is publicly announced or
is proposed, offered or made to the shareholders of the Company or to the
Company and (x) such Acquisition Proposal has not expired or been withdrawn at
the time of the Company Shareholders Meeting, (y) the securityholders of the
Company do not approve the Arrangement (and the other matters to be approved at
such meeting as provided in Section 7.1(a) hereof), and (z) within 12 months
following the termination of this Agreement, the Company enters into, directly
or indirectly, an agreement, commitment or understanding with respect to such
Acquisition Proposal, an amended version thereof, a competing Acquisition
Proposal or an Acquisition Proposal solicited in response to the foregoing, or
any such Acquisition Proposal is consummated, then the Company shall pay to FCE
a cash termination fee of $2 million, payable immediately upon satisfaction of
the requirements contained in paragraphs (x), (y) and (z) of this Section
6.5(c). If the Company pays a cash termination fee to FCE pursuant to this
Section 6.5(c), then the Company may set-off such amounts previously paid to FCE
pursuant to Section 6.5(b).
(d) If this Agreement is terminated by the Company pursuant to
Section 6.1(h), then FCE shall pay to the Company upon such termination a cash
termination fee of $2 million at the time of such termination.
(e) If this Agreement is terminated by FCE pursuant to Section
6.1(g) or by the Company pursuant to Section 6.1(i), then the Company shall pay
to FCE upon such termination a cash termination fee of $2 million at the time of
such termination.
(f) FCE and the Company each agree that the agreements contained
in Sections 6.5(a) through 6.5(e) are an integral part of the transactions
contemplated by this Agreement. If either party fails to promptly pay the other
party any fee due under such Sections 6.5(a) through 6.5(e), it shall pay the
other party's costs and expenses (including legal fees and expenses) in
connection with any action, including the filing of any lawsuit or other legal
action, taken to collect payment, together with interest on the amount of any
unpaid fee at the publicly announced prime rate of Canadian Imperial Bank of
Commerce from the date such fee was first due.
ARTICLE 7
ADDITIONAL AGREEMENTS
FCE and the Company, as the case may be, agree to take the following
actions after the execution of this Agreement.
7.1. MEETINGS
The Company and FCE shall each duly call a meeting of its
securityholders entitled to vote to be held as soon as practicable after the SEC
has indicated that it has no further comments
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on the Joint Proxy Statement for the purpose of (a) in the case of the Company,
voting upon the Plan of Arrangement and the transactions contemplated hereby and
thereby; and (b) in the case of FCE, voting upon proposals to approve (i) this
Agreement and the transactions contemplated hereby and by the Plan of
Arrangement, and (ii) such other matters relating to this Agreement and the
Arrangement, if any, as shall be legally required in the reasonable judgment of
FCE. Each party shall take all reasonable and lawful action to solicit and
obtain approval of its securityholders and take all other action necessary or
advisable to secure the vote or consent of the securityholders required by
applicable Law or applicable stock exchange requirements. The parties shall also
coordinate and cooperate with respect to the timing of such meetings. Each party
may only change its recommendation in the event that the board of directors of
such party concludes, in good faith, after receiving the advice of outside
counsel that such action is reasonably necessary for the board of directors to
act in a manner consistent with its fiduciary duty and, in the event that
Section 4.4 is applicable, if such party and its board of directors are in
compliance with that Section. The meetings of securityholders of the Company and
FCE will be called for the same day at such times as will result in the
completion of the FCE Stockholders Meeting prior to the commencement of the
Company Shareholders Meeting.
7.2. THE CLOSING
Subject to the termination of this Agreement as provided in Article 6,
the Closing of the transactions contemplated by this Agreement (the "Closing")
will take place at the offices of Stikeman Elliott LLP, 4300 Bankers Hall West,
888--3rd Street, S.W., Calgary, Alberta, T2P 5C5 on a date (the "Closing Date")
and at a time to be mutually agreed upon by the parties, which date shall be no
later than the first Business Day after all conditions to Closing set forth
herein shall have been satisfied or waived, unless another place, time and date
is mutually selected by the Company and FCE. Concurrently with the Closing, the
Plan of Arrangement will be filed with the Registrar under the ABCA.
7.3. ANCILLARY DOCUMENTS/RESERVATION OF SHARES
(a) Provided all other conditions of this Agreement have been
satisfied or waived, the Company shall, on the Closing Date, file Articles of
Arrangement pursuant to Section 193 of the ABCA to give effect to the Plan of
Arrangement.
(b) On the Effective Date:
(i) FCE, ExchangeCo and Callco shall execute and deliver
a Support Agreement containing the terms and conditions set forth in
Exhibit C, together with such other terms and conditions as may be
reasonably agreed to by the parties hereto; and
(ii) FCE, ExchangeCo and a Canadian trust company to be
mutually agreed to by FCE and the Company shall execute and deliver a
Voting and Exchange Trust Agreement containing the terms and conditions
set forth in Exhibit D, together with such other terms and conditions
as may be reasonably agreed to by the parties hereto.
(c) On or before the Effective Date, FCE will reserve for issuance
such number of shares of FCE Common Stock as shall be necessary to give effect
to the transactions contemplated by this Agreement.
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7.4. NOTICE TO HOLDERS OF COMPANY OPTIONS
As soon as practicable after the Effective Time, FCE shall deliver to
each holder of an outstanding Company Option an appropriate notice setting forth
such holder's rights pursuant thereto and that such Company Option shall
continue in effect on the same terms and conditions as set forth therein,
subject to the adjustments and other terms provided for by this Agreement.
7.5. INDEMNIFICATION AND RELATED MATTERS
(a) FCE agrees that all rights to indemnification existing in
favour of the present or former directors and officers of the Company (as such)
or any of the Company's subsidiaries or present or former directors and officers
(as such) of the Company or any of its subsidiaries serving or who served at the
Company's or any of its subsidiaries' request as a director, officer, employee,
agent or representative of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise (each such present or former
director or officer of the Company or any of its subsidiaries, an "Indemnified
Party"), as provided by contract or in the Company's charter or bylaws or
similar documents of any of its subsidiaries in effect as of the date hereof
with respect to matters occurring prior to the Effective Time, shall survive and
shall continue in full force and effect and without modification, to the extent
permitted by applicable Laws, so long as the Company is in existence as a
corporation, for a period of not less than the statutes of limitations
applicable to such matters.
(b) From and after the Effective Time, FCE and the Company,
jointly and severally, shall and FCE shall cause the Company to indemnify and
hold harmless to the fullest extent permitted under the ABCA and applicable
Laws, each Indemnified Party against any costs and expenses (including
reasonable attorney's fees), judgments, fines, losses, claims and damages and
liabilities, and amounts paid in settlement thereof with the consent of the
indemnifying party, such consent not to be unreasonably withheld, in connection
with any actual or threatened claim, action, suit, proceeding or investigation
that is based on, or arises out of, the fact that such person is or was a
director or officer of the Company or any of its subsidiaries (including without
limitation with respect to any of the transactions contemplated hereby or the
Arrangement) or who is serving or who served at the Company's or any of its
subsidiaries' request as a director, officer, employee, agent or representative
of another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise. In the event of any such claim, action, suit, proceeding or
investigation, FCE shall cause the Company to pay the reasonable fees and
expenses of counsel in advance of the final disposition of any such claim,
action, suit, proceeding or investigation to the fullest extent permitted by law
subject to the limitations imposed by the ABCA and applicable Laws. Without
limiting the foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any Indemnified Parties, (i) the Indemnified
Parties may retain counsel reasonably satisfactory to FCE and, subject to
limitations imposed by the ABCA and applicable Laws, the Company shall (or FCE
shall cause the Company to) pay all reasonable fees and expenses of such counsel
for the Indemnified Parties promptly as statements therefor are received; and
(ii) FCE will use all reasonable efforts to assist in the defense of such
matter; provided, however, that neither the Company nor FCE shall be liable for
any settlement effected without its prior written consent which shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under this Section 7.5(b), upon learning of any such claim, action, suit,
proceeding or investigation, shall notify FCE (but the failure to so
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notify shall not relieve a party from any liability which it may have under this
Section 7.5 (b) unless such failure results in actual prejudice to such party
and then only to the extent of such prejudice). The Indemnified Parties as a
group may retain only one law firm in any jurisdiction to represent them with
respect to each such matter unless such counsel determines that there is, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of any two or more Indemnified Parties, in which
event additional counsel may be required to be retained by the Indemnified
Parties.
(c) Subject to limitations imposed by the ABCA and applicable
Laws, provided the Arrangement becomes effective, the Company shall (or FCE
shall cause the Company to) pay all expenses, including reasonable attorney's
fees, as the same may be incurred by any Indemnified Parties in any action by
any Indemnified Party or parties seeking to enforce the indemnity or other
obligations provided for in this Section 7.5; provided, however, that the
Company will be entitled to reimbursement for any advances made under this
Section 7.5 to any Indemnified Party who ultimately proves unsuccessful in
enforcing the indemnity as finally determined by a non-appealable judgment in a
court of competent jurisdiction, and payment of such expenses in advance of the
final disposition of the action shall be made only upon receipt of any
undertaking by the Indemnified Party to reimburse all amounts advanced if such
action ultimately proves unsuccessful to the extent permitted by applicable
Laws.
(d) Provided the Arrangement becomes effective, for a period of
six years after the Effective Date, FCE shall continue in effect director and
officer liability insurance for the benefit of the Indemnified Parties in such
amounts, and with such deductibles, retained amounts, coverages and exclusions
as the Company provides for its own directors and officers at the date hereof;
provided that in no event shall the FCE be required to expend pursuant to this
Section 7.5 more than an amount per year equal to 150% of the current annual
premium paid by FCE for similar insurance carried by FCE for its own directors
and officers.
(e) This Section 7.5, which shall survive the consummation of this
Agreement and the Arrangement, is intended to benefit each person or entity
indemnified hereunder.
7.6. AFFILIATE AGREEMENTS
The Company will use its reasonable best efforts to have its Affiliates
sign and deliver to FCE the Company Affiliate Agreements in the form of Exhibit
B concurrently with the execution hereof. For purposes of this Agreement, an
"Affiliate" shall have the meaning referred to in Rule 145 under the Securities
Act. In the event that the Company does not succeed in getting its respective
Affiliates to sign and deliver the Company Affiliate Agreements, such party
shall continue to use its reasonable best efforts to have its Affiliates sign
and deliver the Company Affiliate Agreements.
7.7. CONSENTS; APPROVALS
The Company and FCE shall coordinate and cooperate with one another and
shall each use their reasonable best efforts to obtain (and shall each refrain
from taking any willful action that would impede obtaining) all consents,
waivers, approvals, authorizations or orders (including, without limitation, all
rulings, decisions or approvals by any Governmental Entity),
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and the Company and FCE shall make all filings required in connection with the
authorization, execution and delivery of this Agreement and the consummation by
them of the transactions contemplated hereby, excepting only those filings with
foreign jurisdictions for which the failure to file would not have a Material
Adverse Effect on the Company or FCE, as the case may be. The foregoing covenant
shall not include any obligation by the Company or FCE to agree to divest,
abandon, licence or take similar action with respect to any assets (tangible or
intangible) of the Company or FCE, as the case may be.
7.8. SECURITIES COMPLIANCE
The Company and FCE shall use reasonable best efforts to obtain all
orders required from the applicable Canadian Governmental Entities to permit the
issuance and first resale of (i) the Exchangeable Shares, and (ii) the shares of
FCE Common Stock issuable upon exchange of the Exchangeable Shares from time to
time, in each case without qualification with, or approval of, or the filing of
any prospectus or similar document, or the taking of any proceeding with, or the
obtaining of any further order, ruling or consent from, any Canadian
Governmental Entity under any Canadian federal, provincial or territorial
securities or other Laws or pursuant to the rules and regulations of any
Governmental Entity administering such Laws, or the fulfillment of any other
legal requirement in any such jurisdiction (other than, with respect to such
first resales, any restrictions on transfer by reason of, among other things, a
holder being a "control person" for purposes of Canadian federal, provincial or
territorial securities Laws).
ARTICLE 8
MISCELLANEOUS
8.1. NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All representations and warranties of the parties contained in this
Agreement will remain operative and in full force and effect, regardless of any
investigation made by or on behalf of the parties to this Agreement, until the
earlier of the valid termination of this Agreement or the Closing Date,
whereupon such representations and warranties will expire and be of no further
force or effect. All agreements and covenants of the parties shall survive the
Closing Date, except as otherwise set forth in this Agreement.
8.2. NOTICES
All notices and other communications required or permitted hereunder
shall be in writing and be sent to the parties hereto at the address as set
below, or at such other address as such party shall have furnished to the other
party in writing in accordance with this Section:
(a) if to FCE to: FuelCell Energy, Inc., 3 Great Pasture Road,
Danbury, Connecticut 06813, Attention: Chief Executive Officer, Facsimile No.
203-825-6100, with required copies to Robinson & Cole LLP, Financial Centre, 695
East Main Street, Stamford, Connecticut 06901, Attention: Richard Krantz,
Facsimile No. (203) 462-7599 and to Stikeman Elliott LLP, Suite 5300, Commerce
Court West, 199 Bay Street, Toronto, Ontario M5L 189, Attention: Brian Pukier,
Facsimile No. (416) 947-0866.
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(b) if to the Company to: Global Thermoelectric Inc., 4908 52nd
Street S.E., Calgary, Alberta, T2B3R2 Attention: Chief Executive Officer,
Facsimile No. (403) 204-6105, with required copies to Bennett Jones LLP, 4500
Bankers Hall East, 855--2nd Street S.W., Calgary, Alberta, T2K 4K7, Attention:
John MacNeil, Facsimile No. (403) 265-7219.
All notices and other communications shall be deemed effectively given
as to the party to whom it is addressed as of the earliest of the following
times: (i) when received, (ii) when delivered personally, (iii) one (1) Business
Day after being delivered by facsimile (with appropriate confirmation of
receipt), (iv) one (1) Business Day after being timely deposited with an
overnight courier service with instructions (and the capability) to make
delivery on the next day, (v) if sent internationally, five (5) Business Days
after being deposited in international mail, first class with postage prepaid,
or (vi) if sent domestically, three (3) Business Days after being deposited in
U.S. mail, first class with postage prepaid.
8.3. INTERPRETATION
When a reference is made in this Agreement to Sections or Exhibits,
such reference shall be to a Section or Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
therein shall be deemed in each case to be followed by the words "without
limitation." Any references in this Agreement to "the date hereof" refers to the
date of execution of this Agreement. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. The terms and provisions of this Agreement
shall not be construed against the drafter or drafters hereof. All parties
hereto agree that the language of this Agreement shall be construed as a whole
according to its fair meaning and not strictly for or against any of the parties
hereto.
8.4. SEVERABILITY
If any provision of this Agreement or the application thereof to any
person or circumstance is held invalid or unenforceable in any jurisdiction, the
remainder hereof, and the application of such provision to such person or
circumstance in any other jurisdiction or to other persons or circumstances in
any jurisdiction, shall not be affected thereby, and to this end the provisions
of this Agreement shall be severable.
8.5. COUNTERPARTS
This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to each of the other parties, it being understood that all parties
need not sign the same counterpart.
8.6. MISCELLANEOUS
This Agreement, which includes the Company Disclosure Letter, the FCE
Disclosure Letter and the Exhibits hereto and the Confidentiality Agreement, and
any other documents referred to herein or contemplated hereby: (a) constitutes
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter
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hereof; (b) is not intended to confer upon any other person any rights or
remedies hereunder (except that Section 7.5 is for the benefit of the Company's
directors and officers and is intended to confer rights on such persons); and
(c) shall not be assigned by operation of law or otherwise except as otherwise
specifically provided.
8.7. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the Province of Alberta (regardless of the laws that might otherwise
govern under applicable principles of conflicts of law) as to all matters,
including without limitation validity, construction, effect, performance and
remedies. The Parties attorn to the exclusive jurisdiction of the Alberta Court
of Queen's Bench.
8.8. AMENDMENT AND WAIVERS
Any term or provision of this Agreement may be amended, and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by a writing
signed by the party to be bound thereby which writing expressly refers to this
Agreement and the operation of the provisions of this Section 8.8. The waiver by
a party of any breach hereof or default in the performance hereof will not be
deemed to constitute a waiver of any other default or any succeeding breach or
default. This Agreement may be amended by the parties hereto at any time before
or after approval of the holders of Company Common Shares, or the FCE
stockholders, but, after such approval, no amendment will be made which by
applicable law requires the further approval of the securityholders of either
the Company or FCE without obtaining such further approval.
8.9. EXPENSES
Except as otherwise provided herein, each party will bear its
respective expenses and legal fees incurred with respect to this Agreement and
the transactions contemplated hereby. Notwithstanding the foregoing, the parties
shall share equally the costs of (i) printing and filing the Joint Proxy
Statement, and (ii) any filings or applications with any Governmental Entity
relating to the transactions contemplated by the Plan of Arrangement and this
Agreement.
8.10. FURTHER ASSURANCES
Each of the parties hereto will from time to time execute and deliver
all such further documents and instruments and do all such acts and things as
the other parties may reasonably require to effectively carry out or better
evidence or perfect the terms and provisions of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY OMITTED]
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IN WITNESS WHEREOF, FCE and the Company have caused this Agreement to
be signed by their respective officers thereunder duly authorized, all as of the
date first written above.
FUELCELL ENERGY, INC.
By: _________________________________
GLOBAL THERMOELECTRIC INC.
Per: ________________________________
Per: ________________________________
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APPENDIX
DEFINED TERMS
For the purpose of this Agreement:
"ABCA" shall have the meaning set forth in Section 1.1;
"Acquisition Proposal" shall mean a proposal or offer (other than by
the other party hereto), whether or not subject to a due diligence condition,
whether or not in writing, to acquire in any manner, directly or indirectly,
beneficial ownership (as defined under Rule 13(d) of the Exchange Act) of more
than 20% of the assets of the Company or FCE or any subsidiary thereof or to
acquire in any manner, directly or indirectly, more than 9.9% (and for the
purposes of Section 6.5(c), 20%) of the outstanding voting shares of the Company
or FCE whether by an arrangement, amalgamation, a merger, consolidation or other
business combination, by means of a sale of shares of capital stock, sale of
assets, tender offer or exchange offer or similar transaction involving the
Company or FCE or any subsidiary thereof including without limitation any single
or multi-step transaction or series of related transactions which is structured
to permit such third party to acquire beneficial ownership of more than 20% of
the assets of the Company or FCE or any subsidiary thereof or to acquire in any
manner, directly or indirectly, more than 9.9% (and for the purposes of Section
6.5(c), 20%) of the outstanding voting shares of the Company or FCE (other than
the transactions contemplated by this Agreement);
"Affiliate" shall have the meaning referred to in Rule 144 under the
Securities Act;
"Ancillary Rights" means the interest of a holder of Company Common
Shares who elects or is deemed to have elected to receive Exchangeable Shares as
a beneficiary of the trust created under the Voting and Exchange Trust
Agreement;
"Applicable Environmental Laws" shall have the meaning set forth in
Sections 2.15(c);
"Appropriate Regulatory Approvals" shall mean those sanctions, rulings,
consents, orders, exemptions, permits and other approvals (including the lapse,
without objection, of a prescribed time under a statute or regulation that
states that a transaction may be implemented if a prescribed time lapses
following the giving of notice without an objection being made) of Governmental
Entities, regulatory agencies or self-regulatory organizations;
"Arrangement" shall have the meaning set forth in Section 1.1;
"Business Day" shall mean any day other than a Saturday, Sunday or a
statutory or civic holiday in the United States or Canada;
"Callco" shall mean a corporation to be organized under the laws of
Alberta, Canada;
"C.F.R." shall mean the United States Code of Federal Regulations;
"Closing" shall have the meaning set forth in Section 7.2;
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"Closing Date" shall have the meaning set forth in Section 7.2;
"COBRA" shall have the meaning set forth in Section 3.21;
"Code" shall have the meaning set forth in Section 2.19(d);
"Commissions" shall mean the applicable Canadian provincial securities
commissions or similar regulatory authorities;
"Company Affiliate Agreement" shall mean the agreement in the form of
Exhibit B attached hereto to be executed and delivered to the Company by the
Affiliates of the Company;
"Company Balance Sheet" shall have the meaning set forth in Section
2.8(b);
"Company Comfort Letter" shall have the meaning set forth in Section
4.7(a);
"Company Common Shares" shall have the meaning set forth in Section
2.2;
"Company Disclosure Letter" shall mean the Company letter dated the
date of this Agreement and delivered by the Company to FCE concurrently
herewith;
"Company Documents" shall have the meaning set forth in Section 2.7(a);
"Company Employee Plan" shall have the meaning set forth in Section
2.22(a);
"Company Employees" shall have the meaning set forth in Section 2.21;
"Company Financial Statements" shall have the meaning set forth in
Section 2.8(b);
"Company Incentive Plan" shall have the meaning set forth in Section
2.2;
"Company Intellectual Property Rights" shall mean all Intellectual
Property Rights used or proposed to be used in, or necessary to, the businesses
of the Company and its subsidiaries as currently conducted or as currently
reasonably contemplated by the Company and its subsidiaries, whether owned or
controlled, licenced, or otherwise held by or for the benefit of the Company or
its subsidiaries, including without limitation the Registered Intellectual
Property Rights;
"Company Net Cash" shall mean, with respect to the Company and any of
its subsidiaries and for any reference date, the aggregate amount of cash, cash
equivalents, and short term investments held by the Company and such
subsidiaries;
"Company Net Working Capital" shall mean, with respect to the Company
and any of its subsidiaries and for any reference date: (i) current assets,
including, without limitation, cash, cash equivalents and short term
investments, less (ii) current liabilities, including, without limitation,
warranty reserves;
"Company Options" shall have the meaning set forth in Section 2.2;
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"Company Per Diem Burn Rate" shall have the meaning set forth in
Section 2.31;
"Company Property" shall have the meaning set forth in Section 2.16;
"Company Property Permitted Encumbrances" shall have the meaning set
forth in Section 2.16;
"Company Securities" shall have the meaning set forth in Section 2.2;
"Company Series 2 Preferred Shares" shall have the meaning set forth in
Section 2.2;
"Company Shareholders Meeting" shall mean the special meeting of
holders of Company Common Shares, including any adjournment thereof, to be
called to consider the Arrangement;
"Company Statement of Cash Flows" shall have the meaning set forth in
Section 2.8(b);
"Company Statement of Operations" shall have the meaning set forth in
Section 2.8(b);
"Company Technology" shall mean all Technology used or proposed to be
used in, or necessary to, the businesses of the Company and its subsidiaries as
currently conducted or as currently contemplated by the Company and its
subsidiaries, whether owned or controlled, licenced or otherwise held by or for
the benefit of the Company or its subsidiaries;
"Confidentiality Agreement" shall mean that certain confidentiality
agreement dated as of July 15, 2003, as amended, and entered into by and between
the Company and FCE;
"Contract" shall mean in the case of the Company or FCE, any pending
and/or executory contract, agreement, arrangement or understanding to which the
Company or FCE, as the case may be, or any of its subsidiaries, is a party or by
which the Company or FCE, as the case may be, or any of its subsidiaries, or any
of their respective assets is bound or affected;
"Controlled" shall have the meaning set forth in 16 C.F.R. Section
801.1(b);
"Copyrights" shall mean all copyrights, and all right, title and
interest in all copyrights, copyright registrations and applications for
copyright registration, certificates of copyright and copyrightable subject
matter throughout the world, all right, title and interest in related
applications and registrations throughout the world, and all Moral Rights;
"Court" shall have the meaning set forth in the recitals hereto;
"Dissenters" shall have the meaning set forth in Section 1.3;
"Dissenting Shareholders" shall have the meaning set forth in Section
1.3;
"Effective Date" shall have the meaning set forth in Section 1.1;
"Effective Time" shall have the meaning set forth in Section 1.1;
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"Encumbrance" shall mean any lien, charge, mortgage, security interest,
option, preferential purchase right, lease, easement, right of way, restriction,
execution, encumbrance or other right or interest of any other Person;
"ERISA" shall have the meaning set forth in Section 3.21;
"ERISA Affiliate" shall have the meaning set forth in Section 3.21;
"Exchange Act" shall have the meaning set forth in Section 1.5(a);
"Exchange Ratio" shall have the meaning set forth in Section 1.2(a);
"Exchangeable Shares" shall have the meaning set forth in Section 1.10;
"ExchangeCo" shall mean a corporation to be incorporated by FCE under
the ABCA as a wholly-owned, direct or indirect, subsidiary of FCE;
"FCE Balance Sheet" shall have the meaning set forth in Section 3.8(b);
"FCE Comfort Letter" shall have the meaning set forth in Section
4.7(b);
"FCE Common Stock" shall have the meaning set forth in Section 3.2;
"FCE Disclosure Letter" shall mean the FCE letter dated the date of
this Agreement and delivered by FCE to the Company concurrently herewith;
"FCE Documents" shall have the meaning set forth in Section 3.7(a);
"FCE Employee Plans" shall have the meaning set forth in Section 3.21;
"FCE Financial Statements" shall have the meaning set forth in Section
3.8(b);
"FCE Incentive Plan" shall have the meaning set forth in Section 3.2;
"FCE Options" shall have the meaning set forth in Section 3.2;
"FCE Net Cash" shall mean, with respect to FCE and any of its
subsidiaries and for any reference date, the aggregate amount of cash, cash
equivalents, and short term investments held by the Company and such
subsidiaries;
"FCE Net Working Capital" shall mean, with respect to FCE and any of
its subsidiaries and for any reference date: (i) current assets, including,
without limitation, cash, cash equivalents and short term investments, less (ii)
current liabilities, including, without limitation, warranty reserves;
"FCE Per Diem Burn Rate" shall have the meaning set forth in Section
3.29;
"FCE Property" shall have the meaning set forth in Section 3.16;
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"FCE Property Permitted Encumbrances" shall have the meaning set forth
in Section 3.16;
"FCE Statement of Cash Flows" shall have the meaning set forth in
Section 3.8(b);
"FCE Statement of Operations" shall have the meaning set forth in
Section 3.8(b);
"FCE Stock Price" shall have the meaning set forth in Section 1.2(b);
"FCE Stockholders Meeting" shall have the meaning set forth in Section
1.5(a);
"FCE Technology" shall mean all Technology used or proposed to be used
in, or necessary to, the businesses of FCE and its subsidiaries as currently
conducted or as currently contemplated by FCE and its subsidiaries, whether
owned or controlled, licenced or otherwise held by or for the benefit of FCE or
its subsidiaries;
"Final Order" shall have the meaning set forth in Section 1.1;
"Governmental Entity" shall mean any (a) multinational, federal,
provincial, state, regional, municipal, local or other government, governmental
or public department, central bank, court, tribunal, arbitral body, commission,
board, bureau or agency, domestic or foreign, (b) any subdivision, agent,
commission, board, or authority of any of the foregoing or (c) any
quasi-governmental or private body exercising any regulatory, expropriation or
taxing authority under or for the account of any of the foregoing;
"Hazardous Substance" means any material, substance, waste, pollutant
or contaminant listed, defined, designated or classified as hazardous, toxic,
flammable, explosive, reactive, corrosive, infectious, carcinogenic, mutagenic
or radioactive or otherwise regulated by any Governmental Entity or under any
Applicable Environmental Law, including petroleum or petroleum products
(including crude oil) and any derivative or by-products thereof, natural gas,
synthetic gas and any mixtures thereof, or any substance that is or contains
polychlorinated biphenyls (PCBs), radon gas, urea formaldehyde,
asbestos-containing materials (ACMs) or lead;
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended;
"Indemnified Party" shall have the meaning set forth in Section 7.5(a);
"Intellectual Property Rights" shall mean, collectively, Patents, Trade
Secrets, Copyrights, Trademarks, mask work rights, rights in integrated circuit
topographies, industrial design rights, and all other intellectual property
rights and proprietary rights, whether arising under the laws of the United
States, Canada or any other country or jurisdiction, including (i) all rights
received under any licence or other arrangement with respect to the foregoing,
(ii) all rights or causes of action for infringement or misappropriation (past,
present or future) of any of the foregoing and (iii) all rights to apply for or
register any of the foregoing rights;
"Interim Order" shall have the meaning set forth in Section 1.1;
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"IRS" shall have the meaning set forth in Section 2.19(b);
"Joint Proxy Statement" shall have the meaning set forth in Section
1.5(a);
"Laws" shall mean all statutes, regulations, statutory rules,
principles of law, orders, published policies and guidelines, and terms and
conditions of any grant of approval, permission, authority or licence of any
court, Governmental Entity, statutory body (including The Toronto Stock Exchange
or the Nasdaq National Market) or self-regulatory authority, and the term
"applicable" with respect to such Laws and in the context that refers to one or
more Persons, means that such Laws apply to such Person or Persons or its or
their business, undertaking, property or securities and emanate from a Person
having jurisdiction over the Person or Persons or its or their business,
undertaking, property or securities;
"Material Adverse Change" shall have the meaning set forth in Section
1.7(b);
"Material Adverse Effect" shall have the meaning set forth in Section
1.7(a);
"Material Contract" shall mean, with respect to FCE or the Company:
(a) any contract not made in the ordinary course of business which
is material to such person or its subsidiaries, including any such contract to
which such person or subsidiary has succeeded by assumption or assignment or in
which such person or subsidiary has a beneficial interest;
(b) any contract to which such person's directors, officers,
promoters, voting trustees, or security holders are parties;
(c) any contract upon which the business of such person is
substantially dependent, as in the case of continuing contracts to sell the
major part of such person's products or services or to purchase the major part
of such person's requirements of goods, services or raw materials or any
franchise or licence or other agreement to use a patent, formula, trade secret,
process or trade name upon which such person's business depends to a material
extent;
(d) any contract calling for the acquisition or sale of any
property, plant or equipment for a consideration exceeding 15 percent of such
fixed assets of the person on a consolidated basis;
(e) any material lease under which a part of the party's property
is held by such person; or
(f) any management contract or any compensatory plan, contract or
arrangement, including but not limited to plans relating to options, warrants or
rights, pension, retirement or deferred compensation or bonus, incentive or
profit sharing in which any director or any of the executive officers of the
person, participates, except for any compensatory plan, contract or arrangement
which pursuant to its terms is available to employees, officers or directors
generally and which in operation provides for the same method of allocation of
benefits between management and non-management participants;
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"Measurement Period" shall mean the twenty consecutive trading days
ending on and including the third trading day next preceding the Company
Shareholders Meeting;
"Moral Rights" shall mean any right to claim authorship of a work, any
right to object to any distortion or other modification of a work, and any
similar right, existing under the Law of any country or under any treaty;
"Nasdaq" shall have the meaning set forth in Section 3.4(a);
"Patents" shall mean all patent rights and all right, title and
interest in and to all letters patent or equivalent rights and applications,
including any reissue, extension, division, continuation, or continuation in
part applications throughout the world and any patents issuing with respect to
any such applications;
"Person" or "Persons" shall mean any individual, firm, partnership,
joint venture, venture capital fund, association, trust, trustee, executor,
administrator, legal personal representative, estate, group, body corporate,
corporation, unincorporated association or organization, Governmental Entity,
syndicate or other entity, whether or not having legal status;
"Plan of Arrangement" shall have the meaning set forth in Section 1.1;
"Quantum Combination" shall have the meaning set forth in the first
Recital hereof;
"Quantum Combination Agreement" shall have the meaning set forth in the
first Recital hereof;
"Registered Intellectual Property Rights" means all (i) Patents; (ii)
registered Trademarks, applications to register Trademarks, including
intent-to-use applications or proposed use applications, or other registrations
or applications related to Trademarks; (iii) Copyright registrations and
applications to register Copyrights; (iv) mask work or integrated circuit
topography registrations and applications to register mask works or integrated
circuit topographies; and (v) any other Intellectual Property Rights that are
the subject of an application certificate, filing, registration or other
document issued by, filed with, or recorded by, any state, government or other
public legal authority at any time;
"Registrar" shall mean the Registrar appointed pursuant to Section 263
of the ABCA;
"Release" shall mean any releasing, spilling, leaking, pumping,
pouring, placing, emitting, emptying, discharging, injecting, escaping,
leaching, disposing, or dumping into the environment, whether intentional or
unintentional, negligent or non-negligent, sudden or non-sudden, accidental or
non-accidental;
"Representatives" shall have the meaning set forth in Section 4.4;
"SEC" shall have the meaning set forth in Section 1.1;
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"SEC Filings" shall mean reports and information furnished or filed
with the SEC under the Exchange Act and the rules and regulations promulgated by
the SEC thereunder, as may be required in connection with this Agreement and the
transactions contemplated hereby;
"Securities Act" shall have the meaning set forth in Section 1.5(a);
"SEDAR" shall mean System for Electronic Document Analysis and
Retrieval;
"Special Voting Share" shall mean the share of special voting stock of
FCE having substantially the rights, privileges, restrictions and conditions
described in the Voting and Exchange Trust Agreement;
"Superior Proposal" shall have the meaning set forth in Section 4.4;
"Support Agreement" shall mean an agreement to be made between FCE,
ExchangeCo and Callco, substantially in the form and content of Exhibit C, with
such changes as the parties hereto may agree;
"Tax" and "Taxes" shall mean, with respect to any entity, (A) all
income taxes (including any tax on or based upon net income, gross income,
income as specially defined, earnings, profits or selected items of income,
earnings or profits) and all capital taxes, gross receipts taxes, environmental
taxes, sales taxes, use taxes, Ad Valorem taxes, value added taxes, transfer
taxes, franchise taxes, licence taxes, withholding taxes, payroll taxes,
employment taxes, Canada or Quebec Pension Plan premiums, excise, severance,
social security premiums, workers' compensation premiums, unemployment insurance
or compensation premiums, stamp taxes, occupation taxes, premium taxes, property
taxes, windfall profits taxes, alternative or add-on minimum taxes, goods and
services tax, customs duties or other taxes, fees, imports, assessments or
charges of any kind whatsoever, together with any interest and any penalties or
additional amounts imposed by any taxing authority (domestic or foreign) on such
entity, and any interest, penalties, additional taxes and additions to tax
imposed with respect to the foregoing, and (B) any liability for the payment of
any amount of the type described in the immediately preceding clause (A) as a
result of being a "transferee" (within the meaning of section 6901 of the Code
or any other applicable Laws) of another entity or a member of an affiliated or
combined group;
"Tax Act" shall mean the Income Tax Act (Canada);
"Tax Returns" shall mean all returns, declarations, reports,
information returns and statements required to be filed with any taxing
authority relating to Taxes (including any attached schedules), including,
without limitation, any information return, claim for refund, amended return and
declaration of estimated Tax;
"Technology" shall mean any algorithms, computer software (in source
code and object code form), documentation, data and data bases, inventions and
discoveries (whether or not patented or patentable), ideas, concepts,
techniques, know-how, processes, methods, applications, know-how, content,
technical information, engineering, production and other designs, drawings,
schematics, specifications, formulas and all other technology or information
existing anywhere in the world;
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"Termination Date" shall have the meaning set forth in Section 6.1(d);
"Third Party Intellectual Property Rights" shall mean, as to any
Person, the Intellectual Property Rights and Technology of other Persons that
are used in or necessary to the business of such Person;
"Trade Secrets" shall mean all right, title and interest in all trade
secrets and trade secret rights arising under any Law, including common law,
state law, federal law or laws of foreign countries;
"Trademarks" shall mean all trademarks, service marks, trade names,
trade designations, trade dress and domain names and associated goodwill and all
right, title and interest in or to the foregoing arising under common law, state
law, federal law or laws of foreign countries, registrations and applications
for registrations thereof, and all right, title and interest in related
applications and registrations throughout the world;
"Trustee" shall mean the trustee to be chosen by FCE, acting
reasonably, to act as trustee under the Voting and Exchange Trust Agreement,
being a corporation organized and existing under the laws of Canada and
authorized to carry on the business of a trust company in all the provinces of
Canada, and any successor trustee appointed under the Voting and Exchange Trust
Agreement.
"TSX" shall mean the Toronto Stock Exchange;
"Ultimate Parent Entity" shall have the meaning set forth in 16
C.F.R. Section 801.1(a)(3); and
"Voting and Exchange Trust Agreement" shall mean an agreement to be
made between FCE, ExchangeCo and the Trustee in connection with the Plan of
Arrangement substantially in the form and content of Exhibit D, with such
changes thereto as the parties hereto may agree.
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EXHIBIT A - PLAN OF ARRANGEMENT
Attached as Annex D to Joint Proxy Statement.
B-82
EXHIBIT B
AFFILIATE AGREEMENT
THIS AFFILIATE AGREEMENT (this "Agreement") is made and entered into as
of April ___, 2003 by and between FuelCell Energy, Inc., a Delaware corporation
("FCE"), and the undersigned stockholder (the "Affiliate"), who may be deemed an
affiliate of Global Thermoelectric Inc., an Alberta corporation (the "Company"),
under applicable law. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed thereto in the Combination Agreement (as
defined below).
RECITALS:
WHEREAS, pursuant to that certain Combination Agreement dated as of
August ___, 2003 (the "Combination Agreement") by and between FCE and the
Company, FCE will acquire all of the outstanding common shares of the Company;
WHEREAS, the Affiliate has been advised that the Affiliate may be
deemed to be an "affiliate" of the Company, as the term "affiliate" is used for
purposes of Rule 144 and Rule 145 of the rules and regulations of the Securities
and Exchange Commission (the "SEC"); and
WHEREAS, the execution and delivery of this Agreement by the Affiliate
is a material inducement to, and in consideration of, FCE's willingness to enter
into the Combination Agreement.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements contained in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. Acknowledgments by Affiliate. The Affiliate understands and
hereby acknowledges that the representations, warranties and covenants by the
Affiliate set forth herein may be relied upon by FCE, the Company and their
respective affiliates and legal counsel. The Affiliate has carefully read this
Agreement and the Combination Agreement and has discussed the requirements of
this Agreement with the Affiliate's professional advisors, who are qualified to
advise the Affiliate with regard to such matters.
2. Compliance with Rule 145 and the Securities Act.
(a) The Affiliate hereby represents and warrants to FCE
that the Affiliate is the sole beneficial owner of the number of common shares
of the Company ("Company Common Shares") set forth under the Affiliate's name on
the signature page hereto (the "Shares").
(b) The Affiliate understands and hereby acknowledges
that the Affiliate has been advised that (A) the issuance of shares of common
stock of FCE and ("FCE Common Stock") in connection with the Arrangement is
expected to be effected pursuant to Section
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3(a)(10) of the Securities Act of 1933, as amended (the "Securities Act"), and
the resale of such shares will be subject to restrictions set forth in Rule 145
under the Securities Act; and (B) the Affiliate may be deemed to be an
"affiliate" of the Company as the term "affiliate" is used for purposes of Rule
144 and Rule 145 of the rules and regulations of the Commission. Accordingly,
the Affiliate hereby agrees not to sell, transfer or otherwise dispose of any
FCE Common Stock issued to the Affiliate in the Arrangement unless (i) such
sale, transfer or other disposition is made in conformity with the requirements
of Rule 145(d) promulgated under the Securities Act; (ii) such sale, transfer or
other disposition is made pursuant to a registration statement declared or
ordered effective under the Securities Act, or an appropriate exemption from the
registration and prospectus delivery requirements of the Securities Act; (iii)
the Affiliate delivers to FCE a written opinion of legal counsel, reasonably
acceptable to FCE in form and substance, that such sale, transfer or other
disposition is otherwise exempt from the registration and prospectus delivery
requirements of the Securities Act; or (iv) an authorized representative of the
Commission shall have rendered written advice to the Affiliate to the effect
that the Commission would take no action, or that the staff of the Commission
would not recommend that the Commission take any action, with respect to the
proposed disposition if consummated.
(c) The Affiliate understands and hereby acknowledges
that FCE will give stop transfer instructions to its transfer agent with respect
to any shares of FCE Common Stock issued to the Affiliate pursuant to the
Arrangement, and there shall be placed on the certificates representing such
shares of FCE Common Stock a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 APPLIES AND MAY ONLY BE TRANSFERRED IN
CONFORMITY WITH RULE 145(d) OR PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IN
ACCORDANCE WITH A WRITTEN OPINION OF COUNSEL, REASONABLY ACCEPTABLE TO
THE ISSUER IN FORM AND SUBSTANCE, THAT SUCH TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED."
The legend described above shall be removed (by delivery of a substitute
certificate without such legend), and FCE shall so instruct its transfer agent,
if the Affiliate delivers to FCE (i) satisfactory written evidence that the
shares of FCE Common Stock have been sold in compliance with Rule 145 (in which
case, the substitute certificate shall be issued in the name of the transferee);
or (ii) an opinion of counsel, in form and substance reasonably satisfactory to
FCE, to the effect that public sale of such shares by the holder thereof is no
longer subject to Rule 145.
(d) The Affiliate understands and hereby acknowledges
that FCE is under no obligation to register the sale, transfer or disposition of
the shares of FCE Common Stock under the Securities Act.
(e) The Affiliate understands and hereby acknowledges
that unless a transfer by the Affiliate is made pursuant to an effective
registration statement under the Securities Act or
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in conformity with the provisons of Rule 145, FCE reserves the right to place a
legend in substantially the form that follows on certificates issued to any
transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND WERE ACQUIRED FROM A PERSON WHO RECEIVED SUCH SHARES IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT
APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE HOLDER NOT WITH A VIEW
TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN
THE MEANING OF THE SECURITIES ACT AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR IN ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT."
3. Application to Subsequently Acquired Shares. The Affiliate
hereby agrees that all Company Common Shares and all shares of FCE Common Stock
acquired by the Affiliate subsequent to the date hereof (including shares of FCE
Common Stock acquired pursuant to the Arrangement, upon exercise or conversion
of options, warrants or other convertible securities, and/or upon redemption,
retraction, or exchange of the Exchangeable Shares) shall be subject to the
terms and conditions set forth in this Agreement as if held by the Affiliate as
of the date hereof.
4. Miscellaneous.
(a) Waiver. No waiver by any party hereto of any
condition or any breach of any term or provision set forth in this Agreement
shall be effective unless in writing and signed by each party hereto. The waiver
of a condition or any breach of any term or provision of this Agreement shall
not operate as or be construed to be a waiver of any other previous or
subsequent breach of any term or provision of this Agreement.
(b) Severability. If any provision of this Agreement or
the application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder hereof, and the application of
such provision to such person or circumstance in any other jurisdiction or to
other persons or circumstances in any jurisdiction, shall not be affected
thereby, and to this end the provisions of this Agreement shall be severable.
(c) Governing Law. This Agreement shall be governed by
and construed, interpreted and enforced in accordance with the laws of the
Province of Alberta without giving effect to any choice or conflict of law
provision, rule or principle (whether of the Province of Alberta or any other
jurisdiction).
(d) Entire Agreement. This Agreement, the Combination
Agreement and the other agreements referred to in the Combination Agreement set
forth the entire agreement and understanding of FCE and the Affiliate with
respect to the subject matter hereof and thereof, and
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supersede all prior discussions, agreements and understandings between FCE and
the Affiliate with respect to the subject matter hereof and thereof.
(e) Notices. All notices and other communications
pursuant to this Agreement shall be in writing and shall be sent to the parties
hereto at the address set forth below, or at such other address as such party
shall have furnished to the other party in accordance with this section:
If to FCE: FuelCell Energy, Inc.
3 Great Pasture Road
Danbury, Connecticut 06813
Attention: Chief Executive Officer
Facsimile No. 203-825-6100
with required copies to:
Robinson & Cole LLP
Financial Centre
695 East Main Street
Stamford, Connecticut 06901
Attention: Richard Krantz
Facsimile No. 203-462-7599
If to the Affiliate: To the address for notice set forth
on the signature page hereof.
(f) Survival. The representations, warranties, covenants
and other terms and provisions set forth in this Agreement shall survive the
consummation of the Arrangement.
(g) Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed an original, and all of
which together shall constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY OMITTED.]
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed as of the date first written above.
FUELCELL ENERGY, INC. AFFILIATE
By: ______________________________ By (Signature): _________________________
Name: ____________________________ Print Name: _____________________________
Title: ___________________________ Affiliate's Address for Notice:
_____________________________
_____________________________
_____________________________
Shares beneficially owned:
____________ shares of Company Common
Stock currently held
___________ shares of Company Common
Stock issuable upon the exercise of
outstanding options, warrants and
other rights
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EXHIBIT C
SUPPORT AGREEMENT
SUPPORT AGREEMENT ("AGREEMENT") made as of the - day of -, 2003.
BETWEEN:
FUELCELL ENERGY, INC., a corporation existing
under the laws of the State of Delaware
(hereinafter referred to as "FCE")
- and -
- ALBERTA LTD., a company organized under the
laws of Alberta
(hereinafter referred to as "EXCHANGECO"),
- and -
- ALBERTA LTD., a company organized under the
laws of Alberta
(hereinafter referred to as "CALLCO")
WHEREAS, in connection with a combination agreement (the "COMBINATION
AGREEMENT") made as of -, 2003 between FCE and Global Thermoelectric Inc., a
corporation existing under the laws of Alberta ("GLOBAL"), ExchangeCo is to
issue exchangeable shares (the "Exchangeable Shares") to certain holders of
common shares in the capital of Global pursuant to the plan of arrangement (the
"ARRANGEMENT") contemplated by the Combination Agreement; and
WHEREAS, pursuant to the Combination Agreement, FCE has agreed to
execute a support agreement with ExchangeCo and Callco substantially in the form
of this Agreement on the Effective Date (as defined in the Combination
Agreement);
NOW, THEREFORE, in consideration of the respective covenants and
agreements provided in this Agreement and for other good and valuable
consideration (the receipt and sufficiency of which are hereby acknowledged),
the parties hereto covenant and agree as follows:
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ARTICLE 1
INTERPRETATION
SECTION 1.1 DEFINED TERMS.
Each term denoted herein by initial capital letters and not otherwise
defined herein shall have the meaning ascribed thereto in the rights,
privileges, restrictions and conditions (collectively, the "EXCHANGEABLE SHARE
PROVISIONS") attaching to the Exchangeable Shares attached as Exhibit E to the
Combination Agreement unless the context requires otherwise.
SECTION 1.2 INTERPRETATION NOT AFFECTED BY HEADINGS.
The division of this agreement into articles, sections and other
portions and the insertion of headings are for convenience of reference only and
shall not affect the construction or interpretation hereof. Unless otherwise
indicated, all references to an "Article" or "Section" followed by a number
refer to the specified Article or Section of this Agreement. The terms "this
Agreement," "hereof," "herein" and "hereunder" and similar expressions refer to
this agreement and not to any particular Article, Section or other portion
hereof.
SECTION 1.3 RULES OF CONSTRUCTION.
Unless otherwise specifically indicated or the context otherwise
requires, (a) all references to "dollars" or "$" mean United States dollars, (b)
words importing the singular shall include the plural and vice versa and words
importing any gender shall include all genders, and (c) "include," "includes"
and "including" shall be deemed to be followed by the words "without
limitation."
SECTION 1.4 DATE FOR ANY ACTION.
If the event that any date on which any action is required to be taken
hereunder by any of the parties hereto is not a Business Day, such action shall
be required to be taken on the next succeeding day that is a Business Day.
ARTICLE 2
COVENANTS OF FCE AND EXCHANGECO
SECTION 2.1 COVENANTS REGARDING EXCHANGEABLE SHARES.
So long as any Exchangeable Shares not owned by FCE or its Affiliates
are outstanding, FCE will:
(a) not declare or pay any dividend on FCE Common Stock unless (i)
ExchangeCo shall (w) on the same day declare or pay, as the
case may be, an equivalent dividend (as provided for in the
Exchangeable Share Provisions) on the Exchangeable Shares (an
"EQUIVALENT DIVIDEND") and (x) ExchangeCo shall have
sufficient money or other assets or authorized but unissued
securities
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available to enable the due declaration and the due and
punctual payment, in accordance with applicable law, of any
such Equivalent Dividend, or (ii) ExchangeCo shall (y)
subdivide the Exchangeable Shares in lieu of a stock dividend
thereon (as provided for in the Exchangeable Share Provisions)
(an "EQUIVALENT STOCK SUBDIVISION") and (z) have sufficient
authorized but unissued securities available to enable the
Equivalent Stock Subdivision;
(b) advise ExchangeCo sufficiently in advance of the declaration
by FCE of any dividend on FCE Common Stock and take all such
other actions as are necessary, in cooperation with
ExchangeCo, to ensure that (i) the respective declaration
date, record date and payment date for an Equivalent Dividend
on the Exchangeable Shares shall be the same as the
declaration date, record date and payment date for the
corresponding dividend on the FCE Common Stock, or (ii) the
record date and effective date for an Equivalent Stock
Subdivision shall be the same as the record date and payment
date for the stock dividend on the FCE Common Stock;
(c) ensure that the record date for any dividend declared on FCE
Common Stock is not less than 10 Business Days after the
declaration date of such dividend;
(d) take all such actions and do all such things as are necessary
or desirable to enable and permit ExchangeCo, in accordance
with applicable law, to pay and otherwise perform its
obligations with respect to the satisfaction of the
Liquidation Amount, the Retraction Price or the Redemption
Price in respect of each issued and outstanding Exchangeable
Share (other than Exchangeable Shares owned by FCE or its
Affiliates) upon the liquidation, dissolution or winding-up of
ExchangeCo or any other distribution of the assets of
ExchangeCo among its shareholders for the purpose of
winding-up its affairs, the delivery of a Retraction Request
by a holder of Exchangeable Shares or a redemption of
Exchangeable Shares by ExchangeCo, as the case may be,
including all such actions and all such things as are
necessary or desirable to enable and permit ExchangeCo to
cause to be delivered FCE Common Stock to the holders of
Exchangeable Shares in accordance with the provisions of
Article 5, 6 or 7, as the case may be, of the Exchangeable
Share Provisions;
(e) take all such actions and do all such things as are necessary
or desirable to enable and permit Callco, in accordance with
applicable law, to perform its obligations arising upon the
exercise by it of the Liquidation Call Right, the Retraction
Call Right or the Redemption Call Right, including all such
actions and all such things as are necessary or desirable to
enable and permit Callco to cause to be delivered FCE Common
Stock to the holders of Exchangeable Shares in accordance with
the provisions of the Liquidation Call Right, the Retraction
Call Right or the Redemption Call Right, as the case may be;
(f) not exercise its vote as a direct or indirect shareholder to
initiate the voluntary liquidation, dissolution or winding-up
of ExchangeCo nor take any action or omit to take any action
that is designed to result in the liquidation, dissolution or
winding-up of ExchangeCo; and
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(g) recognize the right of a holder of Exchangeable Shares to
exercise its Exchange Put Right in the manner provided for in
Article 9 of the Exchangeable Share Provisions.
SECTION 2.2 SEGREGATION OF FUNDS.
FCE will cause ExchangeCo to deposit a sufficient amount of funds in a
separate account of ExchangeCo and segregate a sufficient amount of such other
assets and property as is necessary to enable ExchangeCo to pay dividends when
due and to pay or otherwise satisfy its respective obligations under Article 5,
6 or 7 of the Exchangeable Share Provisions, as applicable.
SECTION 2.3 RESERVATION OF FCE COMMON STOCK.
FCE hereby represents, warrants and covenants that FCE has either
issued to the Trustee or reserved for issuance and will, at all times while any
Exchangeable Shares (other than Exchangeable Shares held by FCE or its
affiliates) are outstanding, keep available, free from preemptive and other
rights, out of its authorized and unissued capital stock such number of shares
of FCE Common Stock (or other shares or securities into which FCE Common Stock
may be reclassified or changed as contemplated by Section 2.7 hereof) (a) as is
equal to the sum of (i) the number of Exchangeable Shares issued and outstanding
from time to time and (ii) the number of Exchangeable Shares issuable upon the
exercise of all rights to acquire Exchangeable Shares outstanding from time to
time and (b) as are now and may hereafter be required to enable and permit
ExchangeCo to meet its obligations under the Voting and Exchange Trust Agreement
and under any other security or commitment pursuant to the Arrangement with
respect to which FCE may now or hereafter be required to issue FCE Common Stock,
to enable and permit ExchangeCo to meet its obligations hereunder, under the
Voting and Exchange Trust Agreement and under the Exchangeable Share Provisions.
SECTION 2.4 NOTIFICATION OF CERTAIN EVENTS.
In order to assist FCE in compliance with its obligations hereunder and
to permit FCE to exercise the Liquidation Call Right, the Retraction Call Right
and the Redemption Call Right, ExchangeCo will notify FCE and Callco of each of
the following events at the times set forth below:
(a) in the event of any determination by the Board of Directors of
ExchangeCo to institute voluntary liquidation, dissolution or
winding-up proceedings with respect to ExchangeCo or to effect
any other distribution of the assets of ExchangeCo among its
shareholders for the purpose of winding up its affairs, at
least 60 days prior to the proposed effective date of such
liquidation, dissolution, winding-up or other distribution;
(b) promptly, upon the earlier of receipt by ExchangeCo of notice
of and ExchangeCo otherwise becoming aware of any threatened
or instituted claim, suit, petition or other proceeding with
respect to the involuntary liquidation, dissolution or
winding-up of ExchangeCo or to effect any other distribution
of the
B-91
assets of ExchangeCo among its shareholders for the purpose of
winding up its affairs;
(c) promptly, upon receipt by ExchangeCo of a Retraction Request;
(d) promptly following the date on which notice of redemption is
given to holders of Exchangeable Shares, upon the
determination of a Redemption Date in accordance with the
Exchangeable Share Provisions; and
(e) promptly upon the issuance by ExchangeCo of any Exchangeable
Shares or rights to acquire Exchangeable Shares (other than
the issuance of Exchangeable Shares and rights to acquire
Exchangeable Shares in exchange for outstanding common shares
of Global pursuant to the Arrangement).
SECTION 2.5 DELIVERY OF FCE COMMON STOCK TO EXCHANGECO.
In furtherance of its obligations hereunder, upon notice from
ExchangeCo or Callco of any event that requires ExchangeCo or Callco to cause to
be delivered FCE Common Stock to any holder of Exchangeable Shares, FCE shall
forthwith issue and deliver the requisite number of shares of FCE Common Stock
to be received by, and issued to or to the order of, the former holder of the
surrendered Exchangeable Shares, as ExchangeCo or Callco shall direct. All such
shares of FCE Common Stock shall be duly authorized, validly issued and fully
paid and non-assessable and shall be free and clear of any lien, claim or
encumbrance.
SECTION 2.6 QUALIFICATION OF FCE COMMON STOCK.
FCE covenants that if any FCE Common Stock (or other shares or
securities into which FCE Common Stock may be reclassified or changed as
contemplated by Section 2.7 hereof) to be issued and delivered hereunder
(including for greater certainty, pursuant to the Exchangeable Share Provisions,
or pursuant to the Exchange Put Right, the Exchange Right or the Automatic
Exchange Rights (all as defined in the Voting and Exchange Trust Agreement))
require registration or qualification with, or approval of, or the filing of any
document, including any prospectus or similar document, the taking of any
proceeding with, or the obtaining of any order, ruling or consent from, any
governmental or regulatory authority under any Canadian or United States
federal, provincial, territorial or state securities or other law or regulation
or pursuant to the rules and regulations of any securities or other regulatory
authority, or the fulfillment of any other United States or Canadian legal
requirement (collectively, the "APPLICABLE LAWS") before such shares (or other
shares or securities into which FCE Common Stock may be reclassified or changed
as contemplated by Section 2.7 hereof) may be issued and delivered by FCE at the
direction of ExchangeCo or Callco, if applicable, to the holder of surrendered
Exchangeable Shares or in order that such shares (or other shares or securities
into which FCE Common Stock may be reclassified or changed as contemplated by
Section 2.7 hereof) may be freely traded thereafter (other than any restrictions
of general application on transfer by reason of a holder being a "control
person" of FCE for purposes of Canadian provincial securities law or an
"affiliate" of FCE for purposes of United States federal or state securities
law), FCE will in good faith expeditiously take all such actions and do all such
things as are necessary or desirable and within its power to cause such FCE
Common Stock (or other shares or securities into which FCE
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Common Stock may be reclassified or changed as contemplated by Section 2.7
hereof) to be and remain duly registered, qualified or approved under United
States and/or Canadian law, as the case may be. FCE represents and warrants that
it has in good faith taken all actions and done all things as are necessary
under Applicable Laws as they exist on the date hereof to cause the shares of
FCE Common Stock (or other shares or securities into which FCE Common Stock may
be reclassified or changed) to be issued and delivered hereunder (including, for
greater certainty, pursuant to the Exchangeable Share Provisions, or pursuant to
the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights) to
be freely tradeable thereafter (other than restrictions on transfer by reason of
a holder being a "control person" of FCE for the purposes of Canadian federal
and provincial securities law or an "affiliate" of FCE for purposes of United
States federal or state securities law). FCE will in good faith expeditiously
take all such actions and do all such things as are necessary or desirable and
within its power to cause all FCE Common Stock (or other shares or securities
into which FCE Common Stock may be reclassified or changed as contemplated by
Section 2.7 hereof) to be delivered hereunder (including, for greater certainty,
pursuant to the Exchangeable Share Provisions, or pursuant to the Exchange Put
Right, the Exchange Right or the Automatic Exchange Rights) to be listed, quoted
or posted for trading on all stock exchanges and quotation systems on which
outstanding FCE Common Stock (or other shares or securities into which FCE
Common Stock may be reclassified or changed as contemplated by Section 2.7
hereof) are listed and are quoted or posted for trading at such time.
SECTION 2.7 ECONOMIC EQUIVALENCE.
So long as any Exchangeable Shares not owned by FCE or its Affiliates
are outstanding:
(a) FCE will not, without prior approval of ExchangeCo and the
prior approval of the holders of Exchangeable Shares given in
accordance with Section 11.2 of the Exchangeable Share
Provisions:
(i) issue or distribute FCE Common Stock (or securities
exchangeable for or convertible into or carrying
rights to acquire FCE Common Stock) to the holders of
all or substantially all of the then outstanding
shares of FCE Common Stock by way of stock dividend
or other distribution, other than an issue of FCE
Common Stock (or securities exchangeable for or
convertible into or carrying rights to acquire FCE
Common Stock) to holders of FCE Common Stock who (A)
exercise an option to receive dividends in FCE Common
Stock (or securities exchangeable for or convertible
into or carrying rights to acquire FCE Common Stock)
in lieu of receiving cash dividends, or (B) pursuant
to any dividend reinvestment plan or scrip dividend;
or
(ii) issue or distribute rights, options or warrants to
the holders of all or substantially all of the then
outstanding shares of FCE Common Stock entitling them
to subscribe for or to purchase FCE Common Stock (or
securities exchangeable for or convertible into or
carrying rights to acquire FCE Common Stock); or
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(iii) issue or distribute to the holders of all or
substantially all of the then shares of outstanding
FCE Common Stock (A) shares or securities of FCE of
any class other than FCE Common Stock (other than
shares convertible into or exchangeable for or
carrying rights to acquire FCE Common Stock), (B)
rights, options or warrants other than those referred
to in Section 2.7(a)(ii) above, (C) evidences of
indebtedness of FCE or (D) assets of FCE,
unless the economic equivalent on a per share basis of such rights, options,
warrants, securities, shares, evidences of indebtedness or other assets is
issued or distributed simultaneously to holders of the Exchangeable Shares.
(b) FCE will not without the prior approval of ExchangeCo and the
prior approval of the holders of the Exchangeable Shares given
in accordance with Section 11.2 of the Exchangeable Share
Provisions:
(i) subdivide, redivide or change the then outstanding
shares of FCE Common Stock into a greater number of
shares of FCE Common Stock; or
(ii) reduce, combine, consolidate or change the then
outstanding shares of FCE Common Stock into a lesser
number of shares of FCE Common Stock; or
(iii) reclassify or otherwise change FCE Common Stock or
effect an amalgamation, merger, reorganization or
other transaction involving or affecting the shares
of FCE Common Stock,
unless the same or an economically equivalent change is simultaneously made to,
or in the rights of the holders of, the Exchangeable Shares.
(c) FCE will ensure that the record date for any event referred to
in Section 2.7(a) or Section 2.7(b) above, or (if no record
date is applicable for such event) the effective date for any
such event, is not less than five Business Days after the date
on which such event is declared or announced by FCE (with
contemporaneous notification thereof by FCE to ExchangeCo).
(d) The Board of Directors of ExchangeCo shall determine, in good
faith and in its sole discretion, economic equivalence for the
purposes of any event referred to in Section 2.7(a) or Section
2.7(b) above and each such determination shall be conclusive
and binding on FCE. In making each such determination, the
following factors shall, without excluding other factors
determined by the Board of Directors of ExchangeCo to be
relevant, be considered by the Board of Directors of
ExchangeCo:
(i) in the case of any stock dividend or other
distribution payable in FCE Common Stock, the number
of such shares issued in proportion to the number of
shares of FCE Common Stock previously outstanding;
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(ii) in the case of the issuance or distribution of any
rights, options or warrants to subscribe for or
purchase shares of FCE Common Stock (or securities
exchangeable for or convertible into or carrying
rights to acquire FCE Common Stock), the relationship
between the exercise price of each such right, option
or warrant and the Current Market Price;
(iii) in the case of the issuance or distribution of any
other form of property (including any shares or
securities of FCE of any class other than FCE Common
Stock, any rights, options or warrants other than
those referred to in Section 2.7(d)(ii) above, any
evidences of indebtedness of FCE or any assets of
FCE), the relationship between the fair market value
(as determined by the Board of Directors of
ExchangeCo in the manner above contemplated) of such
property to be issued or distributed with respect to
each outstanding share of FCE Common Share and the
Current Market Price;
(iv) in the case of any subdivision, redivision or change
of the then outstanding shares of FCE Common Stock
into a greater number of shares of FCE Common Stock
or the reduction, combination, consolidation or
change of the then outstanding shares of FCE Common
Stock into a lesser number of shares of FCE Common
Stock or any amalgamation, merger, reorganization or
other transaction affecting FCE Common Stock, the
effect thereof upon the then outstanding shares of
FCE Common Stock; and
(v) in all such cases, the general taxation consequences
of the relevant event to holders of Exchangeable
Shares to the extent that such consequences may
differ from the taxation consequences to holders of
shares of FCE Common Stock as a result of differences
between taxation laws of Canada and the United States
(except for any differing consequences arising as a
result of differing marginal taxation rates and
without regard to the individual circumstances of
holders of Exchangeable Shares).
(e) ExchangeCo agrees that, to the extent required, upon due
notice from FCE, ExchangeCo will take or cause to be taken
such steps as may be necessary for the purposes of ensuring
that appropriate dividends are paid or other distributions are
made by ExchangeCo, or subdivisions, redivisions or changes
are made to the Exchangeable Shares, in order to implement the
required economic equivalent with respect to the FCE Common
Stock and Exchangeable Shares as provided for in this Section
2.7.
SECTION 2.8 TENDER OFFERS.
In the event that a tender offer, share exchange offer, issuer bid,
take-over bid or similar transaction with respect to FCE Common Stock (an
"OFFER") is proposed by FCE or is proposed to FCE or its shareholders and is
recommended by the Board of Directors of FCE, or is otherwise effected or to be
effected with the consent or approval of the Board of Directors of FCE, and the
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Exchangeable Shares are not redeemed by ExchangeCo or purchased by Callco
pursuant to the Redemption Call Right, FCE shall in good faith take all such
actions and do all such things as are necessary or desirable and in its power to
enable and permit holders of Exchangeable Shares (other than FCE and its
Affiliates) to participate in such Offer to the same extent and on an
economically equivalent basis as the holders of FCE Common Stock, without
discrimination. Without limiting the generality of the foregoing, FCE will use
its good faith efforts expeditiously to (and in the case of a transaction
proposed by FCE or where it is a participant in the negotiation thereof it will)
ensure that holders of Exchangeable Shares may participate in each such Offer
without being required to retract Exchangeable Shares as against ExchangeCo (or,
if so required, to ensure that any such retraction, shall be effective only
upon, and shall be conditional upon, the closing of such Offer and only to the
extent necessary to tender or deposit to the Offer). Nothing herein shall affect
the rights of ExchangeCo to redeem (or Callco to purchase pursuant to the
Redemption Call Right) Exchangeable Shares, as applicable, in the event of a FCE
Control Transaction.
SECTION 2.9 OWNERSHIP OF OUTSTANDING SHARES.
Without the prior approval of ExchangeCo and the prior approval of the
holders of the Exchangeable Shares given in accordance with Section 10.2 of the
Exchangeable Share Provisions, FCE covenants and agrees in favour of ExchangeCo
that, as long as any outstanding Exchangeable Shares are owned by any Person
other than FCE or any of its Affiliates, FCE will be and remain the direct or
indirect beneficial owner of all issued and outstanding voting shares in the
capital of ExchangeCo and Callco. Notwithstanding the foregoing, FCE shall not
be in violation of this section if any person or group of persons acting jointly
or in concert acquires all or substantially all of the assets of FCE or the FCE
Common Stock pursuant to any merger of FCE pursuant to which FCE was not the
surviving corporation.
SECTION 2.10 FCE AND AFFILIATES NOT TO VOTE EXCHANGEABLE SHARES.
FCE covenants and agrees that it will appoint and cause to be appointed
proxyholders with respect to any Exchangeable Shares held by it and its
Affiliates for the sole purpose of attending each meeting of holders of
Exchangeable Shares in order to be counted as part of the quorum for each such
meeting. FCE further covenants and agrees that it will not, and will cause its
Affiliates not to, exercise any voting rights which may be exercisable by
holders of Exchangeable Shares from time to time pursuant to the Exchangeable
Share Provisions or pursuant to the provisions of the ABCA (or any successor or
other corporate statute by which ExchangeCo may in the future be governed) with
respect to any Exchangeable Shares held by it or by its Affiliates in respect of
any matter considered at any meeting of holders of Exchangeable Shares.
SECTION 2.11 RULE 10b-18 PURCHASES.
For greater certainty, nothing contained in this Agreement, including
the obligations of FCE contained in Section 2.8 hereof, shall limit the ability
of FCE or ExchangeCo to make a "Rule 10b-18 purchase" of FCE Common Stock
pursuant to Rule 10b-18 of the United States Securities Exchange Act of 1934, as
amended, or any successor rule.
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SECTION 2.12 STOCK EXCHANGE LISTING.
FCE covenants and agrees in favour of ExchangeCo that, as long as any
outstanding Exchangeable Shares are owned by any Person other than FCE or any of
its Affiliates, FCE will use its best efforts to maintain a listing for such
Exchangeable Shares on the TSX or, in the event that a listing on TSX is not
available, on another recognized Canadian stock exchange.
ARTICLE 3
FCE SUCCESSORS
SECTION 3.1 CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC.
FCE shall not consummate any transaction (whether by way of
reconstruction, reorganization, consolidation, merger, transfer, sale, lease or
otherwise) whereby all or substantially all of its undertaking, property and
assets would become the property of any other Person or, in the case of a
merger, of the continuing corporation resulting therefrom unless, but may do so
if:
(a) such other Person or continuing corporation (the "FCE
SUCCESSOR") by operation of law, becomes, without more, bound
by the terms and provisions of this Agreement or, if not so
bound, executes, prior to or contemporaneously with the
consummation of such transaction, an agreement supplemental
hereto and such other instruments (if any) as are reasonably
necessary or advisable to evidence the assumption by the FCE
Successor of liability for all moneys payable and property
deliverable hereunder and the covenant of such FCE Successor
to pay and deliver or cause to be delivered the same and its
agreement to observe and perform all the covenants and
obligations of FCE under this Agreement; and
(b) such transaction shall be upon such terms and conditions as
substantially to preserve and not to impair in any material
respect any of the rights, duties, powers and authorities of
the other parties hereunder or the holders of Exchangeable
Shares.
SECTION 3.2 VESTING OF POWERS IN SUCCESSOR.
Whenever the conditions of Section 3.1 have been duly observed and
performed, the parties, if required by Section 3.1, shall execute and deliver
the supplemental agreement provided for in Section 3.1(a) and thereupon the FCE
Successor shall possess and from time to time may exercise each and every right
and power of FCE under this Agreement in the name of FCE or otherwise and any
act or proceeding by any provision of this Agreement required to be done or
performed by the Board of Directors of FCE or any officers of FCE may be done
and performed with like force and effect by the directors or officers of such
FCE Successor.
SECTION 3.3 WHOLLY-OWNED SUBSIDIARIES.
Nothing herein shall be construed as preventing the amalgamation or
merger of any wholly-owned direct or indirect subsidiary of FCE with or into FCE
or the winding-up,
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liquidation or dissolution of any wholly-owned subsidiary of FCE provided that
all of the assets of such subsidiary are transferred to FCE or another
wholly-owned direct or indirect subsidiary of FCE and any such transactions are
expressly permitted by this Article 3.
ARTICLE 4
GENERAL
SECTION 4.1 TERM.
This Agreement shall come into force and be effective as of the date
hereof and shall terminate and be of no further force and effect at such time as
no Exchangeable Shares (or securities or rights convertible into or exchangeable
for or carrying rights to acquire Exchangeable Shares) are held by any Person
other than FCE and any of its Affiliates.
SECTION 4.2 CHANGES IN CAPITAL OF FCE AND EXCHANGECO.
At all times after the occurrence of any event contemplated pursuant to
Section 2.7 and Section 2.8 hereof or otherwise, as a result of which either FCE
Common Stock or the Exchangeable Shares or both are in any way changed, this
Agreement shall forthwith be deemed amended and modified as necessary in order
that it shall apply with full force and effect, mutatis mutandis, to all new
securities into which FCE Common Stock or the Exchangeable Shares or both are so
changed and the parties hereto shall execute and deliver an agreement in writing
giving effect to and evidencing such necessary amendments and modifications.
SECTION 4.3 NOTICES TO PARTIES.
All notices and other communications hereunder shall be in writing and
shall be deemed given when delivered personally, telecopied (which is confirmed)
or dispatched (postage prepaid) to a nationally recognized overnight courier
service with overnight delivery instructions, in each case addressed to the
particular party at:
(a) If to FCE, at:
3 Great Pasture Road
Danbury, Connecticut
06813
Attention: Chief Executive Officer
Facsimile No.: (203) 825-60001
(b) If to ExchangeCo, at:
-
Attention: -
Facsimile No.: -
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or at such other address of which any party may, from time to time, advise the
other parties by notice in writing given in accordance with the foregoing.
SECTION 4.4 ASSIGNMENT.
No party hereto may assign this Agreement or any of its rights,
interests or obligations under this Agreement or the Arrangement (whether by
operation of law or otherwise) except that ExchangeCo may assign in its sole
discretion, any or all of its rights, interests and obligations hereunder to any
wholly-owned subsidiary of FCE, but any such assignment shall not relieve
ExchangeCo of its responsibilities hereunder.
SECTION 4.5 BINDING EFFECT.
Subject to Section 4.4, this Agreement and the Arrangement shall be
binding upon, enure to the benefit of and be enforceable by the parties hereto
and their respective successors and permitted assigns.
SECTION 4.6 AMENDMENTS, MODIFICATIONS.
This Agreement may not be amended or modified except by an agreement in
writing executed by ExchangeCo, Callco and FCE and approved by the holders of
the Exchangeable Shares in accordance with Section 11.2 of the Exchangeable
Share Provisions.
SECTION 4.7 MINISTERIAL AMENDMENTS.
Notwithstanding the provisions of Section 4.6, the parties to this
Agreement may in writing at any time and from time to time, without the approval
of the holders of the Exchangeable Shares, amend or modify this Agreement for
the purposes of:
(a) adding to the covenants of any or all parties provided that
the board of directors of each of ExchangeCo, Callco and FCE
shall be of the good faith opinion that such additions will
not be prejudicial to the rights or interests of the holders
of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with
this Agreement as may be necessary or desirable with respect
to matters or questions which, in the good faith opinion of
the board of directors of each of ExchangeCo, Callco and FCE,
it may be expedient to make, provided that each such board of
directors shall be of the good faith opinion that such
amendments or modifications will not be prejudicial to the
rights or interests of the holders of the Exchangeable Shares;
or
(c) making such changes or corrections which, on the advice of
counsel to ExchangeCo, Callco and FCE, are required for the
purpose of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake or
manifest error, provided that the board of directors of each
of ExchangeCo, Callco and FCE shall be of the good faith
opinion that such changes or corrections
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will not be prejudicial to the rights or interests of the holders of
the Exchangeable Shares.
SECTION 4.8 MEETING TO CONSIDER AMENDMENTS.
ExchangeCo, at the request of FCE, shall call a meeting or meetings of
the holders of the Exchangeable Shares for the purpose of considering any
proposed amendment or modification requiring approval pursuant to Section 4.6
hereof. Any such meeting or meetings shall be called and held in accordance with
the bylaws of ExchangeCo, the Exchangeable Share Provisions and all applicable
laws.
SECTION 4.9 AMENDMENTS ONLY IN WRITING.
No amendment to or modification or waiver of any of the provisions of
this Agreement otherwise permitted hereunder shall be effective unless made in
writing and signed by all of the parties hereto.
SECTION 4.10 GOVERNING LAWS; CONSENT TO JURISDICTION.
This Agreement shall be governed by and construed in accordance with
the laws of the Province of Alberta and the laws of Canada applicable therein
and shall be treated in all respects as an Alberta contract. Each party hereby
irrevocably attorns to the jurisdiction of the courts of the Province of Alberta
in respect of all matters arising under or in relation to this Agreement.
SECTION 4.11 SEVERABILITY.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 4.12 COUNTERPARTS.
This Agreement may be executed in counterparts, each of which shall be
deemed to be an original but all of which together shall constitute one and the
same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
FUELCELL ENERGY, INC.
By:__________________________________
Name:
Title:
- ALBERTA LTD.
By:__________________________________
Name:
Title:
- ALBERTA LTD.
By:__________________________________
Name:
Title:
B-101
EXHIBIT D
VOTING AND EXCHANGE TRUST AGREEMENT
VOTING AND EXCHANGE AGREEMENT ("AGREEMENT") made as of the - day of -, 2003.
BETWEEN:
FUELCELL ENERGY, INC., a corporation existing under the laws
of the State of Delaware
(hereinafter referred to as "FCE"),
- and -
- ALBERTA LTD., a corporation organized under the laws of
Alberta
(hereinafter referred to as "EXCHANGECO"),
- and -
- TRUST COMPANY OF CANADA, a trust company incorporated under
the laws of Canada
(hereinafter referred to as the "TRUSTEE"),
WHEREAS, in connection with the Combination Agreement, ExchangeCo is required to
issue Exchangeable Shares to certain holders of common shares in the capital of
Global pursuant to the Plan of Arrangement contemplated in the Combination
Agreement; and
WHEREAS, pursuant to the Combination Agreement, FCE has agreed to execute a
voting and exchange trust agreement with ExchangeCo and the Trustee
substantially in the form of this Agreement;
NOW, THEREFORE, in consideration of the respective covenants and agreements
provided in this Agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties hereto
covenant and agree as follows:
ARTICLE 1
INTERPRETATION
SECTION 1.1 DEFINITIONS.
In this Agreement, unless the context otherwise requires, the following terms
shall have the following meanings respectively:
"ABCA" means the Business Corporations Act (Alberta) as now in effect
and as it may be amended, consolidated or reenacted from time to time;
"AGGREGATE EQUIVALENT VOTE AMOUNT" means, with respect to any matter,
proposition or question on which holders of FCE Common Stock are
entitled to vote, consent or otherwise act, the product of (i) the
number of shares of Exchangeable Shares issued and outstanding and held
by Record Holders multiplied by (ii) the Equivalent Vote Amount;
"AFFILIATE" has the meaning ascribed thereto in the Securities Act,
unless otherwise expressly stated herein;
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"ARRANGEMENT" means the arrangement under Section 193 of the ABCA on
the terms and subject to the conditions set out in the Plan of
Arrangement;
"ARTICLES" means the Articles of Arrangement of ExchangeCo;
"AUTOMATIC EXCHANGE RIGHTS" means the benefit of the obligation of FCE
to effect the automatic exchange of Exchangeable Shares for FCE Common
Stock pursuant to Section 5.12;
"BENEFICIARIES" means the registered holders from time to time of
Exchangeable Shares, other than FCE and its Affiliates;
"BENEFICIARY VOTES" has the meaning ascribed thereto in Section 4.2;
"BUSINESS DAY" means any day other than a Saturday, Sunday or a
statutory or civic holiday in the United States or Canada;
"CALLCO" means -, a corporation organized and existing under the laws
of Alberta;
"COMBINATION AGREEMENT" means the combination agreement made as of -,
2003 between FCE and Global, as amended, supplemented and/or restated
in accordance therewith prior to the date hereof, providing for, among
other things, the Arrangement;
"COURT" has the meaning ascribed thereto in the Plan of Arrangement;
"EQUIVALENT VOTE AMOUNT" means, with respect any matter, proposition or
question on which holders of FCE Common Stock are entitled to vote,
consent or otherwise act, the number of votes to which a holder of one
share of FCE Common Stock is entitled with respect to such matter,
proposition or question;
"EXCHANGE PUT RIGHT" has the meaning ascribed thereto in the
Exchangeable Share Provisions;
"EXCHANGE RIGHT" has the meaning ascribed thereto in Section 5.1;
"EXCHANGEABLE SHARES" means the non-voting exchangeable shares in the
capital of ExchangeCo, having the rights, privileges, restrictions and
conditions set out in Exhibit E to the Combination Agreement;
"EXCHANGEABLE SHARE CONSIDERATION" has the meaning ascribed thereto in
the Exchangeable Share Provisions;
"EXCHANGEABLE SHARE PRICE" has the meaning ascribed thereto in the
Exchangeable Share Provisions;
"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares;
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"FCE COMMON STOCK" means the shares of common stock, $0.0001 par value
per share, in the capital of FCE and any other securities into which
such shares may be changed or resulting form the application of Section
2.7 of the Support Agreement;
"FCE CONSENT" has the meaning ascribed thereto in Section 4.2;
"FCE MEETING" has the meaning ascribed thereto in Section 4.2;
"FCE SUCCESSOR" has the meaning ascribed thereto in Section 10.1(a).
"FINAL ORDER" means the final order of the Court approving the
Arrangement as such order may be amended by the Court at any time prior
to the date hereof or, if appealed, then, unless such appeal is
withdrawn or denied, as affirmed;
"GLOBAL" means Global Thermoelectric Inc., a corporation existing under
the laws of the Province of Alberta;
"GOVERNMENTAL ENTITY" means any (a) multinational, federal, provincial,
territorial, state, regional, municipal, local or other government,
governmental or public department, central bank, court, tribunal,
arbitral body, commission, board, bureau or agency, domestic or
foreign, (b) subdivision, agent, commission, board, or authority of any
of the foregoing, or (c) quasi-governmental or private body exercising
any regulatory, expropriation or taxing authority under or for the
account of any of the foregoing;
"INDEMNIFIED PARTIES" has the meaning ascribed thereto in Section 8.1;
"INSOLVENCY EVENT" means (i) the institution by ExchangeCo of any
proceeding to be adjudicated a bankrupt or insolvent or to be dissolved
or wound up, or the consent of ExchangeCo to the institution of
bankruptcy, insolvency, dissolution or winding-up proceedings against
it, or (ii) the filing of a petition, answer or consent seeking
dissolution or winding-up under any bankruptcy, insolvency or analogous
laws, including the Companies Creditors' Arrangement Act (Canada) and
the Bankruptcy and Insolvency Act (Canada), and the failure by
ExchangeCo to contest in good faith any such proceedings commenced in
respect of ExchangeCo within 15 days of becoming aware thereof, or the
consent by ExchangeCo to the filing of any such petition or to the
appointment of a receiver, or (iii) the making by ExchangeCo of a
general assignment for the benefit of creditors, or the admission in
writing by ExchangeCo of its inability to pay its debts generally as
they become due, or (iv) ExchangeCo not being permitted, pursuant to
solvency requirements of applicable law, to redeem any Retracted Shares
pursuant to Section 6.6 of the Exchangeable Share Provisions;
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in the
Articles;
"LIQUIDATION EVENT" has the meaning ascribed thereto in Section
5.12(2);
"LIQUIDATION EVENT EFFECTIVE TIME" has the meaning ascribed thereto in
Section 5.12(3);
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"LIST" has the meaning ascribed thereto in Section 4.6;
"OFFICER'S CERTIFICATE" means, with respect to FCE or ExchangeCo, as
the case may be, a certificate signed by any one of the authorized
signatories of FCE or ExchangeCo, as the case may be;
"PERSON" includes any individual, firm, partnership, joint venture,
venture capital fund, limited liability corporation, unlimited
liability corporation, association, trust, trustee, executor,
administrator, legal personal representative, estate, group, body
corporate, corporation, unincorporated association or organization,
Governmental Entity, syndicate or other entity, whether or not having
legal status;
"PLAN OF ARRANGEMENT" means the plan of arrangement relating to the
arrangement of the Corporation under section 193 of the ABCA
contemplated in the Combination Agreement and which Plan of Arrangement
is attached to the Combination Agreement as Exhibit A, subject to any
amendments or variations thereto made in accordance with Article 7 of
the Plan of Arrangement or Section 8.8 of the Combination Agreement or
made at the direction of the Court in the Final Order;
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in the
Articles;
"REDEMPTION DATE" has the meaning ascribed thereto in the Exchangeable
Share Provisions;
"RETRACTED SHARES" has the meaning ascribed thereto in Section 5.7;
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in the
Exchangeable Share Provisions;
"SECURITIES ACT" means the Securities Act (Alberta) and the rules,
regulations and policies made thereunder, as now in effect and as they
may be amended, consolidated or reanacted from time to time;
"SUPPORT AGREEMENT" means that certain support agreement made as of
even date herewith between ExchangeCo, Callco and FCE substantially in
the form and content of Exhibit C to the Combination Agreement, with
such changes thereto as the parties to the Combination Agreement,
acting reasonably, may agree;
"TRUST" means the trust created by this Agreement;
"TRUST ESTATE" means the Voting Share, any other securities, the
Exchange Put Right, the Exchange Right, the Automatic Exchange Rights
and any money or other, property which may be held by the Trustee from
time to time pursuant to this Agreement;
"VOTING RIGHTS" means the voting rights attached to the Voting Share;
"VOTING SHARE" means the share of special voting stock of FCE, $0.001
par value, issued by FCE to and deposited with the Trustee, which
entitles the holder of record to a number
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of votes at meetings of holders of FCE Common Stock equal to the
Aggregate Equivalent Vote Amount.
SECTION 1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Agreement into articles, sections and other portions and
the insertion of headings are for convenience of reference only and should not
affect the construction or interpretation hereof. Unless otherwise indicated,
all references to an "Article" or "Section" followed by a number refer to the
specified Article or Section of this Agreement. The terms "this Agreement,"
"hereof," "herein" and "hereunder" and similar expressions refer to this
Agreement and not to any particular Article, Section or other portion hereof.
SECTION 1.3 RULES OF CONSTRUCTION
Unless otherwise specifically indicated or the context otherwise requires, (a)
all references to "dollars" or "$" mean United States dollars, (b) words
importing the singular shall include the plural and vice versa and words
importing any gender shall include all genders, and (c) "include," "includes"
and "including" shall be deemed to be followed by the words "without
limitation."
SECTION 1.4 DATE FOR ANY ACTION.
In the event that any date on which any action is required to be taken hereunder
by any of the parties hereto is not a Business Day, such action shall be
required to be taken on the next succeeding day that is a Business Day.
ARTICLE 2
PURPOSE OF AGREEMENT
SECTION 2.1 ESTABLISHMENT OF TRUST.
The purpose of this Agreement is to create the Trust for the benefit of the
Beneficiaries, as herein provided. The Trustee will hold the Voting Share in
order to enable the Trustee to exercise the Voting Rights and will hold the
Exchange Right, the Automatic Exchange Rights and the Exchange Put Right in
order to enable the Trustee to exercise such rights as trustee for and on behalf
of the Beneficiaries as provided in this Agreement. The Trustee will hold the
Voting Share for and on behalf of FCE for all other rights associated with such
Voting Share other than the Voting Rights.
ARTICLE 3
VOTING SHARE
SECTION 3.1 ISSUE AND OWNERSHIP OF THE VOTING SHARE.
FCE hereby issues to, and deposits with, the Trustee the Voting Share to be
hereafter held of record by the Trustee as trustee for and on behalf of, and for
the use and benefit of, the Beneficiaries in accordance with the provisions of
this Agreement. During the term of the Trust and subject to the terms and
conditions of this Agreement, the Trustee shall possess and be vested with full
legal ownership of the Voting Share and shall be entitled to exercise all of the
rights and powers of an owner with respect to such Voting Share provided that
the Trustee shall:
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(a) hold the Voting Share and the legal title thereto as trustee
solely for the use and benefit of the Beneficiaries in
accordance with the provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no
power or authority to sell, transfer, vote or otherwise deal
in or with the Voting Share and such Voting Share shall not be
used or disposed of by the Trustee for any purpose other than
the purposes for which this Trust is created pursuant to this
Agreement.
SECTION 3.2 LEGENDED SHARE CERTIFICATES.
ExchangeCo will cause each certificate representing Exchangeable Shares to bear
an appropriate legend notifying the Beneficiaries of their right to instruct the
Trustee with respect to the exercise of the Voting Rights with respect to
Beneficiary Votes.
SECTION 3.3 SAFE KEEPING OF CERTIFICATE.
The physical certificate representing the Voting Share shall at all times be
held in safe keeping by the Trustee or its agent.
ARTICLE 4
EXERCISE OF VOTING RIGHTS
SECTION 4.1 VOTING RIGHTS.
The Trustee, as the holder of record of the Voting Share shall be entitled to
all of the Voting Rights, including the right to consent to or to vote in person
or by proxy the Voting Share on any matter, question, proposal or proposition
whatsoever that may properly come before the shareholders of FCE at a FCE
Meeting or in connection with a FCE Consent. The Voting Rights shall be and
remain vested in and exercised by the Trustee. Subject to Section 6.15 hereof:
(a) the Trustee shall exercise the Voting Rights only on the basis
of instructions received pursuant to this Article 4 from
Beneficiaries entitled to instruct the Trustee as to the
voting thereof at the time at which the FCE Meeting is held or
a FCE Consent is sought; and
(b) to the extent that no instructions are received from a
Beneficiary with respect to the Voting Rights to which such
Beneficiary is entitled, the Trustee shall not exercise or
permit the exercise of such Voting Rights.
SECTION 4.2 NUMBER OF VOTES.
With respect to all meetings of shareholders of FCE at which holders of FCE
Common Stock are entitled to vote (each, a "FCE MEETING") and with respect to
all written consents sought from FCE's shareholders, including the holders of
FCE Common Stock (each, a "FCE CONSENT"), each Beneficiary shall be entitled to
instruct the Trustee to cast and exercise, in the manner instructed, a number of
votes equal to the Equivalent Vote Amount for each Exchangeable Share owned of
record by such Beneficiary on the record date established by FCE or by
applicable law for such FCE Meeting or FCE Consent, as the case may be
(collectively, the "BENEFICIARY
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VOTES"), in respect of each matter, question, proposal or proposition to be
voted on at such FCE Meeting or consented to in connection with such FCE
Consent.
SECTION 4.3 MAILINGS TO SHAREHOLDERS.
(1) With respect to each FCE Meeting and FCE Consent, the Trustee will use
its reasonable efforts promptly to mail or cause to be mailed (or
otherwise communicate in the same manner as FCE utilizes in
communications to holders of FCE Common Stock subject to applicable
regulatory requirements and provided such manner of communications is
reasonably available to the Trustee) to each of the Beneficiaries named
in the List, such mailing or communication to commence on the same day
as the mailing or notice (or other communication) with respect thereto
is commenced by FCE to its shareholders:
(a) a copy of such notice, together with any related materials,
including any proxy or information statement, to be provided
to shareholders of FCE;
(b) a statement that such Beneficiary is entitled to instruct the
Trustee as to the exercise of the Beneficiary Votes with
respect to such FCE Meeting or FCE Consent or, pursuant to
Section 4.7, to attend such FCE Meeting and to exercise
personally thereat the Beneficiary Votes of such Beneficiary;
(c) a statement as to the manner in which such instructions may be
given to the Trustee, including an express indication that
instructions may be given to the Trustee to give:
(i) a proxy to such Beneficiary or its designee to
exercise personally the Beneficiary Votes; or
(ii) a proxy to a designated agent or other representative
of the management of FCE to exercise such Beneficiary
Votes;
(a) a statement that if no such instructions are received from the
Beneficiary, the Beneficiary Votes to which such Beneficiary
is entitled will not be exercised;
(b) a form of direction whereby the Beneficiary may so direct and
instruct the Trustee as contemplated herein; and
(c) a statement of the time and date by which such instructions
must be received by the Trustee in order to be binding upon
it, which in the case of a FCE Meeting shall not be earlier
than the close of business on the second Business Day prior to
such meeting, and of the method for revoking or amending such
instructions.
(2) For the purpose of determining Beneficiary Votes to which a Beneficiary
is entitled in respect of any FCE Meeting or FCE Consent, the number of
Exchangeable Shares owned of record by the Beneficiary shall be
determined at the close of business on the record date established by
FCE or by applicable law
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for purposes of determining shareholders entitled to vote at such FCE
Meeting or to give written consent in connection with such FCE Consent.
FCE will notify the Trustee of any decision of the Board of Directors
of FCE with respect to the calling of any FCE Meeting or the seeking of
any FCE Consent and shall provide all necessary information and
materials to the Trustee in each case promptly and in any event in
sufficient time to enable the Trustee to perform its obligations
contemplated by this Section 4.3.
(3) The materials referred to in this Section 4.3 are to be provided to
the Trustee by FCE and the materials referred to Section 4.3(1) (b),
(c), (d), (e) and (f) shall be subject to reasonable comment by the
Trustee in a timely manner. FCE shall ensure that the materials to be
provided to the Trustee are provided in sufficient time to permit the
Trustee to comment as aforesaid and to send all materials to each
Beneficiary at the same time as such materials are first sent to
holders of FCE Common Stock. FCE agrees not to communicate with holders
of FCE Common Stock with respect to the materials referred to in this
Section 4.3 otherwise than by mail unless such method of communication
is also reasonably available to the Trustee for communication with the
Beneficiaries. Notwithstanding the foregoing, FCE may at its option
exercise the duties of the Trustee to deliver copies of all materials
to each Beneficiary as required by this Section 4.3 so long as in each
case FCE delivers a certificate to the Trustee stating that FCE has
undertaken to perform the obligations set forth in this Section 4.3.
SECTION 4.4 COPIES OF SHAREHOLDER INFORMATION.
FCE will deliver to the Trustee copies of all proxy materials (including notices
of FCE Meetings but excluding proxies to vote FCE Common Stock), information
statements, reports (including all interim and annual financial statements) and
other written communications that, in each case, are to be distributed from time
to time to holders of FCE Common Stock in sufficient quantities and in
sufficient time so as to enable the Trustee to send those materials to each
Beneficiary, to the extent possible, at the same time as such materials are
first sent to holders of FCE Common Stock. The Trustee will mail or otherwise
send to each Beneficiary, at the expense of FCE, copies of all such materials
(and all materials specifically directed to the Beneficiaries or to the Trustee
for the benefit of the Beneficiaries by FCE) received by the Trustee from FCE,
to the extent possible, at the same time as such materials are sent to holders
of FCE Common Stock. The Trustee will make copies of all such materials
available for inspection by any Beneficiary at the Trustee's principal office in
-. Notwithstanding the foregoing, FCE at its option may exercise the duties of
the Trustee to deliver copies of all materials to each Beneficiary as required
by this Section 4.4 so long as in each case FCE delivers a certificate to the
Trustee stating that FCE has undertaken to perform the obligations set forth in
this Section 4.4.
4.5 OTHER MATERIALS.
As soon as reasonably practicable after receipt by FCE or holders of FCE Common
Stock (if such receipt is known by FCE) of any material sent or given by or on
behalf of a third party to
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holders of FCE Common Stock generally, including dissident proxy and information
circulars (and related information and material) and tender and exchange offer
circulars (and related information and material), FCE shall use its reasonable
best efforts to obtain and deliver to the Trustee copies thereof in sufficient
quantities so as to enable the Trustee to forward such material (unless the same
has been provided directly to Beneficiaries by such third party) to each
Beneficiary as soon as possible. As soon thereafter as is reasonably practicable
after receipt thereof, the Trustee will mail or otherwise send to each
Beneficiary, at the expense of FCE, copies of all such materials received by the
Trustee from FCE. The Trustee will also make available for inspection by any
Beneficiary at the Trustee's principal office in - copies of all such materials.
Notwithstanding the foregoing, FCE at its option may exercise the duties of the
Trustee to deliver copies of all such materials to each Beneficiary as required
by this Section 4.5 so long as in each case FCE delivers a certificate to the
Trustee stating that FCE has undertaken to perform the obligations set forth in
this Section 4.5.
SECTION 4.6 LIST OF PERSONS ENTITLED TO VOTE.
ExchangeCo shall, (a) prior to each annual and special FCE Meeting or the
seeking of any FCE Consent and (b) forthwith upon each request made at any time
by the Trustee in writing, prepare or cause to be prepared a list (a ("LIST") of
the names and addresses of the Beneficiaries arranged in alphabetical order and
showing the number of Exchangeable Shares held of record by each such
Beneficiary, in each case at the close of business on the date specified by the
Trustee in such request or, in the case of a List prepared in connection with a
FCE Meeting or a FCE Consent, at the close of business on the record date
established by FCE or pursuant to applicable law for determining the holders of
FCE Common Stock entitled to receive notice of and/or to vote at such FCE
Meeting or to give consent in connection with such FCE Consent. Each such List
shall be delivered to the Trustee promptly after receipt by ExchangeCo of such
request or the record date for such meeting or seeking of consent, as the case
may be, and in any event within sufficient time as to permit the Trustee to
perform its obligations under this Agreement. FCE agrees to give ExchangeCo
notice (with a copy to the Trustee) of the calling of any FCE Meeting or the
seeking of any FCE Consent together with the record dates therefor, sufficiently
prior to the date of the calling of such meeting or seeking of such consent so
as to enable ExchangeCo to perform its obligations under this Section 4.6.
SECTION 4.7 ENTITLEMENT TO DIRECT VOTES.
Any Beneficiary named in a List prepared in connection with any FCE Meeting or
FCE Consent will be entitled (a) to instruct the Trustee in the manner described
in Section 4.3 with respect to the exercise of the Beneficiary Votes to which
such Beneficiary is entitled or (b) to attend such meeting and personally
exercise thereat (or to personally exercise with respect to any FCE Consent), as
the proxy of the Trustee, the Beneficiary Votes to which such Beneficiary is
entitled.
SECTION 4.8 VOTING BY TRUSTEE AND ATTENDANCE OF TRUSTEE REPRESENTATIVE AT
MEETING.
(1) In connection with each FCE Meeting and FCE Consent, the Trustee shall
exercise, either in person or by proxy, in accordance with the
instructions received from a Beneficiary pursuant to Section 4.3, the
Beneficiary Votes as to which such Beneficiary is entitled to direct
the vote (or any lesser number thereof
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as may be set forth in the instructions); provided, however, that such
written instructions are received by the Trustee from the Beneficiary
prior to the time and date fixed by the Trustee for receipt of such
instruction in the notice given by the Trustee to the Beneficiary
pursuant to Section 4.3.
(2) The Trustee shall cause a representative who is empowered by it to sign
and deliver, on behalf of the Trustee, proxies for Voting Rights to
attend each FCE Meeting. Upon submission by a Beneficiary (or its
designee) of identification satisfactory to the Trustee's
representative, and at the Beneficiary's request, such representative
shall sign and deliver to such Beneficiary (or its designee) a proxy to
exercise personally the Beneficiary Votes as to which such Beneficiary
is otherwise entitled hereunder to direct the vote, if such Beneficiary
either (i) has not previously given the Trustee instructions pursuant
to Section 4.3 in respect of such meeting or (ii) submits to such
representative written revocation of any such previous instructions. At
such meeting, upon receipt of a proxy from the Trustee's
representative, the Beneficiary exercising such Beneficiary Votes shall
have the same rights as the Trustee to speak at the meeting in respect
of any matter, question, proposal or proposition, to vote by way of
ballot at the meeting in respect of any matter, question, proposal or
proposition, and to vote at such meeting by way of a show of hands in
respect of any matter, question or proposition.
SECTION 4.9 DISTRIBUTION OF WRITTEN MATERIALS.
Any written materials distributed by or on behalf of the Trustee pursuant to
this Agreement shall be sent by mail (or otherwise communicated in the same
manner as FCE utilizes in communications to holders of FCE Common Stock, subject
to applicable regulatory requirements and provided such manner of communications
is reasonably available to the Trustee) to each Beneficiary at its address as
shown on the books of ExchangeCo. FCE agrees not to communicate with holders of
FCE Common Stock with respect to such written material otherwise than by mail
unless such method of communication is also reasonably available to the Trustee
for communication with the Beneficiaries. ExchangeCo shall provide or cause to
be provided to the Trustee for purposes of communication, on a timely basis and
without charge or other expense:
(a) a current List; and
(b) upon the request of the Trustee, mailing labels to enable the
Trustee to carry out its duties under this Agreement.
ExchangeCo's obligations under this Section 4.9 shall be deemed satisfied to
the extent FCE exercises its option to perform the duties of the Trustee to
deliver copies of materials to each Beneficiary and ExchangeCo provides the
required information and materials to FCE.
SECTION 4.10 TERMINATION OF VOTING RIGHTS.
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Except as otherwise provided herein or in the Exchangeable Share Provisions, all
of the rights of a Beneficiary with respect to the Beneficiary Votes exercisable
in respect of the Exchangeable Shares held by such Beneficiary, including the
right to instruct the Trustee as to the voting of or to vote personally such
Beneficiary Votes, shall cease and be terminated immediately, before the
delivery by such Beneficiary to the Trustee of the certificates representing
such Exchangeable Shares in connection with the exercise by the Beneficiary of
the Exchange Right, the Exchange Put Right or upon the occurrence of the
automatic exchange of Exchangeable Shares for FCE Common Stock, as specified in
Article 5 (unless, in either case, FCE shall not have delivered the Exchangeable
Share Consideration deliverable in exchange therefor to the Trustee for delivery
to the Beneficiaries), or upon the redemption of Exchangeable Shares pursuant to
Article 6 or Article 7 of the Exchangeable Share Provisions, or upon the
effective date of the liquidation, dissolution or winding-up of ExchangeCo
pursuant to Article 5 of the Exchangeable Share Provisions, or upon the purchase
of Exchangeable Shares from the holder thereof pursuant to the exercise by (i)
Callco of the Retraction Call Right, the Redemption Call Right or the
Liquidation Call Right or (ii) the holder by the Exchange Put Right.
ARTICLE 5
EXCHANGE RIGHT AND AUTOMATIC EXCHANGE
SECTION 5.1 GRANT AND OWNERSHIP OF THE EXCHANGE RIGHT.
FCE hereby grants to the Trustee, as trustee for, on behalf of, and for the use
and benefit of the Beneficiaries, the right (the "EXCHANGE RIGHT"), upon the
occurrence and during the continuance of an Insolvency Event, to require FCE to
purchase from each or any Beneficiary, all or any part of the Exchangeable
Shares held by such Beneficiary and the Automatic Exchange Rights, all in
accordance with the provisions of this Agreement. FCE hereby acknowledges
receipt from the Trustee as trustee for and on behalf of the Beneficiaries of
good and valuable consideration (and the adequacy thereof) for the grant of the
Exchange Put Right, the Exchange Right and the Automatic Exchange Rights by FCE
to the Trustee. During the term of the Trust and subject to the terms and
conditions of this Agreement, the Trustee shall possess and be vested with full
legal ownership of the Exchange Put Right, the Exchange Right and the Automatic
Exchange Rights and shall be entitled to exercise all of the rights and powers
of an owner with respect to the Exchange Put Right, the Exchange Right and the
Automatic Exchange Rights, provided that the Trustee shall:
(a) hold the Exchange Put Right, the Exchange Right and the
Automatic Exchange Rights and the legal title thereto as
trustee solely for the use and benefit of the Beneficiaries in
accordance with the provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no
power or authority to exercise or otherwise deal in or with
the Exchange Put Right, the Exchange Right or the Automatic
Exchange Rights, and the Trustee shall not exercise any such
rights for any purpose other than the purposes for which the
Trust is created pursuant to this Agreement.
SECTION 5.2 LEGENDED SHARE CERTIFICATES.
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ExchangeCo will cause each certificate representing Exchangeable Shares to bear
an appropriate legend notifying the Beneficiaries of:
(a) their right to instruct the Trustee with respect to the
exercise of the Exchange Put Right and the Exchange Right in
respect of the Exchangeable Shares held by a Beneficiary; and
(b) the Automatic Exchange Rights.
SECTION 5.3 GENERAL EXERCISE OF THE EXCHANGE PUT RIGHT AND THE EXCHANGE RIGHT.
The Exchange Put Right and the Exchange Right shall be and remain vested in and
exercisable by the Trustee. Subject to Section 6.15, the Trustee shall exercise
the Exchange Put Right and the Exchange Right only on the basis of instructions
received pursuant to this Article 5 from Beneficiaries entitled to instruct the
Trustee as to the exercise thereof. To the extent that no instructions are
received from a Beneficiary with respect to the Exchange Put Right and the
Exchange Right, the Trustee shall not exercise or permit the exercise of the
Exchange Put Right and the Exchange Right.
SECTION 5.4 PURCHASE PRICE.
The purchase price payable by FCE for each Exchangeable Share to be purchased by
FCE under the Exchange Put Right or the Exchange Right shall be an amount per
share equal to the Exchangeable Share Price on the last Business Day prior to
the day of closing of the purchase and sale of such Exchangeable Share under the
Exchange Right. In connection with each exercise of the Exchange Right, FCE
shall provide to the Trustee an Officer's Certificate setting forth the
calculation of the Exchangeable Share Price for each Exchangeable Share. The
Exchangeable Share Price for each such Exchangeable Share so purchased may be
satisfied only by FCE delivering or causing to be delivered to the Trustee, on
behalf of the relevant Beneficiary, the Exchangeable Share Consideration
representing the total Exchangeable Share Price. Upon payment by FCE of such
purchase price to the Trustee for the benefit of the Beneficiary, the relevant
Beneficiary shall cease to have any right to be paid any amount in respect of
declared and unpaid dividends on each such Exchangeable Share by ExchangeCo.
SECTION 5.5 EXERCISE INSTRUCTIONS.
Subject to the terms and conditions herein set forth, a Beneficiary shall be
entitled, upon the occurrence and during the continuance of an Insolvency Event,
to instruct the Trustee to exercise the Exchange Right with respect to all or
any part of the Exchangeable Shares registered in the name of such Beneficiary
on the books of ExchangeCo. To cause the exercise of the Exchange Right by the
Trustee, the Beneficiary shall deliver to the Trustee, in person or by certified
or registered mail, at its principal office in - or at such other places as the
Trustee may from time to time designate by written notice to the Beneficiaries,
the certificates representing the Exchangeable Shares which such Beneficiary
desires FCE to purchase, duly endorsed in blank for transfer, and accompanied by
such other documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the ABCA and the by-laws of ExchangeCo and such
additional documents and instruments as the Trustee, ExchangeCo and FCE may
reasonably require together with (a) a duly completed form of notice of exercise
of the Exchange Right, contained on the reverse of or attached to the
Exchangeable Share certificates, stating (i)
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that the Beneficiary thereby instructs the Trustee to exercise the Exchange
Right so as to require FCE to purchase from the Beneficiary the number of
Exchangeable Shares specified therein, (ii) that such Beneficiary has good title
to and owns all such Exchangeable Shares to be acquired by FCE free and clear of
all liens, claims, security interests and encumbrances, (iii) the names in which
the certificates representing shares of FCE Common Stock issuable in connection
with the exercise of the Exchange Right are to be issued and (iv) the names and
addresses of the persons to whom such new certificates should be delivered, and
(b) payment (or evidence satisfactory to the Trustee, ExchangeCo and FCE of
payment) of the taxes (if any) payable as contemplated by Section 5.8 of this
Agreement. If only a part of the Exchangeable Shares represented by any
certificate or certificates delivered to the Trustee are to be purchased by FCE
under the Exchange Right, a new certificate for the balance of such Exchangeable
Shares shall be issued to the holder at the expense of ExchangeCo.
SECTION 5.6 DELIVERY OF EXCHANGEABLE SHARE CONSIDERATION; EFFECT OF EXERCISE.
Promptly after the receipt by the Trustee of the certificates representing the
Exchangeable Shares which the Beneficiary desires FCE to purchase under the
Exchange Put Right or the Exchange Right, together with such documents and
instruments of transfer and a duly completed form of notice of exercise of the
Exchange Put Right or the Exchange Right (and payment of taxes, if any payable
as contemplated by Section 5.8 or evidence thereof), duly endorsed for transfer
to FCE, the Trustee shall notify FCE and ExchangeCo of its receipt of the same,
which notice to FCE and ExchangeCo shall constitute exercise of the Exchange Put
Right or the Exchange Right by the Trustee on behalf of the Beneficiary in
respect of such Exchangeable Shares, and FCE shall promptly thereafter deliver
or cause to be delivered to the Trustee, for delivery to the Beneficiary in
respect of such Exchangeable Shares (or to such other persons, if any, properly
designated by such Beneficiary) the Exchangeable Share Consideration deliverable
in connection with the exercise of the Exchange Put Right or the Exchange Right;
provided, however, that no such delivery shall be made unless and until the
Beneficiary requesting the same shall have paid (or provided evidence
satisfactory to the Trustee, ExchangeCo and FCE of the payment of) the taxes (if
any) payable as contemplated by Section 5.8 of this Agreement. Immediately upon
the giving of notice by the Trustee to FCE and ExchangeCo of the exercise of the
Exchange Put Right or the Exchange Right, as provided in this Section 5.6, (i)
the closing of the transaction of purchase and sale contemplated by the Exchange
Put Right or the Exchange Right shall be deemed to have occurred, (ii) FCE shall
be required to take all action necessary to permit it to occur including
delivery to the Trustee of the Exchangeable Share Consideration no later than
the close of business on the third Business Day following the receipt by the
Trustee of the notice, certificates and other documents as aforesaid, and (iii)
the Beneficiary of such Exchangeable Shares shall be deemed to have transferred
to FCE all of such Beneficiary's right, title and interest in and to such
Exchangeable Shares and in the related interest in the Trust Estate and shall
cease to be a holder of such Exchangeable Shares and shall not be entitled to
exercise any of the rights of a holder in respect thereof, other than the right
to receive his proportionate part of the total purchase price therefor, unless
such Exchangeable Share Consideration is not delivered by FCE to the Trustee for
delivery to such Beneficiary (or to such other person, if any, properly
designated by such Beneficiary) by the date specified above, in which case the
rights of the Beneficiary shall remain unaffected until such Exchangeable Share
Consideration is delivered by FCE and any cheque included therein is paid. Upon
delivery of such Exchangeable Share Consideration by FCE to the Trustee, the
Trustee shall deliver such Exchangeable Share Consideration to such Beneficiary
(or
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to such other person, if any, properly designated by such Beneficiary).
Concurrently with such Beneficiary ceasing to be a holder of Exchangeable
Shares, the Beneficiary shall be considered and deemed for all purposes to be
the holder of the FCE Common Stock delivered to it pursuant to the Exchange Put
Right or the Exchange Right.
SECTION 5.7 EXERCISE OF EXCHANGE RIGHT SUBSEQUENT TO RETRACTION.
In the event that a Beneficiary has exercised its right under Article 6 of the
Exchangeable Share Provisions to require ExchangeCo to redeem any or all of the
Exchangeable Shares held by the Beneficiary (the "RETRACTED SHARES") and is
notified by ExchangeCo pursuant to Section 6.6 of the Exchangeable Share
Provisions that ExchangeCo will not be permitted as a result of solvency
requirements of applicable law to redeem all such Retracted Shares, and provided
that Callco shall not have exercised the Retraction Call Right with respect to
the Retracted Shares and that the Beneficiary has not revoked the retraction
request delivered by the Beneficiary to ExchangeCo pursuant to Section 6.7 of
the Exchangeable Share Provisions, and provided further that the Trustee has
received written notice of same from ExchangeCo or Callco, the retraction
request will constitute and will be deemed to constitute notice from the
Beneficiary to the Trustee instructing the Trustee to exercise the Exchange
Right with respect to those Retracted Shares that ExchangeCo is unable to
redeem. In any such event, ExchangeCo hereby agrees with the Trustee and in
favour of the Beneficiary promptly to notify the Trustee of such prohibition
against ExchangeCo redeeming all of the Retracted Shares and promptly to forward
or cause to be forwarded to the Trustee all relevant materials delivered by the
Beneficiary to ExchangeCo or to the transfer agent of the Exchangeable Shares
(including a copy of the retraction request delivered pursuant to Section 6.1 of
the Exchangeable Share Provisions) in connection with such proposed redemption
of the Retracted Shares and the Trustee will thereupon exercise the Exchange
Right with respect to the Retracted Shares that ExchangeCo is not permitted to
redeem and will require FCE to purchase such shares in accordance with the
provisions of this Article 5.
SECTION 5.8 STAMP OR OTHER TRANSFER TAXES.
Upon any sale of Exchangeable Shares to FCE pursuant to the Exchange Put Right
or the Exchange Right or the Automatic Exchange Rights, the share certificate or
certificates representing shares of FCE Common Stock to be delivered in
connection with the payment of the purchase price therefor shall be issued in
the name of the Beneficiary in respect of the Exchangeable Shares so sold or in
such names as such Beneficiary may otherwise direct in writing without charge to
the holder of the Exchangeable Shares so sold; provided, however, that such
Beneficiary (a) shall pay (and none of FCE, ExchangeCo or the Trustee shall be
required to pay) any documentary, stamp, transfer or other taxes that may be
payable in respect of any transfer involved in the issuance or delivery of such
shares to a person other than such Beneficiary or (b) shall have evidenced to
the satisfaction of the Trustee, FCE and ExchangeCo that such taxes, if any,
have been paid.
SECTION 5.9 NOTICE OF INSOLVENCY EVENT.
As soon as practicable following the occurrence of an Insolvency Event or any
event that with the giving of notice or the passage of time or both would be an
Insolvency Event, ExchangeCo and FCE shall give written notice thereof to the
Trustee. As soon as practicable following the receipt of notice from ExchangeCo
and FCE of the occurrence of an Insolvency Event, or upon the Trustee becoming
aware of an Insolvency Event, the Trustee will mail to each Beneficiary, at
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the expense of FCE (such funds to be received in advance), a notice of such
Insolvency Event in the form provided by FCE, which notice shall contain a brief
statement of the rights of the Beneficiaries with respect to the Exchange Right.
SECTION 5.10 QUALIFICATION OF FCE COMMON STOCK.
FCE covenants that if any shares of FCE Common Stock to be issued and delivered
pursuant to the Exchange Put Right, the Exchange Right or the Automatic Exchange
Rights require registration or qualification with or approval of or the filing
of any document, including any prospectus or similar document, or the taking of
any proceeding with or the obtaining of any order, ruling or consent from any
governmental or regulatory authority under any Canadian or United States
federal, provincial, territorial or state securities or other law or regulation
or pursuant to the rules and regulations of any securities or other regulatory
authority or the fulfillment of any other Canadian or United States legal
requirement (collectively, the "APPLICABLE LAWS") before such shares (or other
shares or securities into which FCE Common Stock may be reclassified or changed
as contemplated by Section 2.7 of the Support Agreement) may be issued and
delivered by FCE to the holder thereof or in order that such shares (or other
shares or securities into which FCE Common Stock may be reclassified or changed
as contemplated by Section 2.7 of the Support Agreement) may be freely traded
thereafter (other than any restrictions of general application on transfer by
reason of a holder being a "control person" of FCE for purposes of Canadian
provincial securities law or an "affiliate" of FCE for purposes of United States
federal or state securities law), FCE will in good faith expeditiously take all
such actions and do all such things as are necessary or desirable and within its
powers to cause such FCE Common Stock (or other shares or securities into which
FCE Common Stock may be reclassified or changed as contemplated by Section 2.7
of the Support Agreement) to be and remain duly registered, qualified or
approved under United States and/or Canadian law, as the case may be. FCE
represents and warrants that it has in good faith taken all actions and done all
things as are necessary under Applicable Laws as they exist on the date hereof
to cause the shares of FCE Common Stock (or other shares or securities into
which FCE Common Stock may be reclassified or changed) to be issued and
delivered hereunder (including, for greater certainty, pursuant to the
Exchangeable Share Provisions, or pursuant to the Exchange Put Right, the
Exchange Right and the Automatic Exchange Rights) to be freely tradeable
thereafter (other than restrictions on transfer by reason of a holder being a
"control person" of FCE for the purposes of Canadian federal and provincial
securities law or an "affiliate" of FCE for purposes of United States federal or
state securities law). FCE will in good faith expeditiously take all such
actions and do all such things as are necessary or desirable and within its
power to cause all FCE Common Stock (or other shares or securities into which
FCE Common Stock may be reclassified or changed as contemplated by Section 2.7
of the Support Agreement) to be delivered pursuant to the Exchange Put Right,
the Exchange Right or the Automatic Exchange Rights to be listed, quoted or
posted for trading on all stock exchanges and quotation systems on which
outstanding FCE Common Stock are listed, quoted or posted for trading at such
time.
SECTION 5.11 FCE COMMON STOCK.
FCE hereby represents, warrants and convents that it has duly authorized and
irrevocably reserved for issuance and will at all times keep available, free
from pre-emptive and other rights and free and clear of any lien, claim or
encumbrance, out of its authorized and unissued capital stock such number of
shares of FCE Common Stock:
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(a) as is equal to the sum of
(i) the number of Exchangeable Shares issued and outstanding from
time to time; and
(ii) the number of Exchangeable Shares issuable upon the exercise
of all rights to acquire Exchangeable Shares outstanding from
time to time; and
(a) as are now and may hereafter be required to enable and permit
ExchangeCo to meet its obligations hereunder, under the
Certificate of Incorporation of FCE, under the Support
Agreement, under the Exchangeable Share Provisions and under
any other security or commitment pursuant to the Arrangement
with respect to which FCE may now or hereafter be required to
issue shares of FCE Common Stock.
SECTION 5.12 AUTOMATIC EXCHANGE ON LIQUIDATION OF FCE.
(1) FCE will give the Trustee written notice of each of the following
events at the time set forth below:
(a) in the event of any determination by the Board of Directors of
FCE to institute voluntary liquidation, dissolution or
winding-up proceedings with respect to FCE or to effect any
other distribution of assets of FCE among its shareholders for
the purpose of winding up its affairs, at least 60 days prior
to the proposed effective date of such liquidation,
dissolution, winding-up or other distribution; and
(b) promptly following the earlier of (A) receipt by FCE of notice
of, and (B) FCE otherwise becoming aware of, any threatened or
instituted claim, suit, petition or other proceedings with
respect to the involuntary liquidation, dissolution or
winding-up of FCE or to effect any other distribution of
assets of FCE among its shareholders for the purpose of
winding up its affairs, in each case where FCE has failed to
contest in good faith any such proceeding commenced in respect
of FCE within 30 days of becoming aware thereof.
(2) Promptly following receipt by the Trustee from FCE of notice of any
event (a "LIQUIDATION EVENT") contemplated by Section 5.12(1) above,
the Trustee will give notice or cause such notice to be given thereof
to the Beneficiaries. Such notice shall be provided to the Trustee by
FCE and shall include a brief description of rights of the
Beneficiaries with respect to the Automatic Exchange Rights provided
for in Section 5.12(3).
(3) In order that the Beneficiaries will be able to participate on a pro
rata basis with the holders of FCE Common Stock in the distribution of
assets of FCE in connection with a Liquidation Event, immediately prior
to the effective time (the "LIQUIDATION EVENT EFFECTIVE TIME") of a
Liquidation Event all of the then outstanding Exchangeable Shares shall
be automatically exchanged for FCE Common Stock. To effect such
automatic exchange, FCE shall be deemed to have
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purchased each Exchangeable Share outstanding immediately prior to the
Liquidation Event Effective Time and held by Beneficiaries, and each
Beneficiary shall be deemed to have sold the Exchangeable Shares held
by such Beneficiary at such time, for a purchase price per share equal
to the Exchangeable Share Price applicable at that time. FCE shall
provide the Trustee with an Officer's Certificate in connection with
any automatic exchange setting forth the calculation of the
Exchangeable Share Price for each Exchangeable Share.
(4) The closing of the transaction of purchase and sale contemplated by the
automatic exchange of Exchangeable Shares for FCE Common Stock shall be
deemed to have occurred immediately prior to the Liquidation Event
Effective Time, and each Beneficiary shall be deemed to have
transferred to FCE all of the Beneficiary's right, title and interest
in and to such Beneficiary's Exchangeable Shares and the related
interest in the Trust Estate. Any right of each such Beneficiary to
receive declared and unpaid dividends from ExchangeCo shall be deemed
to be satisfied and discharged and each such Beneficiary shall cease to
be a holder of such Exchangeable Shares and FCE shall deliver to the
Beneficiary the Exchangeable Share Consideration deliverable upon the
automatic exchange of Exchangeable Shares. Concurrently with such
Beneficiary ceasing to be a holder of Exchangeable Shares, the
Beneficiary shall be considered and deemed for all purposes to be the
holder of the FCE Common Stock issued pursuant to the automatic
exchange of Exchangeable Shares for FCE Common Stock and the
certificates held by the Beneficiary previously representing the
Exchangeable Shares exchanged by the Beneficiary with FCE pursuant to
such automatic exchange shall thereafter be deemed to represent FCE
Common Stock issued to the Beneficiary by FCE pursuant to such
automatic exchange. Upon the request of a Beneficiary and the surrender
by the Beneficiary of Exchangeable Share certificates deemed to
represent FCE Common Stock, duly endorsed in blank and accompanied by
such instruments of transfer as FCE may reasonably require, FCE shall
deliver or cause to be delivered to the Beneficiary certificates
representing FCE Common Stock of which the Beneficiary is the holder.
SECTION 5.13 WITHHOLDING RIGHTS.
FCE, ExchangeCo and the Trustee shall be entitled to deduct and withhold from
any consideration otherwise payable under this Agreement to any holder of
Exchangeable Shares or FCE Common Stock such amounts as FCE, ExchangeCo or the
Trustee is required to deduct and withhold with respect to such payment under
the Income Tax Act (Canada), the United States Internal Revenue Code of 1986 or
any provision of federal, provincial, state, local or foreign tax law, in each
case as amended or succeeded. The Trustee may act on the advice of counsel with
respect to such matters. To the extent that amounts are so withheld, such
withheld amounts shall be treated for all purposes as having been paid to the
holder of the shares in respect of which such deduction and withholding was
made, provided that such withheld amounts are actually remitted to the
appropriate taxing authority. To the extent that the amount so required to be
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deducted or withheld from any payment to a holder exceeds the cash portion of
the consideration otherwise payable to the holder, FCE, ExchangeCo and the
Trustee are hereby authorized to sell or otherwise dispose of such portion of
the consideration as is necessary to provide sufficient funds to FCE, ExchangeCo
or the Trustee, as the case may be, to enable it to comply with such deduction
or withholding requirement and FCE, ExchangeCo or the Trustee shall notify the
holder thereof and remit to such holder any unapplied balance of the net
proceeds of such sale. FCE represents and warrants that, based upon facts
currently known to it, it has no current intention, as at the date of this
Agreement, to deduct or withhold from any consideration paid to holders of
Exchangeable Shares any amounts under the United States Internal Revenue Code of
1986.
ARTICLE 6
CONCERNING THE TRUSTEE
SECTION 6.1 POWERS AND DUTIES OF THE TRUSTEE.
(1) The rights, powers, duties and authorities of the Trustee under this
Agreement, in its capacity as trustee of the Trust, shall include:
(a) receipt and deposit of the Voting Share from FCE as trustee
for and on behalf of the Beneficiaries in accordance with the
provisions of this Agreement;
(b) granting proxies and distributing materials to Beneficiaries
as provided in this Agreement;
(c) casting and exercising the Beneficiary Votes in accordance
with the provisions of this Agreement;
(d) receiving the grant of the Exchange Put Right, the Exchange
Right and the Automatic Exchange Rights from FCE as trustee
for and on behalf of the Beneficiaries in accordance with the
provisions of this Agreement;
(e) exercising the Exchange Put Right, the Exchange Right and
enforcing the benefit of the Automatic Exchange Rights, in
each case in accordance with the provisions of this Agreement,
and in connection therewith receiving from Beneficiaries
Exchangeable Shares and other requisite documents and
distributing to such Beneficiaries FCE Common Stock and
cheques, if any, to which such Beneficiaries are entitled upon
the exercise of the Exchange Put Right, the Exchange Right or
pursuant to the Automatic Exchange Rights, as the case may be;
(f) holding title to the Trust Estate;
(g) investing any moneys forming, from time to time, a part of the
Trust Estate as provided in this Agreement;
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(h) taking action on its own initiative or at the direction of a
Beneficiary or Beneficiaries to enforce the obligations of FCE
and ExchangeCo under this Agreement; and
(i) taking such other actions and doing such other things as are
specifically provided in this Agreement.
(2) In the exercise of such rights, powers, duties and authorities, the
Trustee shall have (and is granted) such incidental and additional
rights, powers, duties and authority not in conflict with any of the
provisions of this Agreement as the Trustee, acting in good faith and
in the reasonable exercise of its discretion, may deem necessary,
appropriate or desirable to effect the purpose of the Trust. Any
exercise of such discretionary rights, powers, duties and authorities
by the Trustee shall be final, conclusive and binding upon all persons.
(3) The Trustee in exercising its rights, powers, duties and authorities
hereunder shall act honestly and in good faith and with a view to the
best interests of the Beneficiaries and shall exercise the care,
diligence and skill that a reasonably prudent trustee would exercise in
comparable circumstances.
(4) The Trustee shall not be bound to give notice or do or take any act,
action or proceeding by virtue of the powers conferred on it hereby
unless and until it shall be specifically required to do so under the
terms hereof, nor shall the Trustee be required to take any notice of,
or to do, or to take any act, action or proceeding as a result of any
default or breach of any provision hereunder, unless and until notified
in writing of such default or breach, which notices shall distinctly
specify the default or breach desired to be brought to the attention of
the Trustee, and in the absence of such notice the Trustee may for all
purposes of this Agreement conclusively assume that no default or
breach has been made in the observance or performance of any of the
representations, warranties, covenants, agreements or conditions
contained herein.
SECTION 6.2 NO CONFLICT OF INTEREST.
The Trustee represents to FCE and ExchangeCo that at the date of execution and
delivery of this Agreement there exists no material conflict of interest in the
role of the Trustee as a fiduciary hereunder and the role of the Trustee in any
other capacity. The Trustee shall, within 90 days after it becomes aware that
such material conflict of interest exists, either eliminate such material
conflict of interest or resign in the manner and with the effect specified in
Article 10. If, notwithstanding the foregoing provisions of this Section 6.2,
the Trustee has such a material conflict of interest, the validity and
enforceability of this Agreement shall not be affected in any manner whatsoever
by reason only of the existence of such material conflict of interest. If the
Trustee contravenes the foregoing provisions of this Section 6.2, any
interested party may apply to the Court for an order that the Trustee be
replaced as trustee hereunder.
SECTION 6.3 DEALINGS WITH TRANSFER AGENTS, REGISTRARS, ETC.
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(1) FCE and ExchangeCo irrevocably authorize the Trustee, from time to
time, to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent
registrar or transfer agent, of the Exchangeable Shares and
FCE Common Stock; and
(b) requisition, from time to time, (i) from any such registrar or
transfer agent any information readily available from the
records maintained by it which the Trustee may reasonably
require for the discharge of its duties and responsibilities
under this Agreement and (ii) from the transfer agent of FCE
Common Stock, and any subsequent transfer agent of such
shares, the share certificates issuable upon the exercise from
time to time of the Exchange Put Right, the Exchange Right and
pursuant to the Automatic Exchange Rights.
(2) FCE and ExchangeCo irrevocably authorize their respective registrars
and transfer agents to comply with all such requests. FCE covenants
that it will supply its transfer agent with duly executed share
certificates for the purpose of completing the exercise from time to
time of the Exchange Put Right, the Exchange Right and the Automatic
Exchange Rights.
SECTION 6.4 BOOKS AND RECORDS.
The Trustee shall keep available for inspection by FCE and ExchangeCo at the
Trustee's principal office in - correct and complete books and records of
account relating to the Trust created by this Agreement, including all relevant
data relating to mailings and instructions to and from Beneficiaries and all
transactions pursuant to the Voting Rights, the Exchange Put Right, the Exchange
Right and the Automatic Exchange Rights. On or before January 15, 2004, and on
or before January 15 in every year thereafter, so long as the Voting Share is on
deposit with the Trustee, the Trustee shall transmit to FCE and ExchangeCo a
brief report, dated as of the preceding December 31, with respect to:
(a) the property and funds comprising the Trust Estate as of that
date;
(b) the number of exercises of the Exchange Put Right and the
Exchange Right, if any, and the aggregate number of
Exchangeable Shares received by the Trustee on behalf of
Beneficiaries in consideration of the issuance by FCE of FCE
Common Stock in connection with the Exchange Put Right and the
Exchange Right, during the calendar year ended on such date;
and
(c) any action taken by the Trustee in the performance of its
duties under this Agreement which it had not previously
reported.
SECTION 6.5 INCOME TAX RETURNS AND REPORTS.
The Trustee shall, to the extent necessary, prepare and file on behalf of the
Trust appropriate United States and Canadian income tax returns and any other
returns or reports as may be required by applicable law or pursuant to the rules
and regulations of any securities exchange or other trading system through which
the Exchangeable Shares are traded. In connection therewith,
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the Trustee may obtain the advice and assistance of such experts or advisors as
the Trustee reasonably considers necessary or advisable (who may be experts or
advisors to FCE or ExchangeCo). If requested by the Trustee, FCE or ExchangeCo
shall retain qualified experts or advisors for the purpose of providing such tax
advice or assistance.
SECTION 6.6 INDEMNIFICATION PRIOR TO CERTAIN ACTIONS BY TRUSTEE.
(1) The Trustee shall exercise any or all of the rights, duties, powers or
authorities vested in it by this Agreement at the request, order or
direction of any Beneficiary upon such Beneficiary furnishing to the
Trustee reasonable funding, security or indemnity against the costs,
expenses and liabilities which may be incurred by the Trustee therein
or thereby, provided that no Beneficiary shall be obligated to furnish
to the Trustee any such security or indemnity in connection with the
exercise by the Trustee of any of its rights, duties, powers and
authorities with respect to the Voting Share held by the Trustee
pursuant to Article 4, subject to Section 6.15, with respect to the
Exchange Put Right and the Exchange Right pursuant to Article 5,
subject to Section 6.15, and with respect to the Automatic Exchange
Rights pursuant to Article 5, subject to Section 6.15.
(2) None of the provisions contained in this Agreement shall require the
Trustee to expend or risk its own funds or otherwise incur financial
liability in the exercise of any of its rights, powers, duties, or
authorities unless funded, given security or indemnified as aforesaid.
SECTION 6.7 ACTION OF BENEFICIARIES.
No Beneficiary shall have the right to institute any action, suit or proceeding
or to exercise any other remedy authorized by this Agreement for the purpose of
enforcing any of its rights or for the execution of any trust or power hereunder
unless the Beneficiary has requested the Trustee to take or institute such
action, suit or proceeding and furnished the Trustee with the funding, security
or indemnity referred to in Section 6.6 and the Trustee shall have failed to
act within a reasonable time thereafter. In such case, but not otherwise, the
Beneficiary shall be entitled to take proceedings in any court of competent
jurisdiction such as the Trustee might have taken; it being understood and
intended that no one or more Beneficiaries shall have any right in any manner
whatsoever to affect, disturb or prejudice the rights hereby created by any such
action, or to enforce any right hereunder or the Voting Rights, the Exchange Put
Right, the Exchange Rights or the Automatic Exchange Rights except subject to
the conditions and in the manner herein provided, and that all powers and trusts
hereunder shall be exercised and all proceedings at law shall be instituted, had
and maintained by the Trustee, except only as herein provided, and in any event
for the equal benefit of all Beneficiaries.
SECTION 6.8 RELIANCE UPON DECLARATIONS.
The Trustee shall not be considered to be in contravention of any of its rights,
powers, duties and authorities hereunder if, when required, it acts and relies
in good faith upon statutory declarations, certificates, opinions, Lists,
reports or other papers or documents furnished pursuant to the provisions hereof
or required by the Trustee to be furnished to it in the exercise of
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its rights, powers, duties and authorities hereunder if such statutory
declarations, certificates, opinions, Lists, reports or other papers or
documents comply with the provisions of Section 6.9, if applicable, and with
any other applicable provisions of this Agreement.
SECTION 6.9 EVIDENCE AND AUTHORITY TO TRUSTEE.
(1) FCE and/or ExchangeCo shall furnish to the Trustee evidence of
compliance with the conditions provided for in this Agreement relating
to any action or step required or permitted to be taken by FCE and/or
ExchangeCo or the Trustee under this Agreement or as a result of any
obligation imposed under this Agreement, including in respect of the
Voting Rights or the Exchange Put Right, the Exchange Right or the
Automatic Exchange Rights and the taking of any other action to be
taken by the Trustee at the request of or on the application of FCE
and/or ExchangeCo promptly if and when:
(a) such evidence is required by any other section of this
Agreement to be furnished to the Trustee in accordance with
the terms of this Section 6.9; or
(b) the Trustee, in the exercise of its rights, powers, duties and
authorities under this Agreement, gives FCE and/or ExchangeCo
written notice requiring it to furnish such evidence in
relation to any particular action or obligation specified in
such notice.
(2) Such evidence shall consist of an Officer's Certificate of FCE and/or
ExchangeCo or a statutory declaration or a certificate made by persons
entitled to sign an Officer's Certificate stating that any such
condition has been complied with in accordance with the terms of this
Agreement.
(3) Whenever such evidence relates to a matter other than the Voting Rights
or the Exchange Put Right, the Exchange Right or the Automatic Exchange
Rights or the taking of any other action to be taken by the Trustee at
the request or on the application of FCE and/or ExchangeCo, and except
as otherwise specifically provided herein such evidence may consist of
a report or opinion of any solicitor, attorney, auditor, accountant,
appraiser, valuer, engineer or other expert or any other person whose
qualifications give authority to a statement made by him, provided that
if such report or opinion is furnished by a director, officer or
employee of FCE and/or ExchangeCo it shall be in the form of an
Officer's Certificate or a statutory declaration.
(4) Each statutory declaration, Officer's Certificate, opinion or report
furnished to the Trustee as evidence of compliance with a condition
provided for in this Agreement shall include a statement by the person
giving the evidence:
(a) declaring that such person has read and understands the
provisions of this Agreement relating to the condition in
question;
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(b) describing the nature and scope of the examination or
investigation upon which such person based the statutory
declaration, certificate, statement or opinion; and
(c) declaring that such person has made such examination or
investigation as such person believes is necessary to enable
such person to make the statements or give the opinions
contained or expressed therein.
SECTION 6.10 EXPERTS, ADVISERS AND AGENTS.
The Trustee may:
(a) in relation to these presents act and rely on the opinion or
advice of or information obtained from any solicitor,
attorney, auditor, accountant, appraiser, valuer, engineer or
other expert, whether retained by the Trustee or by FCE and/or
ExchangeCo or otherwise, and may retain or employ such
assistants as may be necessary to the proper discharge of its
powers and duties and determination of its rights hereunder
and may pay proper and reasonable compensation for all such
legal and other advice or assistance as aforesaid; and
(b) employ such agents and other assistants as it may reasonably
require for the proper determination and discharge of its
powers and duties hereunder, and may pay reasonable
remuneration for all services performed for it (and shall be
entitled to receive reasonable remuneration for all services
performed by it) in the discharge of the trusts hereof and
compensation for all disbursements, costs and expenses made or
incurred by it in the discharge of its duties hereunder and in
the management of the Trust.
SECTION 6.11 INVESTMENT OF MONEYS HELD BY TRUSTEE.
Unless otherwise provided in this Agreement, any moneys held by or on behalf of
the Trustee which under the terms of this Agreement may or ought to be invested
or which may be on deposit with the Trustee or which may be in the hands of the
Trustee may be invested and reinvested in the name or under the control of the
Trustee, in trust for the applicable party or parties, in securities in which,
under the laws of Canada, trustees are authorized to invest trust moneys,
provided that such securities are stated to mature within two years after their
purchase by the Trustee, and the Trustee shall so invest such moneys on the
written direction of FCE. Pending the investment of any moneys as hereinbefore
provided, such moneys may be deposited in the name of the Trustee in any
chartered bank in Canada or, with the consent of FCE, in the deposit department
of the Trustee or any other loan or trust company authorized to accept deposits
under the laws of Canada or any state thereof at the rate of interest then
current on similar deposits. Any interest earned or received from moneys held by
the trust shall be the property of and distributed to the applicable party or
parties upon demand therefore.
SECTION 6.12 TRUSTEE NOT REQUIRED TO GIVE SECURITY.
The Trustee shall not be required to give any bond or security in respect of the
execution of the trusts, rights, duties, powers and authorities of this
Agreement or otherwise in respect of the premises.
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SECTION 6.13 TRUSTEE NOT BOUND TO ACT ON REQUEST.
Except as in this Agreement otherwise specifically provided, the Trustee shall
not be bound to act in accordance with any direction or request of FCE and/or
ExchangeCo or of the directors thereof until a duly authenticated copy of the
instrument or resolution containing such direction or request shall have been
delivered to the Trustee, and the Trustee shall be empowered to act and rely
upon any such copy purporting to be authenticated and believed by the Trustee to
be genuine.
SECTION 6.14 AUTHORITY TO CARRY ON BUSINESS.
The Trustee represents to FCE and ExchangeCo that at the date of execution and
delivery by it of this Agreement it is authorized to carry on the business of a
trust company in the Province of Alberta but if, notwithstanding the provisions
of this Section 6.14, it ceases to be so authorized to carry on business, the
validity and enforceability of this Agreement and the Voting Rights, the
Exchange Right and the Automatic Exchange Rights shall not be affected in any
manner whatsoever by reason only of such event but the Trustee shall, within 90
days after ceasing to be authorized to carry on the business of a trust company
in the Province of Alberta, either become so authorized or resign in the manner
and with the effect specified in Article 10.
SECTION 6.15 CONFLICTING CLAIMS.
(1) If conflicting claims or demands are made or asserted with respect to
any interest of any Beneficiary in any Exchangeable Shares, including
any disagreement between the heirs, representatives, successors or
assigns succeeding to all or any part of the interest of any
Beneficiary in any Exchangeable Shares, resulting in conflicting claims
or demands being made in connection with such interest, then the
Trustee shall be entitled, at its sole discretion, to refuse to
recognize or to comply with any such claims or demands. In so refusing,
the Trustee may elect not to exercise any Voting Rights, Exchange Put
Right, Exchange Right or Automatic Exchange Rights subject to such
conflicting claims or demands and, in so doing, the Trustee shall not
be or become liable to any person on account of such election or its
failure or refusal to comply with any such conflicting claims or
demands. The Trustee shall be entitled to continue to refrain from
acting and to refuse to act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Put Right, Exchange Right or Automatic
Exchange Rights subject to such conflicting claims or demands
have been adjudicated by a final judgment of a court of
competent jurisdiction and all rights of appeal have expired;
or
(b) all differences with respect to the Voting Rights, Exchange
Put Right, Exchange Right or Automatic Exchange Rights subject
to such conflicting claims or demands have been conclusively
settled by a valid written agreement binding on all such
adverse claimants, and the Trustee shall have been furnished
with an executed copy of such agreement certified to be in
full force and effect.
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(2) If the Trustee elects to recognize any claim or comply with any demand
made by any such adverse claimant, it may in its discretion require
such claimant to furnish such surety bond or other security
satisfactory to the Trustee as it shall deem appropriate to fully
indemnify it as between all conflicting claims or demands.
SECTION 6.16 ACCEPTANCE OF TRUST.
The Trustee hereby accepts the Trust created and provided for by and in this
Agreement and agrees to perform the same upon the terms and conditions herein
set forth and to hold all rights, privileges and benefits conferred hereby and
by law in trust for the various persons who shall from time to time be
Beneficiaries, subject to all the terms and conditions herein set forth.
SECTION 6.17 MAINTENANCE OF OFFICE OR AGENCY.
FCE will maintain in Calgary an office or agency where certificates representing
Exchangeable Shares may be presented or surrendered for exchange by
Beneficiaries and where notices and demands to or upon FCE or ExchangeCo in
respect of the Exchangeable Shares may be served. FCE will give prompt written
notice to the Trustee of the location, and any change in the location, of such
office or agency. If at any time FCE shall fail to maintain any such office or
agency or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be served at the Corporate
Trust Office of the Trustee, and FCE and ExchangeCo hereby appoint the Trustee
as their agent to receive all such presentations, surrenders, notices and
demands. Furthermore, copies of all FCE proxy materials will be made available
for inspection by any Beneficiary at such office or agency.
ARTICLE 7
COMPENSATION
SECTION 7.1 FEES AND EXPENSES OF THE TRUSTEE.
FCE and ExchangeCo jointly and severally agree to pay the Trustee reasonable
compensation for all of the services rendered by it under this Agreement and
will reimburse the Trustee for all reasonable expenses (including taxes other
than taxes based on the net income of the Trustee, fees paid to legal counsel
and other experts and advisors and travel expenses) and disbursements, including
the cost and expense of any suit or litigation of any character and any
proceedings before any governmental agency reasonably incurred by the Trustee in
connection with its duties under this Agreement; provided that FCE and
ExchangeCo shall have no obligation to reimburse the Trustee for any expenses or
disbursements paid, incurred or suffered by the Trustee in any suit or
litigation in which the Trustee is determined to have acted in bad faith or with
gross negligence, recklessness or willful misconduct.
ARTICLE 8
INDEMNIFICATION AND LIMITATION OF LIABILITY
SECTION 8.1 INDEMNIFICATION OF THE TRUSTEE.
(1) FCE and ExchangeCo jointly and severally agree to indemnify and hold
harmless the Trustee and each of its directors, officers, employees and
agents appointed
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and acting in accordance with this Agreement (collectively, the
"INDEMNIFIED PARTIES") against all claims, losses, damages, reasonable
costs, penalties, fines and reasonable expenses (including reasonable
expenses of the Trustee's legal counsel) which, without fraud, gross
negligence, recklessness, willful misconduct or bad faith on the part
of such Indemnified Party, may be paid, incurred or suffered by the
Indemnified Party by reason or as a result of the Trustee's acceptance
or administration of the Trust, its compliance with its duties set
forth in this Agreement, or any written or oral instruction delivered
to the Trustee by FCE or ExchangeCo pursuant hereto.
(2) In no case shall FCE or ExchangeCo be liable under this indemnity for
any claim against any of the Indemnified Parties unless FCE and
ExchangeCo shall be notified by the Trustee of the written assertion of
a claim or of any action commenced against the Indemnified Parties,
promptly after any of the Indemnified Parties shall have received any
such written assertion of a claim or shall have been served with a
summons or other first legal process giving information as to the
nature and basis of the claim. Subject to (ii) below, FCE and
ExchangeCo shall be entitled to participate at their own expense in the
defense and, if FCE and ExchangeCo so elect at any time after receipt
of such notice, either of them may assume the defense of any suit
brought to enforce any such claim. The Trustee shall have the right to
employ separate counsel in any such suit and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the
expense of the Trustee unless: (i) the employment of such counsel has
been authorized by FCE or ExchangeCo; or (ii) the named parties to any
such suit include both the Trustee and FCE or ExchangeCo and the
Trustee shall have been advised by counsel acceptable to FCE or
ExchangeCo that there may be one or more legal defenses available to
the Trustee that are different from or in addition to those available
to FCE or ExchangeCo and that, in the judgment of such counsel, would
present a conflict of interest were a joint representation to be
undertaken (in which case FCE and ExchangeCo shall not have the right
to assume the defense of such suit on behalf of the Trustee but shall
be liable to pay the reasonable fees and expenses of counsel for the
Trustee). This indemnity shall survive the termination of this
Agreement and the resignation or removal of the Trustee.
SECTION 8.2 LIMITATION OF LIABILITY.
The Trustee shall not be held liable for any loss which may occur by reason of
depreciation of the value of any part of the Trust Estate or any loss incurred
on any investment of funds pursuant to this Agreement, except to the extent that
such loss is attributable to the fraud, gross negligence, recklessness, willful
misconduct or bad faith on the part of the Trustee.
ARTICLE 9
CHANGE OF TRUSTEE
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SECTION 9.1 RESIGNATION.
The Trustee, or any trustee hereafter appointed, may at any time resign by
giving written notice of such resignation to FCE and ExchangeCo specifying the
date on which it desires to resign, provided that such notice shall not be given
less than thirty (30) days before such desired resignation date unless FCE and
ExchangeCo otherwise agree and provided further that such resignation shall not
take effect until the date of the appointment of a successor trustee and the
acceptance of such appointment by the successor trustee. Upon receiving such
notice of resignation, FCE and ExchangeCo shall promptly appoint a successor
trustee, which shall be a trust company organized and existing under the laws of
Canada, by written instrument in duplicate, one copy of which shall be delivered
to the resigning trustee and one copy to the successor trustee. Failing the
appointment and acceptance of a successor trustee, a successor trustee may be
appointed by order of a court of competent jurisdiction upon application of one
or more of the parties to this Agreement. If the retiring trustee is the party
initiating an application for the appointment of a successor trustee by order of
a court of competent jurisdiction, FCE and ExchangeCo shall be jointly and
severally liable to reimburse the retiring trustee for its legal costs and
expenses in connection with same.
SECTION 9.2 REMOVAL.
The Trustee, or any trustee hereafter appointed, may (provided a successor
trustee is appointed) be removed at any time on not less than 30 days' prior
notice by written instrument executed by FCE and ExchangeCo, in duplicate, one
copy of which shall be delivered to the trustee so removed and one copy to the
successor trustee.
SECTION 9.3 SUCCESSOR TRUSTEE.
Any successor trustee appointed as provided under this Agreement shall execute,
acknowledge and deliver to FCE and ExchangeCo and to its predecessor trustee an
instrument accepting such appointment. Thereupon the resignation or removal of
the predecessor trustee shall become effective and such successor trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, duties and obligations of its predecessor under this Agreement,
with the like effect as if originally named as trustee in this Agreement.
However, on the written request of FCE and ExchangeCo or of the successor
trustee, the trustee ceasing to act shall, upon payment of any amounts then due
it pursuant to the provisions of this Agreement, execute and deliver an
instrument transferring to such successor trustee all the rights and powers of
the trustee so ceasing to act. Upon the request of any such successor trustee,
FCE, ExchangeCo and such predecessor trustee shall execute any and all
instruments in writing for more fully and certainly vesting in and confirming to
such successor trustee all such rights and powers.
SECTION 9.4 NOTICE OF SUCCESSOR TRUSTEE.
Upon acceptance of appointment by a successor trustee as provided herein, FCE
and ExchangeCo shall cause to be mailed notice of the succession of such trustee
hereunder to each Beneficiary specified in a List. If FCE or ExchangeCo shall
fail to cause such notice to be mailed within 10 days after acceptance of
appointment by the successor trustee, the successor trustee shall cause such
notice to be mailed at the expense of FCE and ExchangeCo.
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ARTICLE 10
FCE SUCCESSORS
SECTION 10.1 CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC.
FCE shall not consummate any transaction (whether by way of reconstruction,
reorganization, consolidation, merger, transfer, sale, lease or otherwise)
whereby all or substantially all of its undertaking, property and assets would
become the property of any other Person or, in the case of a merger, of the
continuing corporation resulting therefrom unless, but may do so if:
(a) such other Person or continuing corporation (herein called the
"FCE Successor"), by operation of law, becomes, without more,
bound by the terms and provisions of this Agreement or, if not
so bound, executes, prior to or contemporaneously with the
consummation of such transaction, a trust agreement
supplemental hereto and such other instruments (if any) as are
satisfactory to the Trustee, acting reasonably, and in the
opinion of legal counsel to the Trustee are reasonably
necessary or advisable to evidence the assumption by the FCE
Successor of liability for all moneys payable and property
deliverable hereunder and the covenant of such FCE Successor
to pay and deliver or cause to be delivered the same and its
agreement to observe and perform all the covenants and
obligations of FCE under this Agreement; and
(b) such transaction shall be upon such terms and conditions as
substantially to preserve and not to impair in any material
respect any of the rights, duties, powers and authorities of
the Trustee or of the Beneficiaries hereunder.
SECTION 10.2 VESTING OF POWERS IN SUCCESSOR.
Whenever the conditions of Section 10.1 have been duly observed and performed,
the Trustee, FCE Successor and ExchangeCo shall, if required by Section 10.1,
execute and deliver the supplemental trust agreement provided for in Article 11
and thereupon FCE Successor shall possess and from time to time may exercise
each and every right and power of FCE under this Agreement in the name of FCE or
otherwise and any act or proceeding by any provision of this Agreement required
to be done or performed by the Board of Directors of FCE or any officers of FCE
may be done and performed with like force and effect by the directors or
officers of such FCE Successor.
SECTION 10.3 WHOLLY-OWNED SUBSIDIARIES.
Nothing herein shall be construed as preventing the amalgamation or merger of
any wholly-owned direct or indirect subsidiary of FCE with or into FCE or the
winding-up, liquidation or dissolution of any wholly-owned subsidiary of FCE
provided that all of the assets of such subsidiary are transferred to FCE or
another wholly-owned direct or indirect subsidiary of FCE and any such
transactions are expressly permitted by this Article 10.
ARTICLE 11
AMENDMENTS AND SUPPLEMENTAL TRUST AGREEMENTS
SECTION 11.1 AMENDMENTS, MODIFICATIONS, ETC.
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Subject to Section 11.2 and Section 11.4, this Agreement may not be amended or
modified except by an agreement in writing executed by FCE, ExchangeCo and the
Trustee and approved by the Beneficiaries in accordance with Section 11.2 of
the Exchangeable Share Provisions.
SECTION 11.2 MINISTERIAL AMENDMENTS.
Notwithstanding the provisions of Section 11.1, the parties to this Agreement
may in writing, at any time and from time to time, without the approval of the
Beneficiaries, amend or modify this Agreement for the purposes of:
(a) adding to the covenants of any or all parties hereto for the
protection of the Beneficiaries hereunder provided that the
Board of Directors of each of ExchangeCo and FCE shall be of
the good faith opinion that such additions will not be
prejudicial to the rights or interests of the Beneficiaries;
(b) making such amendments or modifications not inconsistent with
this Agreement as may be necessary or desirable with respect
to matters or questions which, in the good faith opinion of
the Board of Directors of each of FCE and ExchangeCo and in
the opinion of the Trustee, having in mind the best interests
of the Beneficiaries it may be expedient to make, provided
that such Boards of Directors and the Trustee, acting on the
advice of counsel, shall be of the opinion that such
amendments and modifications will not be prejudicial to the
interests of the Beneficiaries; or
(c) making such changes or corrections which, on the advice of
counsel to FCE, ExchangeCo and the Trustee, are required for
the purpose of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake or
manifest error, provided that the Trustee, acting on the
advice of counsel, and the Board of Directors of each of FCE
and ExchangeCo shall be of the opinion that such changes or
corrections will not be prejudicial to the rights and
interests of the Beneficiaries.
SECTION 11.3 MEETING TO CONSIDER AMENDMENTS.
ExchangeCo, at the request of FCE, shall call a meeting or meetings of the
Beneficiaries for the purpose of considering any proposed amendment or
modification requiring approval pursuant hereto. Any such meeting or meetings
shall be called and held in accordance with the by-laws of ExchangeCo, the
Exchangeable Share Provisions and all applicable laws.
SECTION 11.4 CHANGES IN CAPITAL OF FCE AND EXCHANGECO.
At all times after the occurrence of any event contemplated pursuant to Section
2.7 or 2.8 of the Support Agreement or otherwise, as a result of which either
FCE Common Stock or the Exchangeable Shares or both are in any way changed, this
Agreement shall forthwith be deemed amended and modified as necessary in order
that it shall apply with full force and effect, mutatis mutandis, to all new
securities into which FCE Common Stock or the Exchangeable Shares or both are so
changed.
SECTION 11.5 EXECUTION OF SUPPLEMENTAL TRUST AGREEMENTS.
B-130
No amendment to or modification or waiver of any of the provisions of this
Agreement otherwise permitted hereunder shall be effective unless made in
writing and signed by all of the parties hereto. From time to time ExchangeCo,
FCE and the Trustee may, subject to the provisions of these presents, and they
shall, when so directed by these presents, execute and deliver by their proper
officers, trust agreements or other instruments supplemental hereto, which
thereafter shall form part hereof, for any one or more of the following
purposes:
(a) evidencing the succession of FCE Successors and the covenants
of and obligations assumed by each such FCE Successor in
accordance with the provisions of Article 10 and the
successors of any successor trustee in accordance with the
provisions of Article 9;
(b) making any additions to, deletions from or alterations of the
provisions of this Agreement or the Voting Rights, the
Exchange Right or the Automatic Exchange Rights which, in the
opinion of the Trustee, will not be prejudicial to the
interests of the Beneficiaries or are, in the opinion of
counsel to the Trustee, necessary or advisable in order to
incorporate, reflect or comply with any legislation the
provisions of which apply to FCE, ExchangeCo, the Trustee or
this Agreement; and
(c) for any other purposes not inconsistent with the provisions of
this Agreement, including to make or evidence any amendment or
modification to this Agreement as contemplated hereby,
provided that, in the opinion of the Trustee, the rights of
the Trustee and Beneficiaries will not be prejudiced thereby.
ARTICLE 12
TERMINATION
SECTION 12.1 TERM.
The Trust created by this Agreement shall continue until the earliest to occur
of the following events:
(a) no outstanding Exchangeable Shares are held by a Beneficiary;
(b) each of FCE and ExchangeCo elects in writing to terminate the
Trust and such termination is approved by the Beneficiaries in
accordance with Section 10.2 of the Exchangeable Share
Provisions; and
(c) 21 years after the death of the last survivor of the
descendants of His Majesty King George VI of Canada and the
United Kingdom of Great Britain and Northern Ireland living on
the date of the creation of the Trust.
SECTION 12.2 SURVIVAL OF AGREEMENT.
This Agreement shall survive any termination of the Trust and shall continue
until there are no Exchangeable Shares outstanding held by a Beneficiary;
provided, however, that the provisions of Articles 7 and 8 shall survive any
such termination of this Agreement.
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ARTICLE 13
GENERAL
SECTION 13.1 SEVERABILITY.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 13.2 ASSIGNMENT.
No party hereto may assign this Agreement or any of its rights, interests or
obligations under this Agreement (whether by operation of law or otherwise)
except that ExchangeCo may assign in its sole discretion, any or all of its
rights, interests and obligations hereunder to any wholly-owned subsidiary of
FCE provided that no such assignment shall relieve ExchangeCo of its
responsibilities hereunder.
SECTION 13.3 BINDING EFFECT.
Subject to Section 13.2, this Agreement and the Arrangement shall be binding
upon, enure to the benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns and to the benefit of the
Beneficiaries.
SECTION 13.4 NOTICES TO PARTIES.
All notices and other communications hereunder shall be in writing and shall be
deemed given when delivered personally, telecopied (which is confirmed) or
dispatched (postage prepaid) to a nationally recognized overnight courier
service with overnight delivery instructions, in each case addressed to the
particular party at:
(a) If to FCE, at:
3 Great Pasture Road
Danbury, Connecticut
06813
Attention: Chief Executive Officer
Facsimile No.: (203) 825-6001
(b) If to ExchangeCo, at:
-
Attention: -
Facsimile No.: -
(c) If to the Trustee, at:
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-
Attention: -
Facsimile No.: -
or at such other address of which any party may, from time to time, advise the
other parties by notice in writing given in accordance with the foregoing.
SECTION 13.5 NOTICE TO BENEFICIARIES.
Any and all notices to be given and any documents to be sent to any
Beneficiaries may be given or sent to the address of such Beneficiary shown on
the register of holders of Exchangeable Shares in any manner permitted by the
by-laws or Exchangeable Share Provisions of ExchangeCo from time to time in
force in respect of notices to shareholders and shall be deemed to be received
(if given or sent in such manner) at the time specified in such by-laws, or
Exchangeable Share Provisions, the provisions of which by-laws or Exchangeable
Share Provisions shall apply mutatis mutandis to notices or documents as
aforesaid sent to such Beneficiaries.
SECTION 13.6 COUNTERPARTS.
This Agreement may be executed in counterparts, each of which shall be deemed to
be an original but all of which together shall constitute one and the same
instrument.
13.7 GOVERNING LAWS; CONSENT TO JURISDICTION.
This Agreement shall be governed by and construed in accordance with the laws of
Alberta and the federal laws of Canada, applicable therein. Each party hereby
irrevocably attorns to the jurisdiction of the courts of Alberta in respect of
all matters arising under or in relation to this Agreement and FCE hereby
appoints Stikeman Elliott as its registered office in Calgary, Alberta as
attorney for service of process.
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SECTION 13.8 UNITED STATES TAX CHARACTERIZATION.
The parties hereto recognize and intend that, for United States federal, state
and local income, franchise and similar tax purposes, the Trust will be
disregarded as an entity separate from FCE pursuant to Treas. Reg.
301.7701-3(b), and no party shall take any position on any tax return or
otherwise that is inconsistent with such treatment.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
FUELCELL ENERGY, INC.
By: _____________________________________
Name:
Title:
- ALBERTA LTD.
By: _____________________________________
Name:
Title:
- TRUST COMPANY OF CANADA
By: _____________________________________
Name:
Title:
B-134
EXHIBIT E-1
PROVISIONS ATTACHING TO THE
EXCHANGEABLE SHARES OF
- ALBERTA LTD.
The Exchangeable Shares shall have the following rights, privileges,
restrictions and conditions:
ARTICLE 1
INTERPRETATION
1.1 For the purposes of these share provisions:
"ABCA" means the Business Corporations Act (Alberta), as amended,
consolidated or reenacted from time to time;
"AFFILIATE" has the meaning ascribed thereto in the Securities Act,
unless otherwise expressly stated herein;
"ARRANGEMENT" means an arrangement under section 193 of the ABCA on the
terms and subject to the conditions set out in the Plan of Arrangement;
"AUTOMATIC Exchange Right" has the meaning ascribed thereto in the
Voting and Exchange Trust Agreement;
"BOARD OF DIRECTORS" means the board of directors of the Corporation;
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a
statutory or civic holiday in the United States or Canada;
"CALLCO" means - Alberta Ltd., a corporation organized and existing
under the laws of Alberta;
"CALLCO CALL NOTICE" has the meaning ascribed thereto in Section 6.3 of
these share provisions;
"CANADIAN DOLLAR EQUIVALENT" means in respect of an amount expressed in
a currency other than Canadian dollars (the "FOREIGN CURRENCY AMOUNT")
at any date the product obtained by multiplying:
(a) the Foreign Currency Amount, by
(b) the noon spot exchange rate on such date for such
foreign currency expressed in Canadian dollars as
reported by the Bank of Canada or, in the event such
spot exchange rate is not available, such spot
exchange rate on such date for such foreign currency
expressed in Canadian dollars as may be deemed by the
Board of Directors to be appropriate for such
purpose;
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"COMBINATION AGREEMENT" means the combination agreement made as of the
- day of -, 2003 between FCE and the Company, as amended, supplemented
and/or restated in accordance therewith prior to the Effective Time
providing for, among other things, the Arrangement;
"COMMON SHARES" mean the common shares of the Corporation;
"COMPANY" means Global Thermoelectric Inc., a corporation organized and
existing under the laws of Alberta;
"CORPORATION" means - Alberta Ltd., a corporation organized and
existing under the laws of Alberta;
"COURT" means the Court of Queen's Bench of Alberta;
"CURRENT MARKET PRICE" means, in respect of FCE Common Stock on any
date, the Canadian Dollar Equivalent of the average of the closing bid
and ask prices (computed and rounded to the third decimal point) of FCE
Common Stock during a period of 20 consecutive trading days ending two
trading days before such date on Nasdaq, or, if the FCE Common Stock is
not then listed on Nasdaq, on such other stock exchange or automated
quotation system on which FCE Common Stock is listed or quoted, as the
case may be, as may be selected by the Board of Directors for such
purpose; provided, however, that if in the opinion of the Board of
Directors the public distribution or trading activity of FCE Common
Stock during such period does not create a market which reflects the
fair market value of FCE Common Stock, then the Current Market Price of
the FCE Common Stock shall be determined by the Board of Directors, in
good faith and in its sole discretion, but based upon the advice of
such qualified independent financial advisors as the Board of Directors
may deem appropriate and provided further that any such selection,
opinion or determination by the Board of Directors shall be conclusive
and binding;
"EFFECTIVE DATE" means the date shown on the articles of arrangement
filed with the Registrar under the ABCA giving effect to the
Arrangement (the "ARTICLES");
"EFFECTIVE TIME" means 12:01 a.m. (Calgary time) on the Effective Date;
"EXCHANGE PUT DATE" has the meaning ascribed thereto in Section 9.2;
"EXCHANGE PUT EVENT" means the failure by one or both of the
Corporation or Callco, as applicable, to complete any redemption,
retraction, distribution on liquidation in respect of, or purchase
Exchangeable Shares required to be completed by it as contemplated
herein, elsewhere in the Articles or in the Voting and Exchange Trust
Agreement;
"EXCHANGE PUT RIGHT" has the meaning ascribed thereto in Section 9.1;
"EXCHANGE RIGHT" has the meaning ascribed thereto in the Voting and
Exchange Trust Agreement;
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"EXCHANGEABLE SHARE CONSIDERATION" means, with respect to each
Exchangeable Share, for any acquisition of, redemption of or
distribution of assets of the Corporation in respect of, or purchase
pursuant to, these share provisions, the Plan of Arrangement, the
Support Agreement or the Voting and Exchange Trust Agreement:
(a) the Current Market Price of one share of FCE Common
Stock deliverable in connection with such action;
plus
(b) a cheque or cheques payable at par at any branch of
the bankers of the payor in the amount of all
declared, payable and unpaid, and all undeclared but
payable, cash dividends deliverable in connection
with such action; plus
(c) such stock or other property constituting any
declared payable and unpaid and all undeclared but
payable non-cash dividends deliverable in connection
with such action,
provided that (i) the part of the consideration which represents (a)
above shall be fully paid and satisfied by the delivery of one share of
FCE Common Stock, such share to be duly issued, fully paid and
non-assessable, (ii) the part of the consideration which represents (c)
above shall be fully paid and satisfied by delivery of such non-cash
items, (iii) any such consideration shall be delivered free and clear
of any lien, claim, encumbrance, security interest or adverse claim or
interests, and (iv) any such consideration shall be paid less any tax
required to be deducted and withheld therefrom and without interest;
"EXCHANGEABLE SHARE PRICE" means, for each Exchangeable Share, an
amount equal to the aggregate of:
(a) the Current Market Price of a share of FCE Common
Stock; plus
(b) an additional amount equal to the full amount of all
cash dividends declared, payable and unpaid, on such
Exchangeable Share; plus
(c) an additional amount equal to the full amount of all
dividends declared and payable or paid on FCE Common
Stock which have not been declared or paid on
Exchangeable Shares in accordance herewith; plus
(d) an additional amount representing the full amount of
all non-cash dividends declared, payable and unpaid,
or undeclared but payable on such Exchangeable Share;
"EXCHANGEABLE SHARE VOTING EVENT" means any matter in respect of which
holders of Exchangeable Shares are entitled to vote as shareholders of
the Corporation, other than an Exempt Exchangeable Share Voting Event,
and, for greater certainty, excludes any matter in respect of which
holders of Exchangeable Shares are entitled to vote (or instruct the
Trustee to vote) in their capacity as Beneficiaries under (and as that
term is defined in) the Voting and Exchange Trust Agreement;
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"EXCHANGEABLE SHARES" means the non-voting exchangeable shares in the
capital of the Corporation, having the rights, privileges, restrictions
and conditions set forth herein;
"EXEMPT EXCHANGEABLE SHARE VOTING EVENT" means any matter in respect of
which holders of Exchangeable Shares are entitled to vote as
shareholders of the Corporation in order to approve or disapprove, as
applicable, any change to, or in the rights of the holders of, the
Exchangeable Shares, where the approval or disapproval, as applicable,
of such change would be required to maintain the economic and legal
equivalence of the Exchangeable Shares and the FCE Common Stock;
"FCE" means FuelCell Energy, Inc., a corporation existing under the
laws of the State of Delaware and includes any successor corporation or
any corporation in which the holders of FCE Common Stock hold
securities resulting from the application of Section 2.7 of the Support
Agreement;
"FCE COMMON STOCK" means the shares of common stock, $.0001 par value
per share, in the capital of FCE and any other securities into which
such shares may be changed or resulting from the application of Section
2.7 of the Support Agreement;
"FCE CONTROL TRANSACTION" means any merger, amalgamation, tender offer,
material sale of shares or rights or interests therein or thereto or
similar transactions involving FCE, or any proposal to carry out the
same;
"FCE DIVIDEND DECLARATION DATE" means the date on which the board of
directors of FCE declares any dividend on the FCE Common Stock;
"FINAL ORDER" means the final order of the Court approving the
Arrangement, as such order may be amended by the Court at any time and
from time to time prior to the Effective Time;
"GOVERNMENTAL ENTITY" means any (a) multinational, federal, provincial,
territorial, state, regional, municipal, local or other government,
governmental or public department, central bank, court, tribunal,
arbitral body, commission, board, bureau or agency, domestic or
foreign, (b) subdivision, agent, commission, board, or authority of any
of the foregoing, or (c) quasi-governmental or private body exercising
any regulatory, expropriation or taxing authority under or for the
account of any of the foregoing;
"LIQUIDATION AMOUNT" has the meaning ascribed thereto in Section 5.1(a)
of these share provisions;
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in the
Articles;
"LIQUIDATION DATE" has the meaning ascribed thereto in Section 5.1(a)
of these share provisions;
"NASDAQ" means The Nasdaq Stock Market Inc.;
B-138
"COMPANY COMMON SHARES" means the issued and outstanding common shares
in the capital of the Corporation immediately prior to the Effective
Time;
"PERSON" includes any individual, firm, partnership, joint venture,
venture capital fund, limited liability corporation, unlimited
liability corporation, association, trust, trustee, executor,
administrator, legal personal representative, estate, group, body
corporate, corporation, unincorporated association or organization,
Governmental Entity, syndicate or other entity, whether or not having
legal status;
"PLAN OF ARRANGEMENT" means the plan of arrangement relating to the
arrangement of the Corporation under section 193 of the ABCA
contemplated in the Combination Agreement and which Plan of Arrangement
is attached to the Combination Agreement as Exhibit A, subject to any
amendments or variations thereto made in accordance with Article 7 of
the Plan of Arrangement or Section 8.8 of the Combination Agreement or
made at the direction of the Court in the Final Order;
"PURCHASE PRICE" has the meaning ascribed thereto in Section 6.3 of
these share provisions;
"RECORD HOLDER" means, when used with reference to the Exchangeable
Shares, the holders of Exchangeable Shares shown from time to time in
the register maintained by or on behalf of the Corporation in respect
of the Exchangeable Shares;
"REDEMPTION CALL PURCHASE PRICE" has the meaning ascribed thereto in
the Articles;
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in the
Articles;
"REDEMPTION DATE" means the date, if any, established by the Board of
Directors for the redemption by the Corporation of all but not less
than all of the outstanding Exchangeable Shares pursuant to Article 7
of these share provisions, which date shall be no earlier than the
fifth anniversary of the Effective Date, unless:
(i) if at any time following the date that is 15
calendar months after the Effective Date,
there are less than 1,000,000 Exchangeable
Shares outstanding (other than Exchangeable
Shares held by FCE and its affiliates), as
such number of shares may be adjusted as
deemed appropriate by the Board of Directors
to give effect to any subdivision or
consolidation of or stock dividend on the
Exchangeable Shares, any issue or
distribution of rights to acquire
Exchangeable Shares or securities
exchangeable for or convertible into
Exchangeable Shares, any issue or
distribution of other securities or rights
or evidences of indebtedness or assets, or
any other capital reorganization or other
transaction affecting the Exchangeable
Shares), in which case the Board of
Directors may accelerate such redemption
date to such date prior to the fifth
anniversary of the Effective Date as it may
determine, upon at least 60 days' prior
written notice to the registered holders of
the Exchangeable Shares and the Trustee;
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(ii) a FCE Control Transaction occurs, in which
case, provided that the Board of Directors
determines, in good faith and in its sole
discretion, that it is not reasonably
practicable to substantially replicate the
terms and conditions of the Exchangeable
Shares in connection with such FCE Control
Transaction and that the redemption of all
but not less than all of the outstanding
Exchangeable Shares is necessary to enable
the completion of such FCE Control
Transaction in accordance with its terms,
the Board of Directors may accelerate such
redemption date to such date prior to the
fifth anniversary of the Effective Date as
it may determine, upon such number of days'
prior written notice to the Record Holders
of the Exchangeable Shares and the Trustee
as the Board of Directors may determine to
be reasonably practicable in such
circumstances;
(iii) an Exchangeable Share Voting Event is
proposed, in which case, provided that the
Board of Directors has determined, in good
faith and in its sole discretion, that it is
not reasonably practicable to accomplish the
business purpose intended by the
Exchangeable Share Voting Event in any other
commercially reasonable manner that does not
result in an Exchangeable Share Voting
Event, which business purpose must be bona
fide and not for the primary purpose of
causing the occurrence of a Redemption Date,
the redemption date shall be the Business
Day prior to the record date for any meeting
or vote of the holders of the Exchangeable
Shares to consider the Exchangeable Share
Voting Event and the Board of Directors
shall give such number of days' prior
written notice of such redemption to the
registered holders of the Exchangeable
Shares and the Trustee as the Board of
Directors may determine to be reasonably
practicable in such circumstances; or
(iv) an Exempt Exchangeable Share Voting Event is
proposed and the holders of the Exchangeable
Shares fail to take the necessary action at
a meeting or other vote of holders of
Exchangeable Shares, to approve or
disapprove, as applicable, the Exempt
Exchangeable Share Voting Event, in which
case the redemption date shall be the
Business Day following the day on which the
holders of the Exchangeable Shares fail to
take such action,
provided, however, that the accidental failure or omission to
give any notice of redemption under clauses (i), (ii) or (iii)
above to any of such holders of Exchangeable Shares shall not
affect the validity of any such redemption;
"REDEMPTION PRICE" has the meaning ascribed thereto in Section 7.1 of
these share provisions;
"REGISTRAR" means the Registrar appointed pursuant to section 263 of
the ABCA;
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"RETRACTED SHARES" has the meaning ascribed thereto in Section 6.1(a)
of these share provisions;
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in Section
6.1(c) of these share provisions;
"RETRACTION DATE" has the meaning ascribed thereto in Section 6.1(b) of
these share provisions;
"RETRACTION PRICE" has the meaning ascribed thereto in Section 6.1 of
these share provisions;
"RETRACTION REQUEST" has the meaning ascribed thereto in Section 6.1 of
these share provisions;
"SECURITIES ACT" means the Securities Act (Alberta) and the rules,
regulations and policies made thereunder, as now in effect and as they
may be amended, consolidated or reenacted from time to time;
"SUBDIVISION" has the meaning ascribed thereto in Section 3.2;
"SUPPORT AGREEMENT" means the agreement made among FCE, Callco and the
Corporation substantially in the form and content of Exhibit C annexed
to the Combination Agreement, with such changes thereto as the parties
to the Combination Agreement, acting reasonably, may agree;
"TRANSFER AGENT" means - or such other Person as may from time to time
be appointed by the Corporation as the registrar and transfer agent for
the Exchangeable Shares;
"TRUSTEE" means the trustee to be chosen by FCE and the Corporation,
acting reasonably, to act as trustee under the Voting and Exchange
Trust Agreement, and any successor trustee appointed under the Voting
and Exchange Trust Agreement; and
"VOTING AND EXCHANGE TRUST AGREEMENT" means the agreement made among
FCE, the Corporation and the Trustee in connection with the Plan of
Arrangement substantially in the form and content of Exhibit D annexed
to the Combination Agreement with such changes thereto as the parties
to the Combination Agreement, acting reasonably, may agree.
ARTICLE 2
RANKING OF EXCHANGEABLE SHARES
2.1 The Exchangeable Shares shall be entitled to a preference over
the Common Shares and any other shares ranking junior to the Exchangeable Shares
with respect to the payment of dividends and the distribution of assets in the
event of the liquidation, dissolution or winding-up of the Corporation, whether
voluntary or involuntary, or any other distribution of the assets of the
Corporation, among its shareholders for the purpose of winding-up its affairs.
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ARTICLE 3
DIVIDENDS
3.1 A holder of an Exchangeable Share shall be entitled to receive
and the Board of Directors shall, subject to applicable law, on each FCE
Dividend Declaration Date, declare a dividend on each Exchangeable Share:
(a) in the case of a cash dividend declared on the FCE
Common Stock, in an amount in cash for each
Exchangeable Share in U.S. dollars, or the Canadian
Dollar Equivalent thereof on the FCE Dividend
Declaration Date, in each case, corresponding to the
cash dividend declared on each share of FCE Common
Stock;
(b) in the case of a stock dividend declared on the FCE
Common Stock to be paid in FCE Common Stock subject
to Section 3.2, by the issue or transfer by the
Corporation of such number of Exchangeable Shares for
each Exchangeable Share as is equal to the number of
shares of FCE Common Stock to be paid on each share
of FCE Common Stock; or
(c) in the case of a dividend declared on the FCE Common
Stock in property other than cash or shares of FCE
Common Stock, in such type and amount of property for
each Exchangeable Share as is the same as or
economically equivalent to (to be determined by the
Board of Directors as contemplated by Section 3.6)
the type and amount of property declared as a
dividend on each share of FCE Common Stock.
Such dividends shall be paid out of money, assets or property of the
Corporation properly applicable to the payment of dividends, or out of
authorized but unissued securities of the Corporation, as applicable.
3.2 In the case of a stock dividend declared on the FCE Common
Stock to be paid in FCE Common Stock, in lieu of declaring the stock dividend
contemplated by Section 3.1(b) on the Exchangeable Shares, the Board of
Directors may, in good faith and in its discretion and subject to applicable law
and to obtaining all required regulatory approvals, subdivide, redivide or
change (the "SUBDIVISION") each issued and unissued Exchangeable Share on the
basis that each Exchangeable Share before the subdivision becomes a number of
Exchangeable Shares equal to the sum of (i) one share of FCE Common Stock and
(ii) the number of shares of FCE Common Stock to be paid as a stock dividend on
each share of FCE Common Stock. In making such Subdivision, the Board of
Directors shall consider the effect thereof upon the then outstanding
Exchangeable Shares and the general taxation consequences of the Subdivision to
the holders of the Exchangeable Shares. In such instance, and notwithstanding
any other provision hereof, such Subdivision shall become effective on the
effective date specified in Section 3.4 without any further act or formality on
the part of the Board of Directors or of the holders of Exchangeable Shares.
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3.3 Cheques of the Corporation payable at par at any branch of the
bankers of the Corporation shall be issued in respect of any cash dividends
contemplated by Section 3.1(a) and the sending of such a cheque to each holder
of an Exchangeable Share shall satisfy the cash dividend represented thereby
unless the cheque is not paid on presentation. Subject to applicable law,
certificates registered in the name of the Record Holder of Exchangeable Shares
shall be issued or transferred in respect of any stock dividends contemplated by
Section 3.1(b) or any Subdivision contemplated by Section 3.2 and the sending of
such a certificate to each holder of an Exchangeable Share shall satisfy the
stock dividend represented thereby. Such other type and amount of property in
respect of any dividends contemplated by Section 3.1(c) shall be issued,
distributed or transferred by the Corporation in such manner as it shall
determine and the issuance, distribution or transfer thereof by the Corporation
to each holder of an Exchangeable Share shall satisfy the dividend represented
thereby. No holder of an Exchangeable Share shall be entitled to recover by
action or other legal process against the Corporation any dividend that is
represented by a cheque that has not been duly presented to the Corporation's
bankers for payment or that otherwise remains unclaimed for a period of six
years from the date on which such dividend was first payable.
3.4 The record date for the determination of the Record Holders of
Exchangeable Shares entitled to receive payment of, and the payment date for,
any dividend declared on the Exchangeable Shares under Section 3.1 shall be the
same dates as the record date and payment date, respectively, for the
corresponding dividend declared on the FCE Common Stock. The record date for the
determination of the Record Holders of Exchangeable Shares entitled to receive
Exchangeable Shares in connection with any Subdivision of the Exchangeable
Shares under Section 3.2 and the effective date of such Subdivision shall be the
same dates as the record date and payment date, respectively, for the
corresponding dividend declared on the FCE Common Stock.
3.5 If on any payment date for any dividends declared on the
Exchangeable Shares under Section 3.1 the dividends are not paid in full on all
of the Exchangeable Shares then outstanding, any such dividends that remain
unpaid shall be paid on a subsequent date or dates determined by the Board of
Directors on which the Corporation shall have sufficient moneys, assets or
property properly applicable to the payment of such dividends.
3.6 The Board of Directors shall determine, in good faith and in
its sole discretion, economic equivalence for the purposes of Sections 3.1 and
3.2, and each such determination shall be conclusive and binding on the
Corporation and its shareholders. In making each such determination, the
following factors shall, without excluding other factors determined by the Board
of Directors to be relevant, be considered by the Board of Directors:
(a) in the case of any stock dividend or other
distribution payable in FCE Common Stock, the number
of such shares issued in proportion to the number of
FCE Common Stock previously outstanding;
(b) in the case of the issuance or distribution of any
rights, options or warrants to subscribe for or
purchase FCE Common Stock (or securities exchangeable
for or convertible into or carrying rights to acquire
FCE
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Common Stock), the relationship between the exercise
price of each such right, option or warrant and the
Current Market Price;
(c) in the case of the issuance or distribution of any
other form of property (including any shares or
securities of FCE of any class other than FCE Common
Stock, any rights, options or warrants other than
those referred to in Section 3.6(b) above, any
evidences of indebtedness of FCE or any assets of
FCE) the relationship between the fair market value
(as determined by the Board of Directors in the
manner above contemplated) of such property to be
issued or distributed with respect to each
outstanding share of FCE Common Stock and the Current
Market Price; and
(d) in all such cases, the general taxation consequences
of the relevant event to holders of Exchangeable
Shares to the extent that such consequences may
differ from the taxation consequences to holders of
FCE Common Stock as a result of differences between
taxation laws of Canada and the United States (except
for any differing consequences arising as a result of
differing marginal taxation rates and without regard
to the individual circumstances of holders of
Exchangeable Shares).
3.7 Except as provided in this Article 3, the holders of
Exchangeable Shares shall not be entitled to receive dividends in respect
thereof. Notwithstanding any provision of this Article 3 to the contrary, if the
Exchangeable Share Price is paid to a holder of an Exchangeable Share by FCE or
Callco, as applicable, pursuant to the Retraction Call Right, the Redemption
Call Right, the Liquidation Call Right, to the Exchange Right or the Automatic
Exchange Right, the holder of the Exchangeable Share shall cease to have any
right to be paid any amount by the Corporation in respect of any unpaid
dividends on such Exchangeable Shares.
ARTICLE 4
CERTAIN RESTRICTIONS
4.1 So long as any of the Exchangeable Shares are outstanding, the
Corporation shall not at any time without, but may at any time with, the
approval of the holders of the Exchangeable Shares given as specified in Section
10.2 of these share provisions:
(a) pay any dividends on the Common Shares or any other
shares ranking junior to the Exchangeable Shares with
respect to the payment of dividends, other than stock
dividends payable in Common Shares or any such other
shares ranking junior to the Exchangeable Shares, as
the case may be;
(b) redeem or purchase or make any capital distribution
in respect of Common Shares or any other shares
ranking junior to the Exchangeable Shares with
respect to the payment of dividends or on any
liquidation, dissolution or
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winding-up of the Corporation or any other
distribution of the assets of the Corporation;
(c) redeem or purchase any other shares of the
Corporation ranking equally with the Exchangeable
Shares with respect to the payment of dividends or on
any liquidation, dissolution or winding-up of the
Corporation or any other distribution of the assets
of the Corporation;
(d) issue any Exchangeable Shares or any other shares of
the Corporation ranking equally with, or superior to,
the Exchangeable Shares other than by way of stock
dividends to the holders of such Exchangeable Shares;
or
(e) amend the Articles or bylaws of the Corporation in
either case in any manner that would adversely effect
the rights or privileges of the holders of the
Exchangeable Shares.
The restrictions in Sections 4.1(a), (b), (c) and (d) shall not apply
if all dividends on the outstanding Exchangeable Shares corresponding
to dividends declared and paid to date on the FCE Common Stock shall
have been declared and paid in full on the Exchangeable Shares.
ARTICLE 5
DISTRIBUTION ON LIQUIDATION
5.1 In the event of the liquidation, dissolution or winding-up of
the Corporation or any other distribution of the assets of the Corporation among
its shareholders for the purpose of winding up its affairs, a holder of
Exchangeable Shares shall be entitled, subject to applicable law and to the
exercise by Callco of the Liquidation Call Right, to receive from the assets of
the Corporation in respect of each Exchangeable Share held by such holder on the
effective date (the "LIQUIDATION DATE") of such liquidation, dissolution,
winding-up or distribution of assets, before any distribution of any part of the
assets of the Corporation among the holders of the Common Shares or any other
shares ranking junior to the Exchangeable Shares, an amount per share equal to
the Exchangeable Share Price applicable on the last Business Day prior to the
Liquidation Date (the "LIQUIDATION AMOUNT").
5.2 On or promptly after the Liquidation Date, and subject to the
exercise by Callco of the Liquidation Call Right, the Corporation shall cause to
be delivered to the holders of the Exchangeable Shares the Liquidation Amount
for each such Exchangeable Share upon presentation and surrender of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the ABCA and the articles and by-laws of the
Corporation and such additional documents and instruments as the Transfer Agent
and the Corporation may reasonably require, at the registered office of the
Corporation or at any office of the Transfer Agent as may be specified by the
Corporation by notice to the holders of the Exchangeable Shares. Payment of the
total Liquidation Amount for such Exchangeable Shares shall be made by delivery
to each holder, at the address of the holder recorded in the register of the
Corporation for the
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Exchangeable Shares or by holding for pick-up by the holder at the registered
office of the Corporation or at any office of the Transfer Agent as may be
specified by the Corporation by notice to the holders of Exchangeable Shares, on
behalf of the Corporation of the Exchangeable Share Consideration representing
the total Liquidation Amount. On and after the Liquidation Date, the holders of
the Exchangeable Shares shall cease to be holders of such Exchangeable Shares
and shall not be entitled to exercise any of the rights of holders in respect
thereof (including any rights under the Voting and Exchange Trust Agreement),
other than the right to receive their proportionate part of the total
Liquidation Amount, unless payment of the total Liquidation Amount for such
Exchangeable Shares shall not be made upon presentation and surrender of share
certificates in accordance with the foregoing provisions, in which case the
rights of the holders shall remain unaffected until the total Liquidation Amount
to which such holders are entitled shall have been paid to such holders in the
manner hereinbefore provided. The Corporation shall have the right at any time
on or after the Liquidation Date to deposit or cause to be deposited the
Exchangeable Share Consideration in respect of the Exchangeable Shares
represented by certificates that have not at the Liquidation Date been
surrendered by the Record Holders thereof in a custodial account with any
chartered bank or trust company in Canada. Upon such deposit being made, the
rights of the holders of Exchangeable Shares, after such deposit, shall be
limited to receiving their proportionate part of the total Liquidation Amount
for such Exchangeable Shares so deposited, against presentation and surrender of
the said certificates held by them, respectively, in accordance with the
foregoing provisions. Upon such payment or deposit of such Exchangeable Share
Consideration, the holders of the Exchangeable Shares shall thereafter be
considered and deemed for all purposes to be Record Holders of the FCE Common
Stock delivered to them or the custodian on their behalf.
5.3 After the Corporation has satisfied its obligations to pay the
holders of the Exchangeable Shares the Liquidation Amount per Exchangeable Share
pursuant to Section 5.1 of these share provisions, such holders shall not be
entitled to share in any further distribution of the assets of the Corporation.
ARTICLE 6
RETRACTION OF EXCHANGEABLE SHARES BY HOLDER
6.1 A holder of Exchangeable Shares shall be entitled at any time,
subject to the exercise by Callco of the Retraction Call Right and otherwise
upon compliance with the provisions of this Article 6, to require the
Corporation to redeem any or all of the Exchangeable Shares registered in the
name of such holder for an amount per share equal to the Exchangeable Share
Price applicable on the last Business Day prior to the Retraction Date (the
"RETRACTION PRICE"), which shall be satisfied in full by the Corporation causing
to be delivered to such holder the Exchangeable Share Consideration representing
the Retraction Price. To effect such redemption, the holder shall present and
surrender at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation by notice to the holders
of Exchangeable Shares, the certificate or certificates representing the
Exchangeable Shares which the holder desires to have the Corporation redeem,
together with such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under the ABCA and the articles and bylaws of
the Corporation and such additional documents and instruments as the Transfer
Agent and the Corporation may reasonably require, and together with a duly
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executed statement (the "RETRACTION REQUEST") in the form of Schedule A hereto
or in such other form as may be acceptable to the Corporation:
(a) specifying that the holder desires to have all or any
number specified therein of the Exchangeable Shares
represented by such certificate or certificates (the
"RETRACTED SHARES") redeemed by the Corporation;
(b) stating the Business Day on which the holder desires
to have the Corporation redeem the Retracted Shares
(the "RETRACTION DATE"), provided that the Retraction
Date shall be not less than 5 Business Days nor more
than 15 Business Days after the date on which the
Retraction Request is received by the Corporation and
further provided that, in the event that no such
Business Day is specified by the holder in the
Retraction Request, the Retraction Date shall be
deemed to be the 15th Business Day after the date on
which the Retraction Request is received by the
Corporation; and
(c) acknowledging the overriding right (the "RETRACTION
CALL RIGHT") of Callco to purchase all but not less
than all the Retracted Shares directly from the
holder and that the Retraction Request shall be
deemed to be a revocable offer by the holder to sell
the Retracted Shares to Callco in accordance with the
Retraction Call Right on the terms and conditions set
out in Section 6.3 below.
6.2 Subject to the exercise by Callco of the Retraction Call
Right, upon receipt by the Corporation or the Transfer Agent in the manner
specified in Section 6.1 of a certificate or certificates representing the
number of Retracted Shares, together with a Retraction Request and such
additional documents and instruments as the Transfer Agent and the Corporation
may reasonably require, and provided that the Retraction Request is not revoked
by the holder in the manner specified in Section 6.7, the Corporation shall
redeem the Retracted Shares effective at the close of business on the Retraction
Date and shall cause to be delivered to such holder the total Retraction Price
with respect to such shares in accordance with Section 6.4. If only a part of
the Exchangeable Shares represented by any certificate is redeemed (or purchased
by FCE pursuant to the Retraction Call Right), a new certificate for the balance
of such Exchangeable Shares shall be issued to the holder at the expense of the
Corporation.
6.3 Upon receipt by the Corporation of a Retraction Request, the
Corporation shall immediately notify Callco thereof and shall provide to Callco
a copy of the Retraction Request. Callco will be deemed to have exercised the
Retraction Call Right unless it notifies the Corporation of its determination
not to do so (the "CALLCO CALL NOTICE") within two Business Days of notification
to Callco by the Corporation of the receipt by the Corporation of the Retraction
Request. If Callco does so notify the Corporation within such two Business Day
period, the Corporation will notify the holder as soon as possible thereafter
that Callco will not exercise the Retraction Call Right. If Callco does not
deliver the Callco Call Notice within such two Business Day period, and provided
that the Retraction Request is not revoked by the holder in the manner specified
in Section 6.7, the Retraction Request shall thereupon be considered only to be
an offer by the holder to sell all but not less than all the Retracted Shares to
Callco in
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accordance with the Retraction Call Right. In such event, the Corporation shall
not redeem the Retracted Shares and Callco shall purchase from such holder and
such holder shall sell to Callco on the Retraction Date all but not less than
all the Retracted Shares for a purchase price (the "PURCHASE PRICE") per share
equal to the Retraction Price, which, as set forth in Section 6.4, shall be
fully paid and satisfied by the delivery by or on behalf of Callco, of the
Exchangeable Share Consideration representing the total Purchase Price,
whereupon the Corporation shall have no obligation to pay the Retraction Price
to such holder of Exchangeable Shares so purchased by Callco. For the purposes
of completing a purchase pursuant to the Retraction Call Right, Callco shall
deposit with the Transfer Agent, on or before the Retraction Date, the
Exchangeable Share Consideration representing the total Purchase Price. Provided
that Callco has complied with Section 6.4, the closing of the purchase and sale
of the Retracted Shares pursuant to the Retraction Call Right shall be deemed to
have occurred as at the close of business on the Retraction Date and, for
greater certainty, no redemption by the Corporation of such Retracted Shares
shall take place on the Retraction Date. In the event that Callco does deliver a
Callco Call Notice within such two Business Day period or otherwise fails to
comply with these Exchangeable Share Provisions in respect thereto, and provided
that the Retraction Request is not revoked by the holder in the manner specified
in Section 6.7, the Corporation shall redeem the Retracted Shares on the
Retraction Date and in the manner otherwise contemplated in this Article 6.
6.4 The Corporation or Callco, as the case may be, shall deliver
or cause the Transfer Agent to deliver to the relevant holder, at the address of
the holder recorded in the register of the Corporation for the Exchangeable
Shares or at the address specified in the holder's Retraction Request or by
holding for pick-up by the holder at the registered office of the Corporation or
at any office of the Transfer Agent as may be specified by the Corporation by
notice to such holder of Exchangeable Shares, the Exchangeable Share
Consideration representing the total Retraction Price or the total Purchase
Price, as the case may be, and such delivery of such Exchangeable Share
Consideration to the Transfer Agent shall be deemed to be payment of and shall
satisfy and discharge all liability for the total Retraction Price or total
Purchase Price, as the case may be, to the extent that the same is represented
by such Exchangeable Share Consideration, except as to any cheque included
therein which is not paid on due presentation.
6.5 On and after the close of business on the Retraction Date, the
holder of the Retracted Shares shall cease to be a holder of such Retracted
Shares and shall not be entitled to exercise any of the rights of a holder in
respect thereof, other than the right to receive the total Retraction Price or
total Purchase Price, as the case may be, unless upon presentation and surrender
of certificates in accordance with the foregoing provisions, payment of the
total Retraction Price or the total Purchase Price, as the case may be, shall
not be made as provided in Section 6.4, in which case the rights of such holder
shall remain unaffected until the total Retraction Price or the total Purchase
Price, as the case may be, has been paid in the manner hereinbefore provided. On
and after the close of business on the Retraction Date, provided that
presentation and surrender of certificates and payment of the total Retraction
Price or the total Purchase Price, as the case may be, has been made in
accordance with the foregoing provisions, the holder of the Retracted Shares so
redeemed by the Corporation or purchased by Callco shall thereafter be
considered and deemed for all purposes to be the holder of the FCE Common Stock
delivered to it.
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6.6 Notwithstanding any other provision of this Article 6, the
Corporation shall not be obligated to redeem Retracted Shares specified by a
holder in a Retraction Request to the extent that such redemption of Retracted
Shares would be contrary to solvency requirements or other provisions of
applicable law. If the Corporation believes that on any Retraction Date it would
not be permitted by any of such provisions to redeem the Retracted Shares
tendered for redemption on such date, and provided that Callco shall not have
been deemed to have exercised the Retraction Call Right with respect to the
Retracted Shares, the Corporation shall only be obligated to redeem Retracted
Shares specified by a holder in a Retraction Request to the extent of the
maximum number that may be so redeemed (rounded down to a whole number of
shares) as would not be contrary to such provisions and shall notify the holder
at least two Business Days prior to the Retraction Date as to the number of
Retracted Shares which will not be redeemed by the Corporation. In any case in
which the redemption by the Corporation of Retracted Shares would be contrary to
solvency requirements or other provisions of applicable law, the Corporation
shall redeem the maximum number of Exchangeable Shares which the Board of
Directors determines the Corporation is permitted to redeem as of the Retraction
Date on a pro rata basis and shall issue to each holder of Retracted Shares a
new certificate, at the expense of the Corporation, representing the Retracted
Shares not redeemed by the Corporation pursuant to Section 6.2. Provided that
the Retraction Request is not revoked by the holder in the manner specified in
Section 6.7 and Callco does not exercise the Retraction Call Right, the holder
of any such Retracted Shares not redeemed by the Corporation pursuant to Section
6.2 as a result of solvency requirements or other provisions of applicable law
shall be deemed by giving the Retraction Request to have instructed the Trustee
to require Callco to purchase such Retracted Shares from such holder on the
Retraction Date or as soon as practicable thereafter on payment by Callco to
such holder of the Retraction Price for each such Retracted Share, all as more
specifically provided in the Voting and Exchange Trust Agreement, and Callco
shall make such purchase.
6.7 A holder of Retracted Shares may, by notice in writing given
by the holder to the Corporation before the close of business on the Business
Day immediately preceding the Retraction Date, withdraw its Retraction Request,
in which event such Retraction Request shall be null and void and, for greater
certainty, the revocable offer constituted by the Retraction Request to sell the
Retracted Shares to Callco shall be deemed to have been revoked.
ARTICLE 7
REDEMPTION OF EXCHANGEABLE SHARES BY THE CORPORATION
7.1 Subject to applicable law, and provided Callco has not
exercised the Redemption Call Right, the Corporation shall on the Redemption
Date redeem all but not less than all of the then outstanding Exchangeable
Shares for an amount per share equal to the Exchangeable Share Price applicable
on the last Business Day prior to the Redemption Date (the "REDEMPTION PRICE").
7.2 In any case of a redemption of Exchangeable Shares under this
Article 7, the Corporation shall, at least 55 days before the Redemption Date
(other than a Redemption Date established in connection with a FCE Control
Transaction, an Exchangeable Share Voting Event, an Exempt Exchangeable Share
Voting Event or a Distribution Date), send or cause to be sent to
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each holder of Exchangeable Shares a notice in writing of the redemption by the
Corporation or the purchase by Callco under the Redemption Call Right, as the
case may be, of the Exchangeable Shares held by such holder. In the case of a
Redemption Date established in connection with a FCE Control Transaction, an
Exchangeable Share Voting Event, or an Exempt Exchangeable Share Voting Event,
the written notice of redemption by the Corporation or the purchase by Callco
under the Redemption Call Right will be sent on or before the Redemption Date,
on as many days prior written notice as may be determined by the Board of
Directors to be reasonably practicable in the circumstances. In any such case,
such notice shall set out the formula for determining the Redemption Price or
the Redemption Call Purchase Price, as the case may be, the Redemption Date and,
if applicable, particulars of the Redemption Call Right. In the case of any
notice given in connection with a possible Redemption Date, such notice will be
given contingently and will be withdrawn if the contingency does not occur.
7.3 On or after the Redemption Date and subject to the exercise by
Callco of the Redemption Call Right, the Corporation shall cause to be delivered
to the holders of the Exchangeable Shares to be redeemed, the Redemption Price
for each such Exchangeable Share upon presentation and surrender at the
registered office of the Corporation or at any office of the Transfer Agent as
may be specified by the Corporation in the notice described in Section 7.2 of
the certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the ABCA and the articles and by-laws of the
Corporation and such additional documents and instruments as the Transfer Agent
and the Corporation may reasonably require. Payment of the total Redemption
Price for such Exchangeable Shares shall be made by delivery to each holder, at
the address of the holder recorded in the securities register of the Corporation
or by holding for pick-up by the holder at the registered office of the
Corporation or at any office of the Transfer Agent as may be specified by the
Corporation in such notice, on behalf of the Corporation of the Exchangeable
Share Consideration representing the total Redemption Price. On and after the
Redemption Date, the holders of the Exchangeable Shares called for redemption
shall cease to be holders of such Exchangeable Shares and shall not be entitled
to exercise any of the rights of holders in respect thereof, other than the
right to receive their proportionate part of the total Redemption Price, unless
payment of the total Redemption Price for such Exchangeable Shares shall not be
made upon presentation and surrender of certificates in accordance with the
foregoing provisions, in which case the rights of the holders shall remain
unaffected until the total Redemption Price has been paid in the manner
hereinbefore provided. The Corporation shall have the right at any time after
the sending of notice of its intention to redeem the Exchangeable Shares as
aforesaid to deposit or cause to be deposited the Exchangeable Share
Consideration with respect to the Exchangeable Shares so called for redemption,
or of such of the said Exchangeable Shares represented by certificates that have
not at the date of such deposit been surrendered by the holders thereof in
connection with such redemption, in a custodial account with any chartered bank
or trust company in Canada named in such notice. Upon the later of such deposit
being made and the Redemption Date, the Exchangeable Shares in respect whereof
such deposit shall have been made shall be redeemed and the rights of the
holders thereof after such deposit or Redemption Date, as the case may be, shall
be limited to receiving their proportionate part of the total Redemption Price
for such Exchangeable Shares so deposited, against presentation and surrender of
the said certificates held by them, respectively, in accordance with the
foregoing provisions. Upon such payment or deposit of such Exchangeable Share
Consideration, the holders of the Exchangeable Shares shall thereafter be
considered and
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deemed for all purposes to be holders of the FCE Common Stock delivered to them
or the custodian on their behalf regardless of when such payment or deposit of
such Exchangeable Share Consideration is made.
ARTICLE 8
PURCHASE FOR CANCELLATION
8.1 Subject to applicable law and the articles of the Corporation
and notwithstanding Section 8.2, the Corporation may at any time and from time
to time purchase for cancellation all or any part of the Exchangeable Shares by
private agreement with any holder of Exchangeable Shares.
8.2 Subject to applicable law and the articles of the Corporation,
the Corporation may at any time and from time to time purchase for cancellation
all or any part of the outstanding Exchangeable Shares by tender to all the
holders of record of Exchangeable Shares then outstanding or through the
facilities of any stock exchange on which the Exchangeable Shares are listed or
quoted at any price per share together with an amount equal to all declared and
unpaid dividends thereon for which the record date has occurred prior to the
date of purchase. If in response to an invitation for tenders under the
provisions of this Section 8.2, more Exchangeable Shares are tendered at a price
or prices acceptable to the Corporation than the Corporation is prepared to
purchase, the Exchangeable Shares to be purchased by the Corporation shall be
purchased as nearly as may be pro rata according to the number of shares
tendered by each holder who submits a tender to the Corporation, provided that
when shares are tendered at different prices, the pro rating shall be effected
(disregarding fractions) only with respect to the shares tendered at the price
at which more shares were tendered than the Corporation is prepared to purchase
after the Corporation has purchased all the shares tendered at lower prices. If
only part of the Exchangeable Shares represented by any certificate shall be
purchased, a new certificate for the balance of such shares shall be issued at
the expense of the Corporation.
ARTICLE 9
EXCHANGE PUT RIGHT
9.1 Upon and subject to the terms and conditions contained in
these share provisions:
(a) a holder of Exchangeable Shares shall have the right
(the "EXCHANGE PUT RIGHT") upon the occurrence of an
Exchange Put Event to require FCE to purchase all or
any part of the Exchangeable Shares of the holder;
and
(b) upon the exercise by the holder of the Exchange Put
Right and provided that, at the time of purchase, the
Exchangeable Shares are listed on a recognized
Canadian stock exchange, the holder shall be required
to sell to FCE, and FCE shall be required to purchase
from the holder, that number of Exchangeable Shares
in respect of which the Exchange Put Right is
exercised, in consideration of the payment by FCE of
the Exchangeable
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Share Price applicable thereto (which shall be the
Exchangeable Share Price applicable on the last
Business Day prior to receipt of notice required
under Section 9.2) and delivery by or on behalf of
FCE of the Exchangeable Share Consideration
representing the total applicable Exchangeable Share
Price.
9.2 The Exchange Put Right may be exercised upon the occurrence of
an Exchange Put Event by notice in writing given by the holder to and received
by the Trustee (the date of such receipt, the "Exchange Put Date") and
accompanied by presentation and surrender of the certificates representing such
Exchangeable Shares, together with such documents and instruments as may be
required to effect a transfer of Exchangeable Shares under the ABCA and the
by-laws of the Corporation and such additional documents and instruments as the
Trustee may reasonably require, at the principle transfer offices in - of the
Trustee, or such other office or offices of the Trustee or of the other persons
designated by the Trustee for that purpose as may from time to time be
maintained by the Trustee for that purpose. Such notice may be (i) in the form
of the panel, if any, on the certificates representing Exchangeable Shares, (ii)
in such other form satisfactory to the Trustee (or such other persons
aforesaid), shall stipulate the number of Exchangeable Shares in respect of
which the right is exercised (which may not exceed the number of shares
represented by certificates surrendered to the Trustee), shall be irrevocable
unless the exchange is not completed in accordance herewith and shall constitute
the holder's authorization to the Trustee (and such other persons aforesaid) to
effect the exchange on behalf of the holder.
9.3 The completion of the sale and purchase referred to in Section
9.2 shall be required to occur, and FCE shall be required to take all actions on
its part necessary to permit it to occur, not later than the close of business
on the third Business Day following the Exchange Put Date.
9.4 The surrender by the holder of Exchangeable Shares under
Section 9.3 shall constitute the representation, warranty and covenant of the
holder that Exchangeable Shares so purchased are sold free and clear of any
lien, encumbrances, security interest or adverse claim or interest.
9.5 If a part only of the Exchangeable Shares represented by any
certificate are to be sold and purchased pursuant to the exercise of the
Exchange Put Right, a new certificate for the balance of such Exchangeable
Shares shall be issued to the holder at the expense of the Corporation.
9.6 Upon receipt by the Trustee of the notice, certificates and
other documents or instruments required by Section 9.2, the Trustee shall
deliver or cause to be delivered, on behalf of FCE and subject to receipt by the
Trustee from FCE of the applicable Exchangeable Share Consideration, to the
relevant holder at the address of the holder specified in the notice or by
holding for pick-up by the holder at the registered office of the Corporation or
at any office of the Trustee (or other persons aforesaid) maintained for that
purpose, the Exchangeable Share Consideration representing the total applicable
Exchangeable Share Price, within the time stipulated in Section 9.4. Delivery by
FCE to the Trustee of such Exchangeable Share Consideration shall be deemed to
be payment of and shall satisfy and discharge all liability for
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the total applicable Exchangeable Share Price, except as to any cheque included
therein which is not paid on due presentation.
9.7 On and after the close of business on the Exchange Put Date,
the holder of the Exchangeable Shares in respect of which the Exchange Put Right
is exercised shall not be entitled to exercise any of the rights of a holder in
respect thereof, other than the right to receive the total applicable
Exchangeable Share Price, unless upon presentation and surrender of certificates
in accordance with the foregoing provisions, payment of the Exchangeable Share
Consideration shall not be made, in which case the rights of such holder shall
remain unaffected until such payment has been made. On and after the close of
business on the Exchange Put Date provided that provided that presentation and
surrender of certificates and payments of the Exchangeable Share Consideration
has been made in accordance with the foregoing provisions, the holder of the
Exchangeable Shares so purchased by FCE shall thereafter be considered and
deemed for all purposes to be a holder of the FCE Common Stock delivered to it.
ARTICLE 10
VOTING RIGHTS
10.1 Except as required by applicable law and by Article 11,
Section 12.1 and Section 13.2, the holders of the Exchangeable Shares shall not
be entitled as such to receive notice of or to attend any meeting of the
shareholders of the Corporation or to vote at any such meeting.
ARTICLE 11
AMENDMENT AND APPROVAL
11.1 The rights, privileges, restrictions and conditions attaching
to the Exchangeable Shares may be added to, changed or removed but, except as
hereinafter provided, only with the approval of the holders of the Exchangeable
Shares given as hereinafter specified.
11.2 Any approval given by the holders of the Exchangeable Shares
to add to, change or remove any right, privilege, restriction or condition
attaching to the Exchangeable Shares or any other matter requiring the approval
or consent of the holders of the Exchangeable Shares shall be deemed to have
been sufficiently given if it shall have been given in accordance with
applicable law subject to a minimum requirement that such approval be evidenced
by resolution passed by not less than 662/3% of the votes cast on such
resolution by holders represented in person or by proxy at a meeting of holders
of Exchangeable Shares (excluding Exchangeable Shares beneficially owned by FCE
or its affiliates) duly called and held at which the holders of at least 25% of
the outstanding Exchangeable Shares at that time are present or represented by
proxy; provided that if at any such meeting the holders of at least 25% of the
outstanding Exchangeable Shares at that time are not present or represented by
proxy within one-half hour after the time appointed for such meeting, then the
meeting shall be adjourned to such date not less than five days thereafter and
to such time and place as may be designated by the Chair of such meeting. At
such adjourned meeting, the holders of Exchangeable Shares present or
represented by proxy thereat may transact the business for which the meeting was
originally called and a resolution passed thereat by the affirmative vote of not
less than 662/3% of the votes
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cast on such resolution by holders represented in person or by proxy at such
meeting (excluding Exchangeable Shares beneficially owned by FCE or its
affiliates) shall constitute the approval or consent of the holders of the
Exchangeable Shares. For purposes of this section, any spoiled votes, illegible
votes, defective votes and abstentions shall be deemed to be votes not cast.
ARTICLE 12
RECIPROCAL CHANGES, ETC. IN RESPECT OF
FCE COMMON STOCK
12.1 Each holder of an Exchangeable Share acknowledges that the
Support Agreement provides, in part, that FCE will not, without the prior
approval of the Corporation and the prior approval of the holders of the
Exchangeable Shares given in accordance with Section 11.2 of these share
provisions:
(a) issue or distribute FCE Common Stock (or securities
exchangeable for or convertible into or carrying
rights to acquire FCE Common Stock) to the holders of
all or substantially all of the then outstanding
shares of FCE Common Stock by way of stock dividend
or other distribution, other than an issue of FCE
Common Stock (or securities exchangeable for or
convertible into or carrying rights to acquire FCE
Common Stock) to holders of FCE Common Stock who (i)
exercise an option to receive dividends in FCE Common
Stock (or securities exchangeable for or convertible
into or carrying rights to acquire FCE Common Stock)
in lieu of receiving cash dividends, or (ii) pursuant
to any dividend reinvestment plan or scrip dividend;
(b) issue or distribute rights, options or warrants to
the holders of all or substantially all of the then
outstanding shares of FCE Common Stock entitling them
to subscribe for or to purchase FCE Common Stock (or
securities exchangeable for or convertible into or
carrying rights to acquire FCE Common Stock); or
(c) issue or distribute to the holders of all or
substantially all of the then outstanding shares of
FCE Common Stock:
(i) shares or securities of FCE of any class
other than FCE Common Stock (other than
shares convertible into or exchangeable for
or carrying rights to acquire FCE Common
Stock);
(ii) rights, options or warrants other than those
referred to in Section 12.1(b) above;
(iii) evidences of indebtedness of FCE; or
(iv) assets of FCE,
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unless the economic equivalent on a per share basis of such rights, options,
warrants, securities, shares, evidences of indebtedness or other assets is
issued or distributed simultaneously to holders of the Exchangeable Shares.
12.2 Each holder of an Exchangeable Share acknowledges that the
Support Agreement further provides, in part, that FCE will not without the prior
approval of the Corporation and the prior approval of the holders of the
Exchangeable Shares given in accordance with Section 11.2:
(a) subdivide, redivide or change the then outstanding
shares of FCE Common Stock into a greater number of
shares of FCE Common Stock;
(b) reduce, combine, consolidate or change the then
outstanding shares of FCE Common Stock into a lesser
number of shares of FCE Common Stock; or
(c) reclassify or otherwise change the shares of FCE
Common Stock or effect an amalgamation, merger,
reorganization or other transaction involving or
affecting the shares of FCE Common Stock,
unless the same or an economically equivalent change shall simultaneously be
made to, or in the rights of the holders of, the Exchangeable Shares and such
change is permitted under applicable law. The Support Agreement further
provides, in part, that the aforesaid provisions of the Support Agreement shall
not be changed without the approval of the holders of the Exchangeable Shares
given in accordance with Section 11.2.
ARTICLE 13
ACTIONS BY THE CORPORATION UNDER SUPPORT AGREEMENT
13.1 The Corporation will take all such actions and do all such
things as shall be necessary or advisable to perform and comply with and to
ensure performance and compliance by FCE, Callco and the Corporation with all
provisions of the Support Agreement and the Voting Trust and Exchange Agreement
and FCE's Certificate of Incorporation applicable to FCE, Callco and the
Corporation, respectively, in accordance with the terms thereof including,
without limitation, taking all such actions and doing all such things as shall
be necessary or advisable to enforce to the fullest extent possible for the
direct benefit of the Corporation all rights and benefits in favour of the
Corporation under or pursuant thereto.
13.2 The Corporation shall not propose, agree to or otherwise give
effect to any amendment to, or waiver or forgiveness of its rights or
obligations under, the Support Agreement or the Voting Trust and Exchange
Agreement or FCE's Certificate of Incorporation without the approval of the
holders of the Exchangeable Shares given in accordance with Section 10.2 other
than such amendments, waivers and/or forgiveness as may be necessary or
advisable for the purposes of:
(a) adding to the covenants of the other parties to such
agreement for the protection of the Corporation or
the holders of the Exchangeable Shares thereunder;
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(b) making such provisions or modifications not
inconsistent with such agreement or certificate as
may be necessary or desirable with respect to matters
or questions arising thereunder which, in the good
faith opinion of the Board of Directors, it may be
expedient to make, provided that the Board of
Directors shall be of the good faith opinion, after
consultation with counsel, that such provisions and
modifications will not be prejudicial to the
interests of the holders of the Exchangeable Shares;
or
(c) making such changes in or corrections to such
agreement or certificate which, on the advice of
counsel to the Corporation, are required for the
purpose of curing or correcting any ambiguity or
defect or inconsistent provision or clerical omission
or mistake or manifest error contained therein,
provided that the Board of Directors shall be of the
good faith opinion, after consultation with counsel,
that such changes or corrections will not be
prejudicial to the interests of the holders of the
Exchangeable Shares.
ARTICLE 14
LEGEND; CALL RIGHTS; WITHHOLDING RIGHTS
14.1 The certificates evidencing the Exchangeable Shares shall
contain or have affixed thereto a legend in form and on terms approved by the
Board of Directors, with respect to the Support Agreement, the provisions of the
Plan of Arrangement relating to the Liquidation Call Right, the Retraction Call
Right, the Redemption Call Right, and the Voting and Exchange Trust Agreement
(including the provisions with respect to the voting rights, exchange right and
automatic exchange thereunder).
14.2 Each holder of an Exchangeable Share, whether of record or
beneficial, by virtue of becoming and being such a holder shall be deemed to
acknowledge each of the Liquidation Call Right, the Retraction Call Right and
the Redemption Call Right, in each case, in favour of Callco, and the overriding
nature thereof in connection with the liquidation, dissolution or winding-up of
the Corporation or any other distribution of the assets of the Corporation among
its shareholders for the purpose of winding-up its affairs, or the retraction or
redemption of Exchangeable Shares, as the case may be, and to be bound thereby
in favour of Callco as therein provided.
14.3 The Corporation, FCE, Callco and the Transfer Agent shall be
entitled to deduct and withhold from any dividend or consideration otherwise
payable to any holder of Exchangeable Shares such amounts as the Corporation,
FCE, Callco or the Transfer Agent is required to deduct and withhold with
respect to such payment under the Income Tax Act (Canada), the United States
Internal Revenue Code of 1986 or any provision of provincial, state,
territorial, local or foreign tax law, in each case, as amended. To the extent
that amounts are so withheld, such withheld amounts shall be treated for all
purposes hereof as having been paid to the holder of the Exchangeable Shares in
respect of which such deduction and withholding was made, provided that such
withheld amounts are actually remitted to the appropriate taxing authority. To
the extent that the amount so required to be deducted or withheld from any
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payment to a holder exceeds the cash portion of the consideration otherwise
payable to the holder, the Corporation, Callco, FCE and the Transfer Agent are
hereby authorized to sell or otherwise dispose of such portion of the
consideration as is necessary to provide sufficient funds to the Corporation,
Callco, FCE or the Transfer Agent, as the case may be, to enable it to comply
with such deduction or withholding requirement and the Corporation, Callco, FCE
or the Transfer Agent shall notify the holder thereof and remit any unapplied
balance of the net proceeds of such sale.
ARTICLE 15
GENERAL
15.1 Any notice, request or other communication to be given to the
Corporation by a holder of Exchangeable Shares shall be in writing and shall be
valid and effective if given by mail (postage prepaid) or by telecopy or by
delivery to the registered office of the Corporation and addressed to the
attention of the Secretary of the Corporation. Any such notice, request or other
communication, if given by mail, telecopy or delivery, shall only be deemed to
have been given and received upon actual receipt thereof by the Corporation.
15.2 Any presentation and surrender by a holder of Exchangeable
Shares to the Corporation or the Transfer Agent of certificates representing
Exchangeable Shares in connection with the liquidation, dissolution or
winding-up of the Corporation or the retraction or redemption of Exchangeable
Shares shall be made by registered mail (postage prepaid) or by delivery to the
registered office of the Corporation or to such office of the Transfer Agent as
may be specified by the Corporation, in each case, addressed to the attention of
the Secretary of the Corporation. Any such presentation and surrender of
certificates shall only be deemed to have been made and to be effective upon
actual receipt thereof by the Corporation or the Transfer Agent, as the case may
be. Any such presentation and surrender of certificates made by registered mail
shall be at the sole risk of the holder mailing the same.
15.3 Any notice, request or other communication to be given to a
holder of Exchangeable Shares by or on behalf of the Corporation shall be in
writing and shall be valid and effective if given by mail (postage prepaid) or
by delivery to the address of the holder recorded in the register of the
Corporation or, in the event of the address of any such holder not being so
recorded, then at the last address of such holder known to the Corporation. Any
such notice, request or other communication, if given by mail, shall be deemed
to have been given and received on the third Business Day following the date of
mailing and, if given by delivery, shall be deemed to have been given and
received on the date of delivery. Accidental failure or omission to give any
notice, request or other communication to one or more holders of Exchangeable
Shares shall not invalidate or otherwise alter or affect any action or
proceeding intended to be taken by the Corporation pursuant thereto.
15.4 Subject to the requirements of National Instrument 54-101 and
any successor policy statement or rule of the Canadian Securities Administrators
or other applicable law, for greater certainty, the Corporation shall not be
required for any purpose under these share provisions to recognize or take
account of Persons who are not recorded as such in the securities register for
the Exchangeable Shares.
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15.5 If the Corporation determines that mail service is or is
threatened to be interrupted at the time when the Corporation is required or
elects to give any notice to the holders of Exchangeable Shares hereunder, the
Corporation shall, notwithstanding the provisions hereof, give such notice by
means of publication in The Globe and Mail; national edition, or any other
English language daily newspaper or newspapers of general circulation in Canada
and in a French language daily newspaper of general circulation in the Province
of Quebec, once in each of two successive weeks, and notice so published shall
be deemed to have been given on the latest date on which the first publication
has taken place. If, by reason of any actual or threatened interruption of mail
service due to strike, lock-out or otherwise, any notice to be given to the
Corporation would be unlikely to reach its destination in a timely manner, such
notice shall be valid and effective only if delivered personally to the
Corporation in accordance with Section 15.1 or 15.2, as the case may be.
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SCHEDULE A
RETRACTION REQUEST
[TO BE PRINTED ON EXCHANGEABLE SHARE CERTIFICATES]
To: - Alberta Ltd. (the "CORPORATION")
This notice is given pursuant to Article 6 of the rights, privileges,
restrictions and conditions (the "SHARE PROVISIONS") attaching to the
Exchangeable Shares of the Corporation represented by this certificate and all
capitalized words and expressions used in this notice that are defined in the
Share Provisions have the meanings ascribed to such words and expressions in
such Share Provisions.
The undersigned hereby notifies the Corporation that, subject to the
Retraction Call Right referred to below, the undersigned desires to have the
Corporation redeem in accordance with Article 6 of the Share Provisions:
[ ] all share(s) represented by this certificate; or
[ ] _________ share(s) only represented by this certificate.
The undersigned hereby notifies the Corporation that the Retraction
Date shall be ___________________________.
NOTE: The Retraction Date must be a Business Day and must not be less
than 5 Business Days nor more than 15 Business Days after the date
upon which this notice is received by the Corporation. If no such
Business Day is specified above, the Retraction Date shall be
deemed to be the 15th Business Day after the date on which this
notice is received by the Corporation.
The undersigned acknowledges the overriding Retraction Call Right of -
Alberta Ltd. ("CALLCO") to purchase all but not less than all the Retracted
Shares from the undersigned and that this notice is and shall be deemed to be a
revocable offer by the undersigned to sell the Retracted Shares to Callco in
accordance with the Retraction Call Right on the Retraction Date for the
Purchase Price and on the other terms and conditions set out in Section 6.3 of
the Share Provisions. This Retraction Request, and this offer to sell the
Retracted Shares to Callco, may be revoked and withdrawn by the undersigned only
by notice in writing given to the Corporation at any time before the close of
business on the Business Day immediately preceding the Retraction Date.
The undersigned acknowledges that if, as a result of solvency
provisions of applicable law, the Corporation is unable to redeem all Retracted
Shares, the undersigned will be deemed to have exercised the Exchange Right (as
defined in the Voting and Exchange Trust Agreement) so as to require FuelCell
Energy Inc. ("FCE") to purchase the unredeemed Retracted Shares.
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The undersigned hereby represents and warrants to Callco, FCE and the
Corporation that the undersigned:
[ ] is
(select one)
[ ] is not
a resident in Canada for purposes of the Income Tax Act (Canada). THE
UNDERSIGNED ACKNOWLEDGES THAT IN THE ABSENCE OF AN INDICATION THAT THE
UNDERSIGNED IS A RESIDENT IN CANADA, WITHHOLDING ON ACCOUNT OF CANADIAN TAX MAY
BE MADE FROM AMOUNTS PAYABLE TO THE UNDERSIGNED ON THE REDEMPTION OR PURCHASE OF
THE RETRACTED SHARES.
The undersigned hereby represents and warrants to Callco, FCE and the
Corporation that the undersigned has good title to, and owns, the share(s)
represented by this certificate to be acquired by Callco, FCE or the
Corporation, as the case may be, free and clear of all liens, claims and
encumbrances.
_______ _____________________________________ __________________________
(Date) (Signature of Shareholder) (Guarantee of Signature)
[ ] Please check box if the securities and any cheque(s) or other non-cash
assets resulting from the retraction or purchase of the Retracted
Shares are to be held for pick-up by the shareholder from the Transfer
Agent, failing which the securities and any cheque(s) or other non-cash
assets will be delivered to the last address of the shareholder as it
appears on the register.
NOTE: This panel must be completed and this certificate, together with
such additional documents as the Transfer Agent may require, must
be deposited with the Transfer Agent. The securities and any
cheque(s) or other non-cash assets resulting from the retraction
or purchase of the Retracted Shares will be issued and registered
in, and made payable to, or transferred into, respectively, the
name of the shareholder as it appears on the register of the
Corporation and the securities and any cheque(s) or other non-cash
assets resulting from such retraction or purchase will be
delivered to such shareholder as indicated above, unless the form
appearing immediately below is duly completed.
Date:__________________
Name of Person in Whose Name Securities
or Cheque(s) Are to be Registered, Issued or
Delivered (please print): ______________________________________________________
Street Address or P.O. Box: ____________________________________________________
Signature of Shareholder: ______________________________________________________
City, Province and Postal Code: ________________________________________________
B-160
Signature Guaranteed by:
NOTE: If this Retraction Request is for less than all of the shares represented
by this certificate, a certificate representing the remaining share(s) of the
Corporation represented by this certificate will be issued and registered in the
name of the shareholder as it appears on the register of the Corporation, unless
the Share Transfer Power on the share certificate is duly completed in respect
of such share(s).
B-161
EXHIBIT E-2
ARTICLES OF ARRANGEMENT
OTHER PROVISIONS
SECTION 1.1 DEFINITIONS
Capitalized terms used herein which are defined in the Exchangeable
Share Provisions shall have the meanings ascribed thereto in the Exchangeable
Share Provisions. In addition, unless there is something in the subject matter
or context inconsistent therewith, in this Schedule the following terms have
the respective meanings set out below and grammatical variations of such terms
shall have corresponding meanings:
"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares;
"EXCHANGEABLE SHARES" means the Exchangeable Shares in the capital of
the Corporation;
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in
Section 1.2;
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in
Section 1.3; and
"TRANSFER AGENT" means - or such other Person as may from time to time
be appointed by the Corporation as the registrar and transfer agent for
the Exchangeable Shares.
SECTION 1.2 LIQUIDATION CALL RIGHT
(a) Callco shall have the overriding right (the "LIQUIDATION CALL
RIGHT"), in the event of and notwithstanding the proposed
liquidation, dissolution or winding-up of the Corporation
pursuant to Article 5 of the Exchangeable Share Provisions, to
purchase from all but not less than all of the holders of
Exchangeable Shares (other than FCE or any of its Affiliates)
on the Liquidation Date all but not less than all of the
Exchangeable Shares held by each such holder on payment by
Callco to each holder of an amount per share equal to the
Liquidation Amount. In the event of the exercise of the
Liquidation Call Right by Callco, each holder shall be
obligated to sell all the Exchangeable Shares held by the
holder to Callco on the Liquidation Date on payment by Callco
to the holder of the Liquidation Amount for each such share.
(b) Callco will be deemed to have exercised the Liquidation Call
Right unless Callco notifies the Transfer Agent in writing, as
agent for the holders of Exchangeable Shares, and the
Corporation of Callco's intention not to exercise such right at
least 55 days before the Liquidation Date, in the case of a
voluntary liquidation, dissolution or winding up of the
Corporation and at least five Business Days before the
Liquidation Date in the case of an involuntary liquidation,
dissolution
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or winding up of the Corporation. The Transfer Agent will
notify the holders of Exchangeable Shares as to whether or not
Callco has exercised the Liquidation Call Right forthwith after
the expiry of the period during which the same may be exercised
by Callco. If Callco exercises the Liquidation Call Right, on
the Liquidation Date Callco will purchase and the holders will
sell all of the Exchangeable Shares then outstanding for a
price per share equal to the Liquidation Amount in accordance
with the procedures in Section 5.2 of the Exchangeable Share
Provisions.
(c) For the purposes of completing the purchase of the
Exchangeable Shares pursuant to the Liquidation Call Right,
Callco shall deposit with the Transfer Agent, on or before the
Liquidation Date, the Exchangeable Share Consideration in
payment of the total Liquidation Amount. Provided that such
Exchangeable Share Consideration has been so deposited with the
Transfer Agent, on and after the Liquidation Date the rights of
each holder of Exchangeable Shares will be limited to receiving
such holder's proportionate part of the total Liquidation
Amount payable by Callco upon presentation and surrender by the
holder of certificates representing the Exchangeable Shares
held by such holder and the holder shall on and after the
Liquidation Date be considered and deemed for all purposes to
be the holder of the shares of FCE Common Stock to be delivered
to it. Upon surrender to the Transfer Agent of a certificate
or certificates representing Exchangeable Shares, together with
such other documents and instruments as may be required to
effect a transfer of Exchangeable Shares under the ABCA and the
by-laws of the Corporation and such additional documents and
instruments as the Transfer Agent may reasonably require, the
holder of such surrendered certificate or certificates shall be
entitled to receive in exchange therefor, and the Transfer
Agent on behalf of Callco shall deliver to such holder the
Exchangeable Share Consideration. If Callco does not exercise
the Liquidation Call Right in the manner described above, on
the Liquidation Date the holders of the Exchangeable Shares
will be entitled to receive in exchange therefor the
liquidation price otherwise payable by the Corporation in
connection with the liquidation, dissolution or winding-up of
the Corporation pursuant to Article 5 of the Exchangeable
Share Provisions.
SECTION 1.3 REDEMPTION CALL RIGHT
(a) Callco shall have the overriding right (the "REDEMPTION CALL
RIGHT"), notwithstanding the proposed redemption of
Exchangeable Shares by the Corporation pursuant to Article 7 of
the Exchangeable Share Provisions, to purchase from all but
not less than all of the holders of Exchangeable Shares
(other than FCE or any of its Affiliates) to be redeemed on the
Redemption Date all but not less than all of the Exchangeable
Shares held by each such holder on payment by Callco to the
holder of the Redemption Call Purchase Price as determined in
accordance with Section 1.3(c). In the event of the exercise
of the Redemption Call Right by Callco, each holder shall be
obligated to sell all the Exchangeable Shares held by the
holder to Callco on the Redemption Date on
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payment by Callco to the holder of the Redemption Call Purchase
Price for each such share.
(b) Callco will be deemed to have exercised the Redemption Call
Right unless Callco notifies the Transfer Agent in writing, as
agent for the holders of Exchangeable Shares, and the
Corporation of Callco's intention not to exercise such right at
least 35 days before the Redemption Date. The Transfer Agent
will notify the holders of the Exchangeable Shares as to
whether or not Callco has exercised the Redemption Call Right
forthwith after the expiry of the period during which the same
may be exercised by Callco. If Callco exercises the Redemption
Call Right, on the Redemption Date Callco will purchase and the
holders will sell all of the Exchangeable Shares to be
redeemed for a price per share equal to the Redemption Call
Purchase Price.
(c) For the purposes of completing the purchase of Exchangeable
Shares pursuant to the Redemption Call Right, Callco shall
deposit with the Transfer Agent, on or before the Redemption
Date, the Exchangeable Share Consideration representing the
Redemption Call Purchase Price. Provided that such
Exchangeable Share Consideration has been so deposited with the
Transfer Agent, on and after the Redemption Date the rights of
each holder of Exchangeable Shares so purchased will be limited
to receiving such holder's proportionate part of the total
Redemption Call Purchase Price payable by Callco upon
representation and surrender by the holder of certificates
representing the Exchangeable Shares purchased by Callco from
such holder and the holder shall on and after the Redemption
Date be considered and deemed for all purposes to be the holder
of the Shares of FCE Common Stock delivered to such holder. Up
on surrender to the Transfer Agent of a certificate or
certificates representing Exchangeable Shares, together with
such other documents and instruments as may be required to
effect a transfer of Exchangeable Shares under the ABCA and the
by-laws of the Corporation and such additional documents and
instruments as the Transfer Agent may reasonably require, the
holder of such surrendered certificate or certificates shall be
entitled to receive in exchange therefor, and the Transfer
Agent on behalf of Callco shall deliver to such holder, the
Exchangeable Share Consideration. If Callco does not exercise
the Redemption Call Right in the manner described above, on
the Redemption Date the holders of the Exchangeable Shares will
be entitled to receive in exchange therefor the redemption
price otherwise payable by the Corporation in connection with
the redemption of Exchangeable Shares pursuant to Article 7 of
the Exchangeable Share Provisions.
SECTION 1.4 EXCHANGE PUT RIGHT
Upon and subject to the terms and conditions contained in the
Exchangeable Share Provisions and the Voting and Exchange Trust Agreement, a
holder of Exchangeable Shares shall have the Exchange Put Right.
B-164
Action No.
0301-14930
ANNEX C - INTERIM ORDER
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
IN THE MATTER OF Section 193 of the Business Corporations Act
(Alberta), RSA 2000, c. B-9, as amended;
AND IN THE MATTER OF an arrangement proposed by Global
Thermoelectric Inc., involving Global Thermoelectric Inc. and
FuelCell Energy, Inc.
BEFORE THE HONOURABLE ) at the Courthouse in the City of Calgary
MADAM JUSTICE B.E.C. ROMAINE ) in the Province of Alberta this 30th day
IN CHAMBERS ) of September 2003.
INTERIM ORDER
UPON the application by Petition of Global Thermoelectric Inc.
("Global") pursuant to Section 193 of the Business Corporations Act (Alberta);
AND UPON reading the said Petition, and the Affidavit of Peter Garrett,
President and CEO of Global filed herein;
AND UPON it appearing that notice of this application has been given to
the Executive Director of the Alberta Securities Commission, and to Enbridge
Inc.;
AND UPON hearing counsel for Global, Enbridge Inc. and FuelCell Energy
Inc.;
IT IS HEREBY ORDERED AND DECLARED THAT:
1. Global shall convene a special meeting (the "Global Meeting") of the
holders of its issued and outstanding common shares (the "Common
Shares") to consider, and if deemed advisable, to pass, with or without
variation, a special resolution (the "Global Arrangement Resolution")
to approve a proposed Plan of Arrangement (the "Plan of Arrangement")
involving Global, its said holders of Common Shares (the
"Shareholders")
C-1
and FuelCell Energy, Inc. ("FuelCell"), a true copy of which Plan of
Arrangement in its substantially final form is included as Annex B to
Exhibit "A" to the Affidavit of Peter Garrett.
2. The Global Meeting shall be called, held and conducted in accordance
with the Business Corporations Act (Alberta) (the "ABCA") and the
Articles and the By-laws of Global subject to what may be provided
hereafter.
3. Subject to any further directions from this Court, the only persons
entitled to notice of the Global Meeting shall be the registered
Shareholders as they may appear on the records of Global as at the
close of business on the record date for the Global Meeting, the
directors and auditors of Global, the Registrar of Corporations under
the ABCA and the Alberta Securities Commission, and the only persons
entitled to be represented and to vote at the Global Meeting, either in
person or by proxy, shall be such holders of common shares, subject to
the provisions of Section 137 of the ABCA.
4. Global shall send the Notice of the Global Meeting, Notice of Petition,
and Joint Management Information Circular and Proxy Statement in
substantially the form contained in Exhibit "A" to the Affidavit of
Peter Garrett, with such amendments thereto as counsel for Global may
advise are necessary or desirable, provided that such amendments are
not inconsistent with the terms of this Order, to the Shareholders, to
the holders of options to purchase common shares of Global, to Enbridge
Inc., the holder of the Series 2 preferred shares of Global, to the
directors and auditors of Global, to the Registrar of Corporations
under the ABCA, and to the Executive Director of the Alberta Securities
Commission by mailing the same by prepaid ordinary mail, or by sending
the same by direct courier at the expense of Global, to such persons at
least 21 days prior to the date of the Global Meeting, excluding the
date of mailing or sending by courier and excluding the date of the
Global Meeting. Such mailing or sending by courier shall constitute
good and sufficient service of the Notice of the Petition, the Global
Meeting and the hearing in respect of the Petition.
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5. The accidental omission to give notice of the Global Meeting, or the
non-receipt of such notice by one or more of the persons specified in
paragraph 3 hereof, shall not invalidate any resolution passed or
proceedings taken at the Global Meeting.
6. Each Common Share shall be entitled to one vote on each matter to be
acted upon at the Global Meeting. The majority required to pass the
Global Arrangement Resolution shall be at least two-thirds of the
aggregate votes cast by the Shareholders (present in person or
represented by proxy), in respect of the Global Arrangement Resolution
at the Global Meeting.
7. The Shareholders who are registered Shareholders shall have the right
to dissent from the Global Arrangement Resolution in accordance with
the provisions of Section 191 of the ABCA, as modified hereby and by
the Plan of Arrangement, and to be paid the fair value of their Common
Shares provided that:
(a) notwithstanding subsection 191(5) of the ABCA, the written
objection to the Global Arrangement Resolution referred to in
subsection 191(5) of the ABCA which is required to be sent to
Global must be received by Global, c/o Bennett Jones LLP,
Attention: Mr. John MacNeil at the address set out below, or
the Chairman of the Global Meeting, in either case, no later
than 24 hours before the Global Meeting; and
(b) the holders exercising such right of dissent otherwise comply
with the requirements of Section 191 of the ABCA.
8. Upon approval of the Plan of Arrangement at the Global Meeting in the
manner set forth in this Order, Global may apply before this Court for
approval of the Plan of Arrangement, which application (the "Final
Application") shall be heard by this Honourable Court at the Court
House, 611 - 4th Street S.W., in the City of Calgary, on the 31st day
of October, 2003 at 2:00 p.m. or so soon thereafter as counsel may be
heard.
9. Any securityholder and any other interested person may appear on the
application for the approval of the Arrangement, provided that such
holder or person shall file with this Court and serve on the solicitors
for Global and the solicitors for FuelCell on or before
C-3
the 23rd day of October, 2003, a Notice of Intention to Appear setting
out the address for service in respect of such holder or person, and
indicating whether such holder or person intends to support or oppose
the application or make submissions thereat together with any evidence
or materials which are to be presented to this Court, such Notice of
Appearance to be effected by delivery, at the address set forth below:
Global:
Bennett Jones LLP
Barristers and Solicitors
4500, 855 - 2nd Street SW
Calgary, AB T2P 4K7
Attention: Mr. Anthony L. Friend, Q.C.
FuelCell:
Stikeman Elliott LLP
Barristers and Solicitors
4300, 888 - 3rd Street SW
Calgary, AB T2P 5C5
Attention: Mr. Christopher W. Nixon
10. In the event the Final Application is adjourned prior to the hearing of
Final Application, only those persons who have filed and served a
Notice of Appearance shall be served with notice of the adjourned date.
11. Global shall be entitled at any time to seek leave to vary this Order.
12. This Order is made without prejudice to the rights of Enbridge Inc. as
holder of the Series 2 preferred shares of Global, including any
remedies and relief that may be sought by Enbridge Inc. with respect to
the Global Meeting and voting as a separate class at the Global
Meeting.
//s// B.E.C. Romaine
--------------------
J.C.Q.B.A.
ENTERED this 30th day of September 2003.
Clerk of the Court of Queen's Bench of Alberta
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ACTION NO: 0301-14930
IN THE COURT OF QUEEN'S BENCH
OF ALBERTA
JUDICIAL CENTRE OF CALGARY
IN THE COURT OF QUEEN'S BENCH OF
ALBERTA JUDICIAL CENTRE OF
CALGARY IN THE MATTER OF Section 193
of the Business Corporations Act, being
Chapter B-9, of the Revised Statutes of Alberta,
2000, as amended;
AND IN THE MATTER OF a Proposed
Arrangement among Global Thermoelectric Inc.
and its Shareholders and FuelCell Energy, Inc.
INTERIM ORDER
BENNETT JONES LLP
Barristers and Solicitors
4500 Bankers Hall East
855 - 2nd Street SW
Calgary, AB T2P 4K7
Attention: Anthony L. Friend, Q.C.
Our File No.: 45283-128
Telephone No.: (403) 298-3100
Fax No.: (403) 265-7219
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ANNEX D - PLAN OF ARRANGEMENT
PLAN OF ARRANGEMENT
UNDER SECTION 193
OF THE BUSINESS CORPORATIONS ACT (ALBERTA)
INVOLVING AND AFFECTING GLOBAL THERMOELECTRIC INC.
AND THE HOLDERS OF ITS COMMON SHARES
ARTICLE 1
INTERPRETATION
SECTION 1.1 DEFINITIONS
In this Plan of Arrangement unless there is something in the subject
matter or context inconsistent therewith, the following terms shall have the
respective meanings set out below and grammatical variations of such terms shall
have corresponding meanings:
"ABCA" means the Business Corporations Act (Alberta), as amended,
consolidated or reenacted from time to time;
"ARRANGEMENT" means the arrangement under section 193 of the ABCA on
the terms and subject to the conditions set out in this Plan of
Arrangement, subject to any amendments thereto made (i) in accordance
with Section 8.8 of the Combination Agreement, (ii) in accordance with
Section 7.1 hereof or (iii) at the direction of the Court in the Final
Order;
"ARRANGEMENT RESOLUTION" means the special resolution passed by the
Shareholders at the Meeting;
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a
statutory or civic holiday in the United States or Canada;
"CALLCO" means - Alberta Ltd., a corporation organized and existing
under the laws of Alberta;
"COMBINATION AGREEMENT" means the agreement made as of the 4th day of
August, 2003, between FCE and the Company, as amended, supplemented
and/or restated in accordance therewith prior to the Effective Time,
providing for, among other things, this Plan of Arrangement and the
Arrangement;
"COMPANY" means Global Thermoelectric Inc., a corporation organized and
existing under the ABCA;
"COMPANY COMMON SHARES" means the common shares in the capital of the
Company;
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"COMPANY PREFERRED SHARES" means the Cumulative Redeemable Convertible
Preferred Shares, Series 2 in the capital of the Company;
"COURT" means the Court of Queen's Bench of Alberta;
"DEPOSITARY" means Computershare Trust Company of Canada at its
principal transfer offices in Calgary, Alberta and Toronto, Ontario;
"DISSENT PROCEDURES" has the meaning ascribed thereto in Section 3.1;
"DISSENTING SHAREHOLDER" means a holder of Company Common Shares who
dissents in respect of the Arrangement in strict compliance with the
Dissent Procedures;
"EFFECTIVE DATE" means the date shown on the articles of arrangement
filed with the Registrar under the ABCA giving effect to the
Arrangement;
"EFFECTIVE TIME" means 12:01 a.m. (Calgary time) on the Effective Date;
"ELECTED COMPANY COMMON SHARE" means any Company Common Share which the
holder shall have indicated pursuant to the terms of Section 4.7 is to
be transferred on the Arrangement to Exchangeco in consideration for
Exchangeable Shares;
"EXCHANGE RATIO" has the meaning ascribed thereto in Section 2.1(a);
"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares
substantially in the form and content of Exhibit E annexed to the
Combination Agreement;
"EXCHANGEABLE SHARES" means the Exchangeable Non-Voting Shares in the
Capital of Exchangeco;
"EXCHANGECO" means - Alberta Ltd., a corporation organized and existing
under the laws of Alberta;
"FCE" means FuelCell Energy, Inc., a corporation existing under the
laws of the State of Delaware and includes any successor corporation or
any corporation in which the holders of FCE Common Stock hold
securities resulting from the application of Section 2.7 of the Support
Agreement;
"FCE COMMON STOCK" means the shares of common stock, $.0001 per value
per share in the capital of FCE and any other securities in which such
shares may be changed or resulting from the application of Section 2.7
of the Support Agreement;
"FCE STOCK PRICE" shall have the meaning given to such term in Section
1.2 of the Combination Agreement;
"FINAL CONVERSION PRICE" has the meaning ascribed thereto in Section
6.1(b);
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"FINAL ORDER" means the final order of the Court approving the
Arrangement, as such order may be amended by the Court at any time and
from time to time prior to the Effective Time;
"INTERIM ORDER" means the interim order of the Court in the relation to
the Arrangement, as such order may be amended by the Court at any time
and from time to time;
"ITA" means the Income Tax Act (Canada), as amended;
"LETTER OF TRANSMITTAL" means a letter of transmittal and election form
in the form accompanying the Proxy Statement;
"MEASUREMENT PERIOD" shall have the meaning given to such term in the
Combination Agreement;
"MEETING" means the special meeting of the Shareholders to be held to
consider this Plan of Arrangement;
"NASDAQ" means The Nasdaq Stock Market Inc.;
"OPTIONS" means all options to purchase Company Common Shares
outstanding as at the Effective Date, including all options outstanding
under the Company's Amended Incentive Stock Option Plan;
"OPTIONHOLDERS" means the holders of Options;
"ORIGINAL ARTICLES" has the meaning ascribed thereto in Section 6.1(b);
"PROXY STATEMENT" means the Joint Management Information Circular and
Proxy Statement of FCE and the Company prepared in connection with the
Arrangement;
"REDEMPTION DATE" has the meaning ascribed thereto in the Exchangeable
Share provisions;
"SHAREHOLDERS" means holders of Company Common Shares; and
"SUPPORT AGREEMENT" means the agreement among FCE, Callco and
Exchangeco substantially in the form and content of Exhibit C annexed
to the Combination Agreement, with such changes thereto as the parties
to the Combination Agreement, acting reasonably may agree.
SECTION 1.2 SECTIONS, HEADINGS AND APPENDIXES
The division of this Plan of Arrangement into sections and the
insertion of headings are for reference purposes only and shall not affect the
interpretation of this Plan of Arrangement. Unless otherwise indicated, any
reference in this Plan of Arrangement to a
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section or an Appendix refers to the specified section of or Appendix to this
Plan of Arrangement. The Appendices are incorporated herein and are an integral
part hereof.
SECTION 1.3 NUMBER, GENDER AND PERSONS
In this Plan of Arrangement, unless the context otherwise requires,
words importing the singular number include the plural and vice versa, words
importing any gender include all genders and words importing persons include
individuals, bodies corporate, partnerships, associations, trusts,
unincorporated organizations, governmental bodies and other legal or business
entities of any kind.
SECTION 1.4 DATE FOR ANY ACTION
In the event that any date on or by which any action is required or
permitted to be taken hereunder is not a Business Day, such action shall be
required or permitted to be taken on or by the next succeeding day which is a
Business Day.
SECTION 1.5 CURRENCY
Unless otherwise expressly stated herein, all references to currency
and payments in cash or moneys in this Plan of Arrangement are to United States
dollars.
SECTION 1.6 STATUTORY REFERENCES
Any reference in this Plan of Arrangement to a statute includes such
statute as amended, consolidated or re-enacted from time to time, all
regulations made thereunder, all amendments to such regulations from time to
time, and any statute or regulation which supersedes such statute or
regulations.
ARTICLE 2
ARRANGEMENT
SECTION 2.1 ARRANGEMENT
At the Effective Time, the following transactions shall occur and shall
be deemed to occur in the following order without any further act or formality:
(a) Each Elected Company Common Share issued and outstanding
immediately prior to the Arrangement (other than Shares held
by Dissenting Shareholders) will, without any further action
on behalf of the Shareholder, be transferred to Exchangeco in
consideration for that number of fully paid and non-assessable
Exchangeable Shares as is determined in accordance with the
formula in section 1.1 of the Combination Agreement (the
"EXCHANGE RATIO").
(b) Upon the transfer referred to in subsection 2.1(a), Exchangeco
shall deliver or cause to be delivered to each such holder,
that number of fully paid and non-assessable Exchangeable
Shares equal to the Exchange Ratio in exchange for each
Elected Company Common Share transferred and each such holder
of
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Elected Company Common Shares shall cease to be such a holder,
shall have his name removed from the register of holders of
Company Common Shares and shall become a holder of the number
of fully paid and non-assessable Exchangeable Shares to which
he is entitled as a result of the transfer referred to in
subsection 2.1(a) and such holder's name shall be added to the
register of holders of Exchangeable Shares accordingly.
(c) Each Company Common Share issued and outstanding immediately
prior to the Arrangement (other than Elected Company Common
Shares and Company Common Shares held by Dissenting
Shareholders who are ultimately entitled to be paid the fair
value of their Company Common Shares) will, without any
further action on behalf of such Shareholder, be transferred
to FCE in consideration for that number of shares of FCE
Common Stock equal to the Exchange Ratio.
(d) Upon the transfer referred to in subsection 2.1(c), FCE shall
deliver or cause to be delivered to each such holder, that
number of fully paid and non-assessable shares of FCE Common
Stock equal to the Exchange Ratio in exchange for each Company
Common Share so transferred and each such holder of Company
Common Shares, shall cease to be such a holder, shall have his
name removed from the register of holders of Company Common
Shares and shall become a holder of the number of shares of
FCE Common Stock to which he is entitled as a result of the
transfer referred to in subsection 2.1(c) and such holder's
name shall be added to the register of holders of FCE Common
Stock accordingly.
(e) The Exchange Ratio shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities
convertible into FCE Common Stock or Company Common Shares),
merger, reorganization, recapitalization or other like change
with respect to FCE Common Stock or Company Common Shares
occurring after the date of the Combination Agreement and
prior to the Effective Date.
(f) Shareholders who are residents of Canada for purposes of the
ITA and who receive Exchangeable Shares under subsection
2.1(a) shall be entitled to make an income tax election
pursuant to subsections 85(1) and 85(2) of the ITA with
respect to the transfer of their Company Common Shares to
Exchangeco by providing two signed copies of the necessary
election forms to Exchangeco within 90 days following the
Effective Date, duly completed with the details of the number
of shares transferred and the applicable agreed amounts for
the purposes of such elections. Thereafter, subject to the
election forms being correct and complete and complying with
the provisions of the ITA, the forms will be completed by
Exchangeco as to its information signed by Exchangeco and
returned to such holders of Company Common Shares for filing
with the Canada Customs and Revenue Agency. Exchangeco will
not be responsible for the proper completion of any election
form, (other than with respect to its information) and except
for the obligation to return duly completed election
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forms which are received within 90 days following the
Effective Date will not be responsible for any taxes, interest
or penalties resulting from the failure by a Shareholder to
properly complete or file the election forms in the form and
manner and within the time prescribed by the ITA.
ARTICLE 3
RIGHTS OF DISSENT
SECTION 3.1 RIGHTS OF DISSENT
Holders of Company Common Shares may exercise rights of dissent with
respect to their Company Common Shares pursuant to and in the manner set forth
in section 191 of the ABCA (as modified by the Interim Order) and this Section
3.1 (the "DISSENT PROCEDURES") in connection with the Arrangement, and such
holders who duly exercise such rights of dissent and who:
(a) are ultimately to be paid fair value for Company Common Shares
shall be deemed to have transferred such Company Common Shares
to FCE on the Effective Date; in consideration for the payment
of such fair value amount by FCE; or
(b) are ultimately not entitled, for any reason, to be paid the
fair value for Company Common Shares shall be deemed to have
participated in the Arrangement on the same basis as any
non-dissenting Shareholder who has not elected, pursuant to
Section 4.7, to receive Exchangeable Shares and shall receive
FCE Common Stock on the basis determined in accordance with
subsection 2.1(c),
but in no case shall the Company be required to recognize such holders as
Shareholders on and after the Effective Date, and the names of such persons
shall be deleted from the registers of Shareholders on the Effective Date.
ARTICLE 4
CERTIFICATE AND FRACTIONAL SHARES
SECTION 4.1 ISSUANCE OF CERTIFICATES REPRESENTING EXCHANGEABLE SHARES
At or promptly after the Effective Time, Exchangeco shall deposit with
the Depositary, for the benefit of the holders of Elected Company Common Shares
transferred pursuant to subsection 2.1(a) to Exchangeco, certificates
representing the Exchangeable Shares issued pursuant to subsection 2.1(a) in
exchange for outstanding Elected Company Common Shares. Upon surrender to the
Depositary of the certificates which immediately prior to the Effective Time
represented outstanding Company Common Shares together which such other
documents and instruments as are required to effect the transfer of the shares
formerly represented by such certificates under the ABCA and the by-laws of the
Company and such additional documents and instruments as the Depositary may
reasonably require, the holder of such surrendered certificates shall be
entitled to receive in exchange therefor, and the Depositary shall forthwith
deliver to such holder, a certificate representing
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that number (rounded down to the nearest whole number) of Exchangeable Shares
which such holder has the right to receive pursuant to the Arrangement (together
with any dividends or distributions with respect thereto pursuant to Section 4.3
and any cash in lieu of fractional shares of Exchangeable Shares pursuant to
Section 4.4). In the event of a transfer of ownership of Company Common Shares
which is not registered in the transfer records of the Company, a certificate
representing the proper number of shares of Exchangeable Shares (together with
any dividends or distributions with respect thereto pursuant to Section 4.3 and
any cash in lieu of fractional shares of Exchangeable Shares pursuant to Section
4.4) shall be delivered to a transferee if the certificate representing such
Company Common Shares is presented to the Depositary, accompanied by all
documents required to evidence and effect such transfer. Until surrendered as
contemplated by this Section 4.1, each certificate which immediately prior to
the Effective Time represented outstanding Company Common Shares that were
transferred pursuant to subsection 2.1(a) to Exchangeco shall be deemed at any
time after the Effective Time, but subject to Section 4.6, to represent only the
right to receive upon such surrender (a) the certificate representing
Exchangeable Shares as contemplated by this Section 4.1, (b) a cash payment in
lieu of any fractional Exchangeable Shares as contemplated by Section 4.4 and
(c) any dividends or distributions with a record date after the Effective Time
theretofore paid or payable with respect to Exchangeable Shares as contemplated
by Section 4.3.
SECTION 4.2 ISSUANCE OF CERTIFICATES REPRESENTING FCE COMMON STOCK
At or promptly after the Effective Time, FCE shall deposit with the
Depositary, for the benefit of the holders of Company Common Shares transferred,
pursuant to subsection 2.1(c) to FCE, certificates representing the FCE Common
Stock issued pursuant to subsection 2.1(c) in exchange for outstanding Company
Common Shares. Upon surrender to the Depositary of the certificates representing
such outstanding Company Common Shares together with such other documents and
instruments as would have been required to effect the transfer of the shares
represented by such certificates under the ABCA and the by-laws of the Company
and such additional documents and instruments as the Depositary may reasonably
require, the holder of such surrendered certificates shall be entitled to
receive in exchange therefor, and the Depositary shall deliver to such holder, a
certificate representing that number (rounded down to the nearest whole number)
of shares of FCE Common Stock which such holder has the right to receive
(together with any dividends or distributions with respect thereto pursuant to
Section 4.3 and any cash in lieu of fractional shares of FCE Common Stock
pursuant to Section 4.4). In the event of a transfer of ownership of Company
Common Shares is not registered in the transfer records of the Company, a
certificate representing the proper number of shares of FCE Common Stock shall
be issued to a transferee if the certificates representing such Company Common
Shares is presented to the Depositary, accompanied by all documents required to
evidence and effect such transfer. Until surrendered as contemplated by this
Section 4.2, the certificates which immediately prior to the Effective Date
represented outstanding Company Common Shares that were transferred pursuant to
subsection 2.1(c) to FCE shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender (i) the certificate
representing FCE Common Stock as contemplated by this Section 4.2, (ii) a cash
payment in lieu of any fractional shares of FCE Common Stock as contemplated by
Section 4.4 and (iii)
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any dividends or distributions with a record date after the Effective Date
theretofore paid or payable with respect to FCE Common Stock as contemplated by
Section 4.3.
SECTION 4.3 DIVIDENDS AND OTHER DISTRIBUTIONS
No dividends or other distributions declared or made after the
Effective Time with respect to the Exchangeable Shares or FCE Common Stock with
a record date after the Effective Time shall be paid to the holder of any
formerly outstanding Company Common Shares, that were transferred pursuant to
Section 2.1. No cash payment in lieu of fractional shares shall be paid to any
such holder of Company Common Shares pursuant to Section 4.4 (and no interest
will be earned and payable thereon), unless and until the certificate
representing such Company Common Shares shall be surrendered in accordance with
Section 4.1 or 4.2. Subject to applicable law and to Section 4.5, at the time of
such surrender of any such certificate (or, in the case of clause (c) below, at
the appropriate payment date), there shall be paid to the Record Holder of the
certificates representing whole Exchangeable Shares or FCE Common Stock, as the
case may be, without interest, (a) the amount of any cash payable in lieu of a
fractional Exchangeable Share or FCE Common Stock to which such holder is
entitled pursuant to Section 4.4, (b) the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole Exchangeable Share or FCE Common Stock, as the case may
be, and (c) the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole Exchangable Share or FCE Common
Stock, as the case may be.
SECTION 4.4 NO FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Exchangeable
Shares or FCE Common Stock shall be issued upon the surrender for exchange of
certificates pursuant to Section 4.1 or 4.2, and such fractional interests shall
not entitle the owner thereof to vote or to possess or exercise any rights as a
security holder of Exchangeco or FCE. In lieu of any such fractional interests,
each person entitled thereto will receive an amount of cash (rounded to the
nearest whole cent), without interest, equal to the product of such fractional
interest, multiplied by the FCE Stock Price, such amount to be provided to the
Depositary by FCE upon request. Any amount calculated under this section will be
calculated based on each beneficial holder.
SECTION 4.5 LOST CERTIFICATES
If any certificate which immediately prior to the Effective Time
represented outstanding Company Common Shares that were transferred pursuant to
Section 2.1 has been lost, stolen or destroyed, upon the making of any affidavit
of that fact by the person claiming such certificate to be lost, stolen or
destroyed, the Depositary will issue in exchange for such lost, stolen or
destroyed certificate, certificates representing Exchangeable Shares or FCE
Common Stock (together with any dividends or distribution with respect thereto
pursuant to Section 4.3 and any cash in lieu of fractional shares of
Exchangeable Shares or FCE Common Stock pursuant to Section 4.4) delivered in
respect thereof as determined in accordance with Section 2.1. When seeking such
certificates and payment in exchange for
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any lost, stolen or destroyed certificate, the person from whom certificates
representing Exchangeable Shares or shares of FCE Common Stock are to be issued
shall, as a condition precedent to the issuance thereof, give a bond
satisfactory to Exchangeco, FCE or the Transfer Agent, as the case may be, in
such sum as Exchangeco, FCE or the Transfer Agent may direct or otherwise
indemnify such party in a manner satisfactory to such party against any claim
that may be made against such party with respect to the certificate alleged to
have been lost, stolen or destroyed.
SECTION 4.6 EXTINGUISHMENT OF RIGHTS
Any certificate which immediately prior to the Effective Time
represented outstanding Company Common Shares and has not been deposited, with
all other instruments required by Section 4.1 or 4.2, on or prior to the sixth
anniversary of the Effective Date, shall cease to represent a claim or interest
of any kind or nature as a Shareholder or a holder of shares of FCE Common Stock
or Exchangeable Shares. On such date, the shares of FCE Common Stock or
Exchangeable Shares (and any dividends or distributions with respect thereto
pursuant to Section 4.3 and any cash in lieu of fractional Exchangeable Shares
or FCE Common Stock pursuant to Section 4.4) to which the former registered
holder of the certificate referred to in the preceding sentence was ultimately
entitled shall be deemed to have been surrendered to FCE or Exchangeco, as the
case may be, together with all entitlements to dividends, distributions, cash
and interest thereon held for such former registered holder, for no
consideration and such shares shall thereupon be cancelled and the name of the
former registered holder shall be removed from the register of holders of such
shares.
SECTION 4.7 ELECTIONS
(a) Each Holder immediately prior to the Effective Time of
Company Common Shares who is a resident of Canada for purposes
of the ITA will be entitled to elect to receive Exchangeable
Shares for such shares (an "Election"). A holder of Company
Common Shares who is a non-resident of Canada for purposes of
the ITA will not be entitled to elect to receive Exchangeable
Shares and any such election otherwise made by such a holder
shall be void and such holder will receive FCE Common Stock as
set out in Section 2.1(c). Shareholders will be required to
certify their residency status in their Letters of
Transmittal. All such elections shall be made on a Letter of
Transmittal. Holders of Company Common Shares who hold Company
Common Shares as nominees, trustees or in other representative
capacities (a "Representative") may submit multiple Letters of
Transmittal.
(b) To be effective, a Letter of Transmittal must be properly
completed, signed and submitted to the Depositary. FCE will
have the discretion, which it may delegate in whole or in
part to the Depositary, to determine whether Letters of
Transmittal have been properly completed, signed and
submitted and to disregard defects therein. The decision of
FCE (or the Depositary) in such matters shall be
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conclusive and binding. Neither FCE nor the Depositary will be
under any obligation to notify any person of any defect in a
Letter of Transmittal submitted to the Depositary.
(c) For the purposes hereof, a holder of Company Common Shares who
does not submit a Letter of Transmittal and Election Form
which is received by the Depositary prior to the Election
Deadline (as hereinafter defined) or who submits a Letter of
Transmittal but fails to make an election on whether to
receive Exchangeable Shares or FCE Common Stock will, in
either case, receive FCE Common Stock. If FCE or the
Depositary shall determine that any purported election was not
properly made, such purported election shall be deemed to be
of no force and effect and the applicable holder of Company
Common Shares who made such election shall receive FCE Common
Stock.
(d) FCE and the Company shall each use their best efforts to mail
the Letter of Transmittal to all persons who become
Shareholders during the period between the record date for the
Meeting and 10:00 a.m. Calgary time, on the date seven
calendar days prior to the anticipated Effective Date and to
make the Letter of Transmittal available on www.sedar.com. A
Letter of Transmittal must be received by the Depositary by
the close of business on the last Business Day prior to the
Effective Date (the "Election Deadline") in order to be
effective. A Letter of Transmittal may not be revoked after
receipt thereof by the Depositary.
ARTICLE 5
WITHHOLDING RIGHTS
SECTION 5.1 WITHHOLDING RIGHTS.
FCE, Exchangeco and the Depositary shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Plan of
Arrangement to any holder of Company Common Shares or Exchangeable Shares such
amounts as FCE, Exchangeco or the Depositary is required to deduct and withhold
with respect to such payment under the United States Internal Revenue Code of
1986, as amended, the ITA or any provision of state, local, provincial or
foreign tax law. To the extent that amounts are so withheld, such amounts shall
be treated for all purposes hereof as having been paid to the holder of shares
in respect of which such deduction and withholding was made, provided that such
withheld amounts are actually remitted to the appropriate taxing authority. To
the extent that the amount so required or permitted to be deducted or withheld
from any payment to a holder exceeds the cash portion of the consideration
otherwise payable to the holder, FCE, Exchangeco and the Depositary are hereby
authorized to sell or otherwise dispose of at fair market value such portion of
such consideration as is necessary to provide sufficient funds to FCE,
Exchangeco or the Depositary, as the case may be, in order to enable it to
comply with such deduction or withholding requirement and FCE, Exchangeco or the
Depositary shall give an accounting to the holder with respect thereto and any
balance of such proceeds of sale.
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ARTICLE 6
ACKNOWLEDGMENTS
SECTION 6.1 ACKNOWLEDGMENTS.
The Company, Callco and FCE acknowledge that:
(a) each Option outstanding at the Effective Time will, without
any action on the part of any Optionholder, represent an
option to purchase the number of shares of FCE Common Stock
determined by multiplying the number of Company Common Shares
subject to such Option at the Effective Time by the Exchange
Ratio (rounded down to the nearest whole number of shares of
FCE Common Stock), at an exercise price per share of FCE
Common Stock equal to the exercise price per share of such
Option immediately prior to the Effective Time divided by the
Exchange Ratio (rounded up to the nearest whole cent),
expressed in U.S. dollars. For the purposes of determining the
exercise price per share of FCE Common Stock, the exercise
price per share of the Company Common Stock Shares subject to
such Option shall be adjusted using the Canadian dollar
exchange rate based upon the average of the noon buying rate
expressed to the fourth decimal place for each of the trading
days in the Measurement Period, as reported by the Federal
Reserve Bank of New York. In the foregoing calculation results
in an Option being exercisable for a fraction of a share of
FCE Common Stock, then the number of shares of FCE Common
Stock subject to such Option will be rounded down to the
nearest whole number of shares, and the exercise price per
whole share of FCE Common Stock will be as determined above.
The obligations of the Company under the Options shall be
assumed by FCE and FCE shall be substituted for the Company
under, and as sponsor, of the Company's Amended Incentive
Stock Option Plan. Except as provided in this paragraph, the
term and all other terms and conditions of the Options in
effect immediately prior to giving effect to the Arrangement
shall govern the Options; and
(b) the rights, preferences, privileges and obligations of the
Company Preferred Shares, as set forth in the Company's
Certificate and Articles of Amendment (the "Original
Articles") dated July 30, 2000, shall be unaffected by the
Arrangement and will be respected and given effect to
following the Effective Time, upon the exercise of any
conversion privilege attaching to the Company Preferred
Shares, by the issuance by FCE, in full satisfaction of such
conversion, of fully-paid non-assessable shares of FCE Common
Stock (or Exchangeable Shares if such holder so elects prior
to the Election Deadline and at the time of conversion the
Exchangeable Shares shall not have been redeemed) to such
holder of the Company Preferred Shares based on the Exchange
Ratio at the following "Current Conversion Prices": (i)
(Cdn.$30.96/the Exchange Ratio) per share of FCE Common Stock
until July 31, 2005; (ii) (Cdn.$33.54/the Exchange Ratio) per
share of FCE Common Stock after July 31, 2005 until July 31,
2010; (iii) (Cdn.$36.12/the Exchange
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Ratio) per share of FCE Common Stock after July 31, 2010 until
July 31, 2015; (iv) (Cdn.$38.70/the Exchange Ratio) per share
of FCE Common Stock after July 31, 2015 until July 31, 2020;
or (v) at any time after July 31, 2020 the price equal to 95%
of the Current Market Price (converted to Cdn.$ at the time of
such calculation), of shares of FCE Common Stock at the time
of conversion (the "Final Conversion Price"). The foregoing
"Current Conversion Prices" remain subject to further
adjustments as provided in Section 5.5 of Schedule "A" to the
Original Articles for any subsequent events. For the purposes
of the Company Preferred Shares conversion privilege, "Common
Shares" shall, from and after the Effective Date, mean the
shares of FCE Common Stock.
ARTICLE 7
AMENDMENT
SECTION 7.1 AMENDMENT
The Company reserves the right to amend, modify and/or supplement this
Plan of Arrangement from time to time at any time prior to the Effective Time
provided that any such amendment, modification or supplement must be contained
in a written document that is (a) agreed to by FCE, (b) filed with the Court
and, if made following the Meeting, approved by the Court and (c) communicated
to Shareholders in the manner required by the Court (if so required).
Any amendment, modification or supplement to this Plan of Arrangement
may be proposed by the Company at any time prior to or at the Meeting (provided
that FCE shall have consented thereto) with or without any other prior notice or
communication, and if so proposed and accepted by the persons voting at the
Meeting (other than as may be required under the Interim Order), shall become
part of this Plan of Arrangement for all purposes.
Any amendment, modification or supplement to this Plan of Arrangement
that is approved by the Court following the Meeting shall be effective only (a)
if it is consented to by the Company, (b) if it is consented to by FCE and (c)
if required by the Court or applicable law, it is consented to by the
Shareholders.
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ANNEX E - LAZARD FAIRNESS OPINION
August 1, 2003
The Board of Directors
FuelCell Energy, Inc.
3 Great Pasture Road
Danbury, CT 06813
Dear Members of the Board:
We understand that FuelCell Energy, Inc. (the "Company") and Global
Thermoelectric, Inc. (the "Target") propose to enter into a combination
agreement (the "Agreement") to be dated August 4, 2003 (the "Agreement"),
pursuant to which the Company will acquire the Target (the "Acquisition").
Pursuant to the Agreement, each issued and outstanding common share of the
Target will be converted into the right to receive such number of shares of the
Company's common stock, par value $0.0001, or Exchangeable Shares (as defined in
the Agreement), as the case may be, (the "Exchange Ratio") determined by
dividing US$2.72 by the daily volume weighted average price of the Company's
common stock during the Measurement Period (as defined in the Agreement) (the
"Company Stock Price"); provided that, for the purposes of calculating the
Exchange Ratio, if the daily volume weighted average price of the Company's
common stock over the Measurement Period is less than $7.96, then the Company
Stock Price shall be $7.96, and if the daily volume weighted average price of
the Company's common stock over the Measurement Period is greater than $9.74,
then the Company Stock Price shall be $9.74.
You have requested our opinion as to the fairness, from a financial
point of view, to the Company of the Exchange Ratio as of the date hereof. In
connection with this opinion, we have:
(i) Reviewed the financial terms and conditions of the Agreement;
(ii) Analyzed certain historical business and financial information
relating to the Company and the Target;
(iii) Reviewed various financial forecasts and other data provided
to us by the Company and the Target relating to their
respective businesses, including the financial projections for
the Target for the years ending December 31, 2003 through 2004
prepared by the management of the Target;
(iv) Held discussions with members of the senior managements of the
Company and the Target with respect to the businesses of the
Company and the Target, respectively, and the strategic
objectives of each;
(v) Reviewed public information with respect to certain other
companies in lines of businesses we believe to be generally
comparable to the businesses of the Company and the Target;
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(vi) Reviewed the financial terms of certain business combinations
involving companies in lines of businesses we believe to be
generally comparable to those of the Company and the Target;
(vii) Reviewed the financial terms of certain business combinations
involving transaction structures we believe to be generally
comparable to the transaction structure set forth in the
Agreement;
(viii) Reviewed the historical stock prices and trading volumes of
the Company's common stock and the Target's common shares; and
(ix) Conducted such other financial studies, analyses and
investigations as we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing
information. We have not assumed any responsibility for any independent
verification of such information or any independent valuation or appraisal of
any of the assets or liabilities of the Company or the Target, or concerning the
solvency or fair value of either of the foregoing entities. We have also relied
upon the views of management of the Company generally with respect to the value
of the existing technology of the Target to be acquired in the Acquisition. With
respect to financial forecasts, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of management of the Company and the Target as to the future financial
performance of the Company and the Target, respectively. We assume no
responsibility for and express no view as to such forecasts or the assumptions
on which they are based.
Further, our opinion is necessarily based on economic, monetary, market
and other conditions as in effect on, and the information made available to us
as of, the date hereof. It should be understood that subsequent developments may
affect the conclusion expressed in this opinion and that we assume no
responsibility for advising any person of any change in any matter affecting
this opinion or for updating or revising our opinion based on circumstances or
events occurring after the date hereof.
In rendering our opinion, we have assumed that the Acquisition will be
consummated on the terms described in the Agreement, without any waiver of any
material terms or conditions by the Company and that obtaining the necessary
regulatory approvals for the Acquisition will not have an adverse effect on the
Company, the Target or the consummation of the Acquisition.
We do not express any opinion as to the price at which the common stock
of the Company or the common shares of the Target may trade subsequent to the
announcement of the Acquisition or as to the price at which the common stock of
the Company may trade subsequent to the consummation of the Acquisition.
Lazard Freres & Co. LLC is acting as investment banker to the Company
in connection with the Acquisition and will receive a fee for our services a
substantial portion of which is contingent upon consummation of the Acquisition.
We have in the past provided investment banking services to the Company for
which we have received customary fees and, as you know,
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one of our managing directors is a member of the immediate family of one of the
Company's Directors.
Our engagement and the opinion expressed herein are for the benefit and
use of the Company's Board of Directors. Our opinion does not address the merits
of the underlying decision by the Company to engage in the Acquisition or the
relative merits of the Acquisition as compared to other business strategies that
might be available to the Company and does not constitute a recommendation to
any stockholder of the Company as to how such stockholder should vote, or take
any action with respect to, the Acquisition.
Based on and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Exchange Ratio is fair to the Company from a financial
point of view.
Very truly yours,
LAZARD FRERES & CO. LLC
By_________________________
George W. Bilicic
Managing Director
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EXHIBIT E-2
ARTICLES OF ARRANGEMENT
OTHER PROVISIONS
SECTION 1.1 DEFINITIONS
Capitalized terms used herein which are defined in the Exchangeable
Share Provisions shall have the meanings ascribed thereto in the Exchangeable
Share Provisions. In addition, unless there is something in the subject matter
or context inconsistent therewith, in this Schedule the following terms have the
respective meanings set out below and grammatical variations of such terms shall
have corresponding meanings:
"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares;
"EXCHANGEABLE SHARES" means the Exchangeable Shares in the capital of
the Corporation;
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in Section
1.2;
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in Section
1.3; and
"TRANSFER AGENT" means - or such other Person as may from time to time
be appointed by the Corporation as the registrar and transfer agent for
the Exchangeable Shares.
SECTION 1.2 LIQUIDATION CALL RIGHT
(a) Callco shall have the overriding right (the "LIQUIDATION CALL
RIGHT"), in the event of and notwithstanding the proposed
liquidation, dissolution or winding-up of the Corporation
pursuant to Article 5 of the Exchangeable Share Provisions, to
purchase from all but not less than all of the holders of
Exchangeable Shares (other than FCE or any of its Affiliates)
on the Liquidation Date all but not less than all of the
Exchangeable Shares held by each such holder on payment by
Callco to each holder of an amount per share equal to the
Liquidation Amount. In the event of the exercise of the
Liquidation Call Right by Callco, each holder shall be
obligated to sell all the Exchangeable Shares held by the
holder to Callco on the Liquidation Date on payment by Callco
to the holder of the Liquidation Amount for each such share.
(b) Callco will be deemed to have exercised the Liquidation Call
Right unless Callco notifies the Transfer Agent in writing, as
agent for the holders of Exchangeable Shares, and the
Corporation of Callco's intention not to exercise such right
at least 55 days before the Liquidation Date, in the case of a
voluntary liquidation, dissolution or winding up of the
Corporation and at least five Business Days before the
Liquidation Date in the case of an involuntary liquidation,
dissolution
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or winding up of the Corporation. The Transfer Agent will
notify the holders of Exchangeable Shares as to whether or not
Callco has exercised the Liquidation Call Right forthwith
after the expiry of the period during which the same may be
exercised by Callco. If Callco exercises the Liquidation Call
Right, on the Liquidation Date Callco will purchase and the
holders will sell all of the Exchangeable Shares then
outstanding for a price per share equal to the Liquidation
Amount in accordance with the procedures in Section 5.2 of the
Exchangeable Share Provisions.
(c) For the purposes of completing the purchase of the
Exchangeable Shares pursuant to the Liquidation Call Right,
Callco shall deposit with the Transfer Agent, on or before the
Liquidation Date, the Exchangeable Share Consideration in
payment of the total Liquidation Amount. Provided that such
Exchangeable Share Consideration has been so deposited with
the Transfer Agent, on and after the Liquidation Date the
rights of each holder of Exchangeable Shares will be limited
to receiving such holder's proportionate part of the total
Liquidation Amount payable by Callco upon presentation and
surrender by the holder of certificates representing the
Exchangeable Shares held by such holder and the holder shall
on and after the Liquidation Date be considered and deemed for
all purposes to be the holder of the shares of FCE Common
Stock to be delivered to it. Upon surrender to the Transfer
Agent of a certificate or certificates representing
Exchangeable Shares, together with such other documents and
instruments as may be required to effect a transfer of
Exchangeable Shares under the ABCA and the by-laws of the
Corporation and such additional documents and instruments as
the Transfer Agent may reasonably require, the holder of such
surrendered certificate or certificates shall be entitled to
receive in exchange therefor, and the Transfer Agent on behalf
of Callco shall deliver to such holder the Exchangeable Share
Consideration. If Callco does not exercise the Liquidation
Call Right in the manner described above, on the Liquidation
Date the holders of the Exchangeable Shares will be entitled
to receive in exchange therefor the liquidation price
otherwise payable by the Corporation in connection with the
liquidation, dissolution or winding-up of the Corporation
pursuant to Article 5 of the Exchangeable Share Provisions.
SECTION 1.3 REDEMPTION CALL RIGHT
(a) Callco shall have the overriding right (the "REDEMPTION CALL
RIGHT"), notwithstanding the proposed redemption of
Exchangeable Shares by the Corporation pursuant to Article 7
of the Exchangeable Share Provisions, to purchase from all but
not less than all of the holders of Exchangeable Shares (other
than FCE or any of its Affiliates) to be redeemed on the
Redemption Date all but not less than all of the Exchangeable
Shares held by each such holder on payment by Callco to the
holder of the Redemption Call Purchase Price as determined in
accordance with Section 1.3(c). In the event of the exercise
of the Redemption Call Right by Callco, each holder shall be
obligated to sell all the Exchangeable Shares held by the
holder to Callco on the Redemption Date on
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payment by Callco to the holder of the Redemption Call
Purchase Price for each such share.
(b) Callco will be deemed to have exercised the Redemption Call
Right unless Callco notifies the Transfer Agent in writing, as
agent for the holders of Exchangeable Shares, and the
Corporation of Callco's intention not to exercise such right
at least 35 days before the Redemption Date. The Transfer
Agent will notify the holders of the Exchangeable Shares as to
whether or not Callco has exercised the Redemption Call Right
forthwith after the expiry of the period during which the same
may be exercised by Callco. If Callco exercises the Redemption
Call Right, on the Redemption Date Callco will purchase and
the holders will sell all of the Exchangeable Shares to be
redeemed for a price per share equal to the Redemption Call
Purchase Price.
(c) For the purposes of completing the purchase of Exchangeable
Shares pursuant to the Redemption Call Right, Callco shall
deposit with the Transfer Agent, on or before the Redemption
Date, the Exchangeable Share Consideration representing the
Redemption Call Purchase Price. Provided that such
Exchangeable Share Consideration has been so deposited with
the Transfer Agent, on and after the Redemption Date the
rights of each holder of Exchangeable Shares so purchased will
be limited to receiving such holder's proportionate part of
the total Redemption Call Purchase Price payable by Callco
upon representation and surrender by the holder of
certificates representing the Exchangeable Shares purchased by
Callco from such holder and the holder shall on and after the
Redemption Date be considered and deemed for all purposes to
be the holder of the Shares of FCE Common Stock delivered to
such holder. Upon surrender to the Transfer Agent of a
certificate or certificates representing Exchangeable Shares,
together with such other documents and instruments as may be
required to effect a transfer of Exchangeable Shares under the
ABCA and the by-laws of the Corporation and such additional
documents and instruments as the Transfer Agent may reasonably
require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange
therefor, and the Transfer Agent on behalf of Callco shall
deliver to such holder, the Exchangeable Share Consideration.
If Callco does not exercise the Redemption Call Right in the
manner described above, on the Redemption Date the holders of
the Exchangeable Shares will be entitled to receive in
exchange therefor the redemption price otherwise payable by
the Corporation in connection with the redemption of
Exchangeable Shares pursuant to Article 7 of the Exchangeable
Share Provisions.
SECTION 1.4 EXCHANGE PUT RIGHT
Upon and subject to the terms and conditions contained in the
Exchangeable Share Provisions and the Voting and Exchange Trust Agreement, a
holder of Exchangeable Shares shall have the Exchange Put Right.
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ANNEX F - CITIGROUP FAIRNESS OPINION
August 4, 2003
The Board of Directors
Global Thermoelectric Inc.
4908 52nd Street S.E.
Calgary, Alberta T2B 3R2
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common shares of Global Thermoelectric Inc.
("Global") of the Exchange Ratio (defined below) provided for in the Combination
Agreement (the "Combination Agreement") to be entered into by and between
FuelCell Energy, Inc. ("FuelCell") and Global. As more fully described in the
Combination Agreement, and subject to the terms and conditions thereof, in the
Arrangement (as defined in the Combination Agreement) each outstanding common
share of Global (the "Global Common Shares") will be transferred either to
FuelCell in exchange for a number of shares of common stock of FuelCell, par
value $0.0001 per share (the "FuelCell Common Stock"), or to a wholly owned
subsidiary of FuelCell in exchange for a number of Exchangeable Shares (as
defined in the Combination Agreement), in each case equal to the Exchange Ratio.
The "Exchange Ratio" shall equal (i) U.S. $2.72, divided by (ii) the FCE Stock
Price (as defined in the Combination Agreement); provided, however, that if the
Daily Volume Weighted Average Price (as defined in the Combination Agreement) of
FuelCell Common Stock is less than U.S. $7.96, the FCE Stock Price shall equal
U.S. $7.96, and if the Daily Volume Weighted Average Price of FuelCell Common
Stock is greater than U.S. $9.74, the FCE Stock Price shall equal U.S. $9.74.
In arriving at our opinion, we reviewed a draft dated August 1, 2003 of the
Combination Agreement and held discussions with certain senior officers,
directors and other representatives and advisors of Global and certain senior
officers and other representatives and advisors of FuelCell concerning the
businesses, operations and prospects of Global and FuelCell. We examined certain
publicly available business and financial information relating to Global and
FuelCell as well as certain financial forecasts and other information and data
relating to Global and FuelCell which were provided to or otherwise reviewed by
or discussed with us by the respective managements of Global and FuelCell,
including information relating to the potential strategic implications and
operational benefits anticipated by the managements of Global and FuelCell to
result from the Arrangement. We reviewed the financial terms of the Arrangement
as set forth in the Combination Agreement in relation to, among other things:
current and historical market prices and trading volumes of Global Common Shares
and FuelCell Common Stock; the historical and projected earnings and other
operating data of Global and FuelCell; and the capitalization and financial
condition of Global and FuelCell. We considered, to the extent publicly
available, the financial terms of certain other transactions effected which we
considered relevant in evaluating the Arrangement and analyzed certain
financial, stock market and other publicly available information relating to the
businesses of other companies whose operations we
F-1
considered relevant in evaluating those of Global and FuelCell. We also
evaluated certain pro forma financial effects of the Arrangement on Global and
FuelCell. At appropriate times, in connection with our engagement and at the
direction of Global, we were requested to approach, and we held discussions
with, selected third parties to solicit indications of interest in the possible
acquisition of all or a part of Global. In addition to the foregoing, we
conducted such other analyses and examinations and considered such other
information and financial, economic and market criteria as we deemed appropriate
in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or provided to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data relating to Global and FuelCell provided to or otherwise reviewed by or
discussed with us, we have been advised by the respective managements of Global
and FuelCell that such forecasts and other information and data were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of Global and FuelCell as to the future financial
performance of Global and FuelCell, the potential strategic implications and
operational benefits (including the amount, timing and achievability thereof)
anticipated to result from the Arrangement and the other matters covered
thereby. We have assumed, with your consent, that the Arrangement will be
consummated in accordance with its terms, without waiver, modification or
amendment of any material term, condition or agreement and that, in the course
of obtaining the necessary regulatory or third party approvals, consents and
releases for the Arrangement, no delay, limitation, restriction or condition
will be imposed that would have a material adverse effect on Global or FuelCell
or the contemplated benefits of the Arrangement. Representatives of Global have
advised us, and we further have assumed, that the final terms of the Combination
Agreement will not vary materially from those set forth in the draft reviewed by
us. We also have assumed, with your consent, that, at the corporate level, the
Arrangement will be tax-free. Our opinion, as set forth herein, relates to the
relative values of Global and FuelCell. We are not expressing any opinion as to
what the value of the FuelCell Common Stock or Exchangeable Shares actually will
be when issued pursuant to the Arrangement or the price at which the FuelCell
Common Stock or Exchangeable Shares will trade at any time. We have not made or
been provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Global or FuelCell nor have we made any
physical inspection of the properties or assets of Global or FuelCell. Our
opinion does not address the relative merits of the Arrangement as compared to
any alternative business strategies or transactions that might exist for Global
or the effect of any other transaction in which Global might engage. Our opinion
is necessarily based upon information available to us, and financial, stock
market and other conditions and circumstances existing, as of the date hereof.
Citigroup Global Markets Inc. has acted as financial advisor to Global in
connection with the proposed Arrangement and will receive a fee for such
services, a significant portion of which is contingent upon the consummation of
the Arrangement. In the ordinary course of our business, we and our affiliates
may actively trade or hold the securities of Global and FuelCell for our own
account or for the account of our customers and, accordingly, may at any time
hold a long or short position in such securities. In addition, we and our
affiliates (including Citigroup Inc. and its affiliates) may maintain
relationships with Global, FuelCell and their respective affiliates.
F-2
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Global in its evaluation of the
proposed Arrangement, and our opinion is not intended to be and does not
constitute a recommendation to any shareholder as to how such shareholder should
vote on the proposed Arrangement.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the holders of Global Common Shares.
Very truly yours,
CITIGROUP GLOBAL MARKETS INC.
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ANNEX G - SECTION 191 OF THE BUSINESS CORPORATIONS ACT (ALBERTA)
PURSUANT TO THE PLAN OF ARRANGEMENT AND THE INTERIM ORDER, THE RIGHT OF DISSENT
UNDER SECTION 191 HAS BEEN MODIFIED. SHAREHOLDERS SHOULD ALSO REFER TO THE
PLAN OF ARRANGEMENT AND THE INTERIM ORDER.
Pursuant to the Interim Order, Global common shareholders shall have
the right to dissent in respect of the Plan of Arrangement. Global must receive
notice of the exercise of this right of dissent no later than 24 hours before
the Global Meeting by delivery of such notice to either Mr. John MacNeil or the
chairman of the Global Meeting, both c/o Bennett Jones LLP, 4500, 855-2nd Street
S.W., Calgary, Alberta T2P 4K7.
SHAREHOLDER'S RIGHT TO DISSENT
(191) (1) Subject to sections 192 and 242, a holder of shares of any
class of a corporation may dissent if the corporation resolves to
(a) amend its articles under section 173 or 174 to add, change or
remove any provisions restricting or constraining the issue or
transfer of shares of that class,
(b) amend its articles under section 173 to add, change or remove
any restrictions on the business or businesses that the
corporation may carry on,
(c) amalgamate with another corporation, otherwise than under
section 184 or 187,
(d) be continued under the laws of another jurisdiction under
section 189, or
(e) sell, lease or exchange all or substantially all its property
under section 190.
(2) A holder of shares of any class or series of shares entitled
to vote under section 176, other than section 176(1)(a), may dissent if the
corporation resolves to amend its articles in a manner described in that
section.
(3) In addition to any other right the shareholder may have, but
subject to subsection (20), a shareholder entitled to dissent under this section
and who complies with this section is entitled to be paid by the corporation the
fair value of the shares held by the shareholder in respect of which the
shareholder dissents, determined as of the close of business on the last
business day before the day on which the resolution from which the shareholder
dissents was adopted.
(4) A dissenting shareholder may only claim under this section
with respect to all the shares of a class held by the shareholder or on behalf
or any one beneficial owner and registered in the name of the dissenting
shareholder.
(5) A dissenting shareholder shall send to the corporation a
written objection to a resolution referred to in subsection (1) or (2)
G-1
(a) at or before any meeting of shareholders at which the
resolution is to be voted on, or
(b) if the corporation did not send notice to the shareholder of
the purpose of the meeting or of the shareholder's right to
dissent, within a reasonable time after the shareholder learns
that the resolution was adopted and of the shareholder's right
to dissent.
(6) An application may be made to the Court by originating notice
after the adoption of a resolution referred to in subsection (1) or (2),
(a) by the corporation, or
(b) by a shareholder if the shareholder has sent an objection to
the corporation under subsection (5), to fix the fair value in
accordance with subsection (3) of the shares of a shareholder
who dissents under this section.
(7) If an application is made under subsection (6), the
corporation shall, unless the Court otherwise orders, send to each dissenting
shareholder a written offer to pay the shareholder an amount considered by the
directors to be the fair value of the shares.
(8) Unless the Court otherwise orders, an offer referred to in
subsection (7) shall be sent to each dissenting shareholder
(a) at least 10 days before the date on which the application is
returnable, if the corporation is the applicant, or
(b) within 10 days after the corporation is served with a copy of
the originating notice, if a shareholder is the applicant.
(9) Every offer made under subsection (7) shall
(a) be made on the same terms, and
(b) contain or be accompanied with a statement showing how the
fair value was determined.z
(10) A dissenting shareholder may make an agreement with the
corporation for the purchase of the shareholder's shares by the corporation, in
the amount of the corporation's offer under subsection (7) or otherwise, at any
time before the Court pronounces an order fixing the fair value of the shares.
(11) A dissenting shareholder
(a) is not required to give security for costs in respect of an
application under subsection (6), and
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(b) except in special circumstances must not be required to pay
the costs of the application or appraisal.
(12) In connection with an application under subsection (6), the
Court may give directions for
(a) joining as parties all dissenting shareholders whose shares
have not been purchased by the corporation and for the
representation of dissenting shareholders who, in the opinion
of the Court, are in need of representation,
(b) be trial of issues and interlocutory matters, including
pleadings and examinations for discovery,
(c) the payment to the shareholder of all or part of the sum
offered by the corporation for the shares,
(d) the deposit of the share certificates with the Court or with
the corporation or its transfer agent,
(e) the appointment and payment of independent appraisers, and the
procedures to be followed by them,
(f) the service of documents, and
(g) the burden of proof on the parties.
(13) On an application under subsection (6), the Court shall make
an order
(a) fixing the fair value of the shares in accordance with
subsection (3) of all dissenting shareholders who are parities
to the application,
(b) giving judgment in that amount against the corporation and in
favour of each of those dissenting shareholders, and
(c) fixing the time within which the corporation must pay that
amount to a shareholder.
(14) On
(a) the action approved by the resolution from which the
shareholder dissents becoming effective,
(b) the making of an agreement under subsection (10) between the
corporation and the dissenting shareholder as to the payment
to be made by the corporation for the shareholder's shares,
whether by the acceptance of the corporation's offer under
subsection (7) or otherwise, or
(c) the pronouncement of an order under subsection (13),
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whichever first occurs, the shareholder ceases to have any rights as a
shareholder other than the right to be paid the fair value of the shareholder's
shares in the amount agreed to between the corporation and the shareholder or in
the amount of the judgment, as the case may be.
(15) Subsection (14)(a) does not apply to a shareholder referred to
in subsection (5)(b).
(16) Until one of the events mentioned in subsection (14) occurs,
(a) the shareholder may withdraw the shareholder's dissent, or
(b) the corporation may rescind the resolution,
and in either event proceedings under this section shall be discontinued.
(17) The Court may in its discretion allow a reasonable rate of
interest on the amount payable to each dissenting shareholder, from the date on
which the shareholder ceases to have any rights as a shareholder by reason of
subsection (14) until the date of payment.
(18) If subsection (20) applies, the corporation shall, within 10
days after
(a) the pronouncement of an order under subsection (13), or
(b) the making of an agreement between the shareholder and the
corporation as to the payment to be made for the shareholder's
shares,
notify each dissenting shareholder that it is unable lawfully to pay dissenting
shareholders for their shares.
(19) Notwithstanding that judgment has been given in favour of a
dissenting shareholder under subsection (13)(b), if subsection (20) applies, the
dissenting shareholder, by written notice delivered to the corporation within 30
days after receiving the notice under subsection (18), may withdraw the
shareholder's notice of objection, in which case the corporation is deemed to
consent to the withdrawal and the shareholder is reinstated to the shareholder's
full rights as a shareholder, failing which the shareholder retains a status as
a claimant against the corporation, to be paid as soon as the corporation is
lawfully able to do so or, in a liquidation, to be ranked subordinate to the
rights of creditors of the corporation but in priority to its shareholders. A
corporation shall not make a payment to a dissenting shareholder under this
section if there are reasonable grounds for believing that
(a) the corporation is or would after the payment be unable to pay
its liabilities as they become due, or
(b) the realizable value of the corporation's assets would by
reason of the payment be less than the aggregate of its
liabilities.
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ANNEX H - ADDITIONAL INFORMATION ABOUT FUELCELL
The following reports filed pursuant to the Securities Exchange Act of
1934 are attached in full:
- Annual Report on Form 10-K for the year ended October 31,
2002, filed January 24, 2003;
- Quarterly Report on Form 10-Q for the quarter ended January
31, 2003, filed on March 14, 2003;
- Quarterly Report on Form 10-Q for the quarter ended April 30,
2003, filed on June 16, 2003;
- Proxy Statement for FuelCell's 2002 Annual Meeting of
Stockholders, filed on February 25, 2003.
- Quarterly Report on Form 10-Q for the quarter ended July 31,
2003, filed on September 12, 2003;
FUELCELL ENERGY, INC. - Form 10-K
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 2002
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: 1-14204
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 offices) (Zip Code)
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 $187,789,044 which is based on the closing price of
$5.65 on January 22, 2003. On January 22, 2003 there were 39,318,251 shares of
common stock of the registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE CERTAIN INFORMATION CONTAINED IN THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT RELATING TO ITS FORTHCOMING 2003 ANNUAL
MEETING OF STOCKHOLDERS TO BE FILED NOT LATER THAN 120 DAYS AFTER THE END OF
REGISTRANT'S FISCAL YEAR ENDED OCTOBER 31, 2002 IS INCORPORATED BY REFERENCE IN
PART III OF THIS ANNUAL REPORT ON FORM 10-K.
================================================================================
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FUELCELL ENERGY, INC. - Form 10-K
FUELCELL ENERGY, INC.
INDEX
DESCRIPTION PAGE NUMBER
----------- -----------
PART I
Item 1 Business H-5
Item 2 Properties H-34
Item 3 Legal Proceedings H-34
Item 4 Submission of Matters to a Vote of Security Holders H-34
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters H-35
Item 6 Selected Financial Data H-36
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations H-37
Item 7A Quantitative and Qualitative Disclosures about Market Risk H-41
Item 8 Financial Statements and Supplementary Data H-41
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure H-41
PART III
Item 10 Directors and Executive Officers of the Registrant H-42
Item 11 Executive Compensation H-42
Item 12 Security Ownership of Certain Beneficial Owners and Management H-42
Item 13 Certain Relationships and Related Transactions H-42
Item 14 Controls and Procedures H-42
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K H-43
Signatures
H-3
FUELCELL ENERGY, INC. - Form 10-K
FORWARD-LOOKING STATEMENT DISCLAIMER
When used in this Report, the words "expects", "anticipates", "estimates",
"should", "will", "could", "would", "may", and similar expressions are intended
to identify forward-looking statements. Such statements include statements
relating to the development and commercialization schedule for our fuel cell
technology and products, future funding under government research and
development contracts, the expected cost competitiveness of our technology, and
the timing and availability of products under development. These and other
forward looking statements contained in this Report are subject to risks and
uncertainties, known and unknown, that could cause actual results to differ
materially from those forward-looking statements, including, without limitation,
general risks associated with product development and introduction, changes in
the utility regulatory environment, potential volatility of energy prices,
government appropriations, the ability of the government to terminate its
development contracts at any time, rapid technological change, and competition,
as well as other risks contained under Item 1 "Business-Risk Factors" of this
Report. We cannot assure that we will be able to meet any of our development or
commercialization schedules, that the government will appropriate the funds
anticipated by us under our government contracts, that the government will not
exercise its right to terminate any or all of our government contracts, that any
of our products or technology, once developed, will be commercially successful,
or that we will be able to achieve any other result anticipated in any other
forward-looking statement contained herein. The forward-looking statements
contained herein speak only as of the date of this Report. Except for ongoing
obligations to disclose material information under the federal securities laws,
we expressly disclaim any obligation or undertaking to release publicly any
updates or revisions to any such statement to reflect any change in our
expectations or any change in events, conditions or circumstances on which any
such statement is based.
BACKGROUND
Information contained in this Report concerning the electric power supply
industry and the distributed generation market, our general expectations
concerning this industry and this market, and our position within this industry
are based on market research, industry publications, other publicly available
information and on assumptions made by us based on this information and our
knowledge of this industry and this market, which we believe to be reasonable.
Although we believe that the market research, industry publications and other
publicly available information are reliable, including the sources that we cite
in this Annual Report, they have not been independently verified by us and,
accordingly, we cannot assure you that such information is accurate in all
material respects. Our estimates, particularly as they relate to our general
expectations concerning the electric power supply industry and the distributed
generation market, involve risks and uncertainties and are subject to change
based on various factors, including those discussed under "Risk Factors" in Item
1 of this Annual Report.
As used in this Annual Report, all degrees refer to Fahrenheit (oF), and
kilowatt and megawatt numbers designate nominal or rated capacity of the
referenced power plant. As used in this Annual Report, "efficiency" or
"electrical efficiency" means the ratio of the electrical energy (AC) generated
in the conversion of a fuel to the total energy contained in the fuel; "overall
energy efficiency" refers to efficiency based on the electrical output plus
useful heat output of the power plant; "kilowatt" (kW) means 1,000 watts;
"megawatt" (MW) means 1,000,000 watts; "gigawatt" (GW) means 1,000,000,000
watts; "terawatt" (TW) means 1,000,000,000,000 watts; "kilowatt hour" (kWh) is
equal to 1 kW of power supplied to or taken from an electric circuit steadily
for one hour; "megawatt hour" (MWh) is equal to 1 MW of power supplied to or
taken from an electric circuit steadily for one hour; "gigawatt hour" (GWh) is
equal to 1 GW of power supplied to or taken from an electric circuit steadily
for one hour; and "terawatt hour" (TWh) is equal to 1 TW of power supplied to or
taken from an electric circuit steadily for one hour.
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FUELCELL ENERGY, INC. - Form 10-K
PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a world leader in the development and manufacture of carbonate fuel cell
power plants for distributed power generation. We have designed and are
developing standard fuel cell power plants that offer significant advantages
compared to existing power generation technology. These advantages include
higher fuel efficiency than existing distributed generation equipment,
significantly lower emissions, quieter operation, lower vibration, flexible
siting and permitting requirements, scalability and potentially lower operating,
maintenance and generation costs. We are currently conducting, and have
successfully concluded, field trials of fuel cell power plants ranging from 250
kW to 2 MW.
According to a 2001 study by Allied Business Intelligence (ABI), the cumulative
worldwide electrical generating capacity is expected to grow from 3,137
gigawatts in 2000 to 4,280 gigawatts in 2011, a 2.8 percent compound annual
growth rate. At an estimate of $750 per kW, that amounts to an approximate $850
billion market potential for new central station and distributed power
generation. We estimate that distributed generation currently captures between
10% and 20% of this market. We believe that there is a market opportunity to
increase the share for distributed generation equipment that can respond to the
need for higher reliability, lower emissions, higher efficiency utilizing
cogeneration, the ability to distribute power in more flexible sizes at specific
load centers, enhanced security by installing incremental power plants in
dispersed locations, and increased energy independence by utilizing fuels other
than oil. Our Direct Fuelcell(R) (DFC(R)) products, which have higher
efficiency, cleaner generation and are more easily sited than existing
distributed generation equipment, have the attributes to penetrate this market
and further enable its growth.
From our founding in 1969, we focused on developing fuel cells and specialized
batteries. These efforts resulted in our obtaining various patents and expertise
in these electrochemical technologies. Since 1975, we have concentrated on
developing products in cooperation with United States Department of Energy
("DOE"), the United States Department of Defense ("DOD"), and other sources such
as MTU-Friedrichshafen GmbH ("MTU"), a unit of DaimlerChrysler, our European
partner, to whom we have licensed our fuel cell technology internationally. In
April 2000 and June 2001, we raised net proceeds of approximately $299,000,000
from additional public offerings of our common stock. Since September 2000, we
have received an additional $25,000,000 from other equity investment partners.
Our carbonate fuel cell, known as the Direct FuelCell, 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 to produce hydrogen. We
believe that this "one-step" 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 proton exchange membrane (PEM) and
phosphoric acid, generally use complex, external fuel processing equipment to
convert the fuel into hydrogen. This external equipment increases capital cost
and reduces electrical efficiency.
Our Direct FuelCell has been demonstrated using a variety of hydrocarbon fuels,
including natural gas, methanol, diesel, biogas, coal gas, coal mine methane and
propane. Our commercial DFC power plant products are expected to achieve an
electrical efficiency of between 45% and 57%. Depending on location, application
and load size, we expect that a co-generation configuration will reach an
overall energy efficiency between 70% and 80%. The following diagram shows the
difference between a typical low temperature, external reforming fuel cell and
our Direct FuelCell in the conversion of fuel into electricity.
LOW TEMPERATURE EXTERNAL HIGH TEMPERATURE INTERNAL
REFORMING FUEL CELL REFORMING DIRECT FUEL CELL
[DIAGRAM] [DIAGRAM]
Our designs use the basic single fuel cell stack incorporated in our
sub-megawatt class product as the building block for our megawatt class
products. All three of our products will offer the capability of using the
exhaust heat by-product for combined cycle applications utilizing an unfired gas
turbine, and for co-generation applications using the high quality heat
by-product for high-pressure steam, district heating and air conditioning.
Our products are designed to meet the power requirements of a wide range of
customers such as utilities, industrial facilities, data centers, shopping
centers, wastewater treatment plants, office buildings, hospitals, universities
and hotels. Our initial market entry commercial products, the DFC300A, DFC1500
and DFC3000, will be rated at 250 kW, 1 MW and 2 MW in capacity. We expect our
commercial products to mature to three configurations: 300 kW, 1.5 MW and 3 MW
for distributed applications generally up to 10 MW. We are also developing new
products, based on our existing power plant design, for applications in the 10
to 50 MW range.
We believe that our initial commercial sales will be to "early adopters." Energy
users that, due to environmental or energy efficiency concerns, are unable to or
choose not to site traditional combustion-based generation, or energy users that
need more reliable electricity sources than provided by the grid, current diesel
back-up generators, and batteries, may be willing to
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FUELCELL ENERGY, INC. - Form 10-K
pay higher prices per kW to obtain the power that they need. We expect that
these "early adopters" will include energy users that are able to take advantage
of government subsidies that provide funding for fuel cell installations. We
believe examples of "early adopters" will be institutions, commercial and
industrial customers in pollution non-attainment zones and customers in
grid-constrained regions. "Early adopters" will also include customers with
opportunity fuels such as industrial or municipal wastewater treatment gas, and
co-generation and reliability applications such as hospitals, schools,
universities and hotels.
Units operating and in backlog include customers that are representative of
these early adopter categories. Our Direct FuelCell has demonstrated
grid-connected operation in the United States at our Santa Clara demonstration
in California, at our Danbury, Connecticut facility, at the Mercedes-Benz
manufacturing facility in Tuscaloosa, Alabama, and at the downtown headquarters
of the Los Angeles Department of Water and Power in Los Angeles, California. In
Europe, we have demonstrated grid-connected operation through installations by
MTU at the University of Bielefeld in Germany; at the Rhon-Klinikum Hospital in
Germany; at an energy park owned by RWE, Germany's largest utility, since April
2002; at a telecommunications center for Deutsche Telecom in Germany since
October 2002; at a hospital in Germany for IPF since November 2002; at a
Michelin tire plant in Germany since November 2002; and for IZAR, a shipbuilder
in Spain, since November 2002. Units in backlog include two 250 kW units which
will be located at Starwood hotels in New Jersey; a 250 kW unit which will be
located at Ocean County College in New Jersey; a 250 kW wastewater treatment
unit for the City of Fukuoka in Japan; a 1 MW wastewater treatment power plant
for King County, Washington; two 250 kW units which will be located at Zoot
Enterprises high-technology campus in Montana; a 250 kW unit at a Coast Guard
base in Massachusetts; a 2 MW plant, which will operate on coal gas, at a site
in Indiana; and a 250kW unit, utilizing coal mine methane gas, at a coal mine in
Ohio.
Our current focus is to standardize our products, increase production volume,
further develop our distribution network and concentrate our sales efforts on
"early adopter" markets. We believe that the initial early adopter customers
will lead to additional orders that will enable us to increase volume and
subsequently implement our cost reduction plan. As a result, we believe we will
eventually be able to provide a lower cost product and therefore achieve greater
market potential with commercial and industrial customers.
RECENT DEVELOPMENTS
On December 16, 2002, Marubeni Corporation announced the siting of a Direct
FuelCell power plant at the Nippon Metal Industry Co., Ltd., in Japan. Marubeni
will install a 250 kW DFC power plant at the Sagamihara Works of Nippon Metal in
the first calendar half of 2003. The facility produces specialty steels for a
wide variety of applications and industries worldwide including in our fuel cell
stacks. Our DFC cogeneration unit will operate using town gas and supply the
facility with electricity and steam.
OUR DIRECT FUELCELL(R) 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 that can
potentially yield a lower cost of electricity, primarily because of lower fuel
and maintenance costs when compared to traditional combustion technologies, such
as gas turbines or internal combustion engines. A fuel cell converts a
hydrocarbon 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 reduced
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" ("BOP"), 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.
Conventional non-nuclear power plants burn a hydrocarbon fuel, such as coal, oil
or natural gas, to create heat. The heat boils water, converting it to steam,
which rotates a turbine, which produces 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, fuel
cells are more efficient than comparable conventional power plants. Emissions of
sulfur and nitrogen oxides from fuel cells are nearly zero, and other pollutants
are
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FUELCELL ENERGY, INC. - Form 10-K
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.
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. 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 commercial building.
The following table shows our estimates of the electrical efficiency, operating
temperature, expected capacity range and certain other operating characteristics
of single cycle PEM, phosphoric acid, carbonate (Direct FuelCell) and solid
oxide fuel cells operating on natural gas:
ELECTRICAL OPERATING EXPECTED
EFFICIENCY TEMPERATURE CAPACITY BY-PRODUCT
FUEL CELL TYPE ELECTROLYTE % degree F RANGE HEAT USE
--------------- -------------------- ---------- ----------- ------------ -------------
PEM Polymer Membrane 30-35 180 5 kW to Warm Water
250 kW
Phosphoric Acid Phosphoric Acid 35-40 400 50 kW to Hot Water
200 kW
CARBONATE POTASSIUM/LITHIUM 45-57 1200 250 KW TO HIGH PRESSURE
(DIRECT CARBONATE 3 MW STEAM
FUELCELL(R))
Solid Oxide Stabilized Zirconium 45-50 1800 3 kW to 3 MW High Pressure
dioxide Ceramic Steam
Our Direct FuelCell operates at approximately 1200 degree F, which is a higher
temperature than most other fuel cells. This is an optimal temperature that
avoids the use of precious metal electrodes required by lower temperature fuel
cells, such as 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. In addition, our fuel cell produces high quality
by-product heat energy (700 degree F) that can be harnessed for combined heat
and power (CHP) applications using hot water, steam or chilled water to heat or
cool buildings.
Our Direct FuelCell 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 to produce hydrogen. We believe that this "one-step"
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. This
external equipment increases capital cost and reduces electrical efficiency.
Our Direct FuelCell has been demonstrated using a variety of hydrocarbon fuels,
including natural gas, methanol, diesel, biogas, coal gas, coal mine methane and
propane. Our commercial DFC power plant products are expected to achieve an
electrical efficiency of between 45% and 57%. Depending on location, application
and load size, we expect that a co-generation configuration will reach an
overall energy efficiency of between 70% and 80%.
We believe that the advantages of our Direct FuelCell technology include the
following:
- High Efficiency. The high efficiency, internal fuel reforming
system incorporated within our Direct FuelCell leads to a
simpler, more cost-effective power plant with superior
operating characteristics that offer a variety of benefits to
energy providers and end users. The elimination of external
reforming contributes to higher operating efficiency, lower
fuel use and, therefore, lower operating costs compared to
competing fuel cell technologies.
- Optimal Operating Temperature. Our Direct FuelCell operates at
a temperature of approximately 1200degreeF. This temperature
generates high quality by-product heat that provides superior
energy efficiencies and allows the use of multiple fuels. This
operating temperature avoids combustion of the fuel, and as a
result, reduces pollutants to a
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FUELCELL ENERGY, INC. - Form 10-K
minimal level. It also allows the fuel cell to be built with
less expensive and commonly available materials.
- Atmospheric Pressure. Our Direct FuelCell operates at
atmospheric pressure. This enables it to be constructed at a
lower cost than other fuel cell systems that operate in a
pressurized environment. This also allows our Direct FuelCell
to operate unattended, with lower maintenance requirements,
and greatly enhances the fuel cell stack-operating lifetime.
- Multiple Fuel Capacity. Because of the internal fuel reforming
system and the high operating temperature, our Direct FuelCell
has the capability to operate using multiple fuel sources,
including natural gas, diesel, methanol, biogas, coal gas,
coal mine methane and propane. We think that this provides a
distinct competitive advantage in that it enables our Direct
FuelCell to be used in a variety of applications where the
supply or delivery of natural gas is limited.
- Scalability. Our power plant design is modular, allowing
several units to be combined to provide incremental power
capabilities. This allows our Direct FuelCell to be utilized
by a wide range of customers with different power needs.
MARKET OPPORTUNITIES FOR DISTRIBUTED GENERATION
According to a 2001 study by Allied Business Intelligence (ABI), the cumulative
worldwide electrical generating capacity is expected to grow from 3,137
gigawatts in 2000 to 4,280 gigawatts in 2011, a 2.8 percent compound annual
growth rate. At an estimate of $750 per kW, that amounts to an approximate $850
billion market potential for new electric generation.
Electricity demand is closely tied to economic growth, with the proliferation of
consumer electronic devices such as computers (desktops, laptops and hand-held
devices), video games, televisions, and cell phones contributing to increased
electrical usage as well. Peak demand continued to set records over the summer
of 2002, even in an economy characterized as sluggish. In August 2002, New York
City reported a weekend record of over 416,000 MWh in July (equivalent to what
Vermont uses in three months). They also reported that July 2002 set a record
for electric generation with nearly 6.2 million MWh, and that 5 of their top 10
peak days have been recorded in 2002. As per an August 2002 New York Times
article, the Long Island Power Authority set a peak record of over 5,000 MW in
July 2002 and reported that power demand on Long Island is growing at 4 to 5
percent per year, three times the state average. Similar records were set in New
England, as the Independent System Operator of New England reported a peak
demand of 25,500 MW on August 14, 2002.
A clear solution to meet the growing worldwide demand for electricity is
distributed generation in general and our fuel cell technology in particular.
This is recognized in the marketplace as ABI reported that global fuel cell
energy generating capacity would increase to nearly 16,000 MW within 10 years, a
substantial increase from the currently installed fuel cell generating capacity
of approximately 45 MW.
The key drivers for fuel cell distributed generation have been defined for a
number of years and recent general economic events as well as specific power
industry developments have strengthened the need for our clean, reliable and
highly efficient DFC power plants.
- Operational Efficiency. The average efficiency of power generation in
the United States, heavily reliant on older coal plants and other
technologies, is less than 35 percent. Efficiencies for smaller scale,
combustion-based distributed generation technologies range from 20 to 25
percent for microturbines to 30 to 45 percent for engines and gas
turbines. Our DFC power plants have the potential to reach efficiencies
of 45 to 57 percent in single cycle applications and 70 to 80 percent
for combined heat and power (CHP) applications.
- Reliability. The continued growth of the 24/7 global economy increases
the need for higher electrical reliability. Distributed generation can
respond to this need by locating power generation close to the end user
and avoiding the transmission and distribution infrastructure
altogether. Power disturbances result in lost revenue, lost
productivity, customer dissatisfaction, lower equipment performance,
equipment damage, degradation of equipment life, and an adverse effect
on safety. According to ABI, losses related to power interruptions are
estimated to run $30 billion per year in the U.S. alone, with hourly
loss estimates from $14,500 in bank/automated teller machine service
fees to $6.4 million for transactions at stock brokerage firms. Such
power interruptions are rarely caused by generation failures (only 6
percent). Rather, weather (65 percent) and animal interference (10
percent) affecting transmission and distribution lines are the primary
causes of power outages.
- Grid Constraints. In many areas, the electrical transmission and
distribution system has not kept pace with economic
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FUELCELL ENERGY, INC. - Form 10-K
development, resulting in a shortage of available power and this trend
is expected to continue. According to the North American Electric
Reliability Council's (NERC) recent Reliability Assessment Study
2002-2011, merchant developers announced plans for more than 286,000 MW
of new capacity during the next ten years, a potential increase of
nearly 31 percent over the 934,370 MW currently installed in North
America. However, only 10,100 new circuit miles of transmission
facilities (230 kilovolts or higher) are planned for construction
throughout North America over the corresponding time period, a five
percent increase over the 203,159 miles currently installed. Several
forces keep utilities from building new transmission lines and expanding
the capacity of existing lines.
- Siting new transmission is extremely difficult. Unlike the
strong federal authority that rests with Federal Energy
Regulatory Commission (FERC) to site natural gas pipelines,
states currently site transmission lines. This can lead to long
delays, especially if multiple states are involved.
- The amount of money (rate of return) that FERC allows
transmission owners to earn on investments in transmission
facilities is too low to attract the capital needed to finance
new transmission investments.
- Public opposition to new facilities can keep utilities from
building new transmission lines.
Two areas of the U.S., New York and southwestern Connecticut, are among those in
need of additional transmission facilities to get needed power in their
respective regions. In a 2002 update of New York ISO's Power Alert report
prepared the previous year, over 7,000 MW of new generation will be needed in
the state by 2005, with 2,000 to 3,000 MW needed to be sited within New York
City because the city's energy needs cannot be satisfied by imported electricity
due to limited transmission capabilities. Likewise, ISO New England has
identified severe reliability problems in southwestern Connecticut due to
inadequate capability to import electricity into the area as well as the
inability to move electricity within the area.
- Emissions. Highly industrialized regions of the world, especially urban
areas, suffer from high pollution rates that restrict the ability to add
traditional combustion-based power generation. Fuel cells, which have
ultra-low emissions, can be sited in these areas and allow these regions
to grow their economies by increasing power generation while reducing
pollution. Comparative emissions of fuel cell power plants versus
traditional combustion-based power plants as complied by the
DOE/National Energy Technology Laboratory are as follows:
--------------------------------------------------------------------
EMISSIONS (LBS. PER MWH)
--------------------------
NOx SO(2)
--- -----
Average U.S. Fossil Fuel Plant 4.20 9.21
--------------------------------------------------------------------
Microturbine 0.29 0.00
--------------------------------------------------------------------
Combined Gas Cycle Turbine 0.23 0.005
--------------------------------------------------------------------
Fuel Cell, Single Cycle (DFC) 0.016 0.00
--------------------------------------------------------------------
Fuel Cell, Combined Cycle (DFC/T) 0.013 0.00
--------------------------------------------------------------------
- Security. The events of 2001 have placed greater emphasis on reducing
our dependence on a large vulnerable infrastructure. Cambridge Energy
Research Associates identified the placement of distributed energy
assets at customer facilities along critical energy paths, similar to
the microgrid concept currently being deployed in many parts of the
world (particularly after natural disasters) as part of the Homeland
Security efforts by the U.S. Substituting smaller, site-specific
generation plants such as our DFC power plants for large central power
plants is consistent with this finding.
- Transmission and Distribution Efficiency. According to a 2002 survey by
World Alliance for Decentralized Energy (WADE), worldwide transmission
and distribution (T&D) losses totaled 1,366 TWh in 1999, the equivalent
of 11.66 percent of the world's electrical consumption, or more than the
combined electrical demand of Germany, the United Kingdom, France and
Spain. Including losses from T&D systems, the worldwide waste of energy
arising from central power is very close to the total amount of energy
consumed by the global transportation sector. Our DFC power plants,
located directly at the customers' site, avoid this because power is
generated at the load center.
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FUELCELL ENERGY, INC. - Form 10-K
- Capacity Addition Efficiency. Fuel cell distributed generation extends
beyond the operations of each individual power plant to aggregate
capacity additions. Our DFC power plants range in size from 250 kW to 2
MW, and multiple units combined together can provide power plants up to
50 MW. Conversely, traditional combustion-based central and/or regional
power plants are larger in size, typically 50 to 100 MW or larger,
resulting, in many cases, in excess capacity until demand grows over
time. The same is true with transmission and distribution line
additions. Consequently, our DFC distributed power generation can be
added in increments that more closely match expected demand and in a
shorter time frame from order to start up. End users benefit by not
having to pay financing costs related to excess capacity. According to
the New York ISO, efficient base load power generation plants take two
to three years to build after approval is reached, adding to the
difficulty in the installation of traditional, combustion-based power
plants.
- Energy Independence. According to a DOE/ Energy Information
Administration (EIA) study, the U.S. currently imports over 50 percent
of the oil it consumes. Political implications of a possible war with
Iraq, and the economic costs associated with even a slight near-term
disruption of Middle East oil imports, warrant significant dedication of
resources to develop technologies that can mitigate adverse impact such
supply shocks can cause. Our DFC power plants are designed to primarily
operate on natural gas, coal (which can be converted to synthetic gas),
as well as municipal and industrial wastewater treatment gas, all
abundant U.S. resources. In addition, our DFC power plants utilize these
domestic fuel sources significantly more efficiently, thereby enhancing
the use of our existing U.S. resources.
Many governments at various levels, both here in the U.S. and abroad, are
proactively pursuing programs and subsidies to stimulate the development of
alternative energy generation in general and fuel cells in particular. We
estimate there are over $500 million of global incentives available for
distributed generation, alternative energy and renewable technologies, including
our DFC power plants, with subsidies ranging up to 50 percent of project costs
depending on the application and the site. We and our partners have been able to
take advantage of specific incentives in New Jersey, Massachusetts, Germany and
Japan, and we have projects that have received preliminary approval for
incentives in New York and Connecticut. For example, the New York State Energy
Research and Development Authority has established a $40 million annual program
for CHP projects with grants up to 50 percent of project costs up to $1 million
per project. In addition, the German Parliament currently provides a credit of
up to 5.11 eurocent/kWh for CHP units, up to 2 MW in size, connected to the
national grid.
Clean coal technology is also a focus for the U.S. EPRI indicates that
additional investment of $5-$6 billion over the next several years is needed to
fully evolve clean coal technologies, with President Bush pledging to invest $2
billion in clean coal technology over the next ten years. Our first DFC3000
power plant will be delivered to the Wabash, Indiana coal gasifier site in the
second half of calendar year 2003 to operate on coal-derived synthetic gas, a
$30-plus million project partially funded by the DOE.
OUR PRODUCTS AND TARGET MARKETS
Our initial market entry commercial products will be rated at 250 kW (DFC300A),
1 MW (DFC1500) and 2 MW (DFC3000) in capacity. We expect our commercial products
to mature to three configurations: 300 kW, 1.5 MW and 3 MW. Our balance of plant
is currently designed for these mature products. Our products are targeted for
utility, commercial and industrial customers in the growing distributed
generation market for applications generally up to 10 MW. We are also developing
new products incorporating unfired gas turbines, based on our existing power
plant design, for applications in the 10 to 50 MW range. Our designs use the
basic single fuel cell stack incorporated in our sub-megawatt class product as
the building block for our megawatt class products, with the same fuel cell
components being used for all of our products.
All of our products offer the capability for co-generation where the heat
by-product is suitable for high-pressure steam, district heating and air
conditioning. The majority of our units currently operating or scheduled for
delivery at customer sites in the U.S., Europe and Japan are CHP units.
Our sub-megawatt class product is a skid-mounted, compact power plant that could
be used to power a light industrial or commercial facility, school or other
similar sized applications. Additional units could subsequently be added to meet
incremental demand growth. We expect to begin delivering our DFC300A
sub-megawatt class product to the market in calendar year 2003.
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 utilities, industrial facilities, data centers, shopping
centers, wastewater treatment plants, office buildings, hospitals and hotels. We
expect to bring our DFC1500 and DFC3000 megawatt class products to market in
calendar year 2003.
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FUELCELL ENERGY, INC. - Form 10-K
We are targeting our initial commercialization efforts for the following
stationary power applications:
- customers in regions with high electricity costs;
- customers with 24/7 base-load requirements;
- those seeking to address electric grid distribution or transmission
shortages or congestion;
- industrial and commercial customers who can make use of the high quality
heat by-product for CHP applications;
- customers with opportunity fuels such as wastewater treatment gas or
other waste gases from municipal and industrial processes;
- customers in regions where air pollution requirements are particularly
strict and;
- customers who possess several of the above characteristics.
Our commercialization efforts after these initial applications will largely
depend on the development of the distributed generation market 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 original equipment manufacturers (OEMs), energy
service providers, specialty distributors and utilities as potential buyers and
distributors of our products.
In conjunction with our partners, we have identified the northeastern U.S. as
well as California as having high electricity prices, selected areas of
transmission and distribution grid congestion, available government subsidies
and home to commercial and industrial applications with significant CHP market
potential. According to a 2000 study prepared for the DOE and the EIA, there is
over 77,000 MW of CHP potential in the U.S. Fifty percent of the total
commercial/institutional CHP potential is located in nine states: California,
Florida, Illinois, Michigan, New Jersey, New York, Ohio, Pennsylvania and Texas.
We have announced orders in the following commercial/industrial segments.
- Hotels/Motels. Our North American energy service company (ESCO) partner,
PPL, announced two hotel customer sub-megawatt DFC power plant sitings
at Sheraton hotels, two of over 740 Starwood Resorts properties located
in 80 countries worldwide. The New Jersey Sheraton establishments in
Parsipanny and Edison are 300-400 room hotels and have approximate
electrical base load requirements of 250 kW and peaking electrical loads
of 750 kW to almost 1 MW. Our DFC300A will be part of PPL's master
energy services agreement with the Sheraton hotels to provide their
energy needs. According to the 2000 DOE/EIA Study, the overall U.S.
market for CHP applications for hotels/motels is greater than 6,500 MW,
with over two-thirds of that potential sized at 5 MW or less.
- Water Treatment/Sanitary. We will be operating our first MW DFC power
plant on natural gas in our Torrington facility in preparation for
delivery to the King County municipal wastewater facility to run on
anaerobic digester gas. Additional DFC300A customer sitings were
announced by our Asian partner, Marubeni, at the Kirin Brewery to
operate on industrial wastewater treatment gas at a brewery and the
municipal wastewater facility at the City of Fukuoka, both in Japan. We
sponsored our own study in 1998 that identified over 550 municipal
wastewater facilities throughout the U.S. capable of generating at least
250 kW of electricity. This is consistent with the DOE/EIA 2000 study
that identified over 8,770 CHP sanitary/wastewater establishments in the
U.S. with a total capacity of 949 MW. Operation of our DFC power plants
on wastewater treatment facilities characterizes our products as a
renewable energy technology, which enables them to qualify for
significantly more incentive funding worldwide.
- Universities/Colleges/Schools. MTU's sub-megawatt unit completed more
than two years of operation in March 2002, running for more than 16,000
hours. In August 2002, PPL announced the siting of a DFC300A at Ocean
County College in New Jersey. According to the 2000 DOE/EIA study,
universities, colleges, and schools, collectively, represent over 19,000
MW of CHP potential in the U.S.
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FUELCELL ENERGY, INC. - Form 10-K
- Office Buildings. We have been operating a DFC300 power plant field
trial demonstration at the Los Angeles Department of Water and Power
headquarters building since mid-2001. Office buildings represent the
single largest commercial/industrial sector in the 2000 DOE/EIA study
with over 18,600 MW of CHP potential.
- Hospitals. Hospitals represent another important CHP application for our
DFC power plants, and, to date, our European partner, MTU, has
demonstrated sub-megawatt units at Rhon-Klinikum, which has been
operational for more than a year, and IPF/Magdeburg, which began
operating in the fall of 2002. According to the 2000 DOE/EIA study, the
CHP application potential in the U.S. is over 8,800 MW, with over 60
percent in the 1-5 MW size range. ABI estimates there are about 6,000
hospitals in the U.S., approximately 10,600 in Japan and more than 6,000
in Western Europe.
- Telecommunications/Internet Data Centers. In the fall of 2002, MTU began
operating a sub-megawatt DFC power plant at a telecommunications center
at Deutche Telecom in Munich. Also in 2002, our North American
distribution partner, PPL, announced that two DFC300A will be installed
in 2003 at the headquarters building of Zoot Enterprises, a provider of
customized instant credit decision making applications for financial
institutions, that will be part of its critical reliability base load
energy needs. ABI estimates there is nearly 25,000 data centers in the
world and that each requires at least a megawatt of power. This is a
potential 25 gigawatt market.
- Grid-constrained areas. Selected areas of the country, including
southwestern Connecticut, Long Island, New York City and central
California, are in need of additional power. The existing transmission
and distribution infrastructure is insufficient to accommodate these
local needs, and proposals to upgrade and enhance these lines have been
met with public opposition. Our DFC power plants can be sited within
these regions to deliver the power to meet these local needs.
- International Markets. Through our international distribution partners
-- MTU in Europe and Marubeni in Asia -- we will be delivering our DFC
power plants in those markets. ABI estimates the cumulative fuel cell
electric generating capacity in Germany and Japan will grow to 530
megawatts and 720 megawatts, respectively, by 2010.
In connection with the DOE's Vision 21 program, we are designing a 40 MW
ultra-high efficiency power system that will combine our Direct FuelCell 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 DFC power plant to provide power to ships
using diesel fuel. Commercial markets for diesel fuel cells include island
communities that have limited natural gas or similar resources and rely on the
use of diesel fuel for the generation of electricity, and the cruise ship
industry, which we believe has substantial "hotel" power needs.
The overall slowdown of the economy, particularly in the industrial sector, the
resulting decline in electricity prices and deterioration in the credit quality
of independent power producers has caused a dramatic decline in new power plant
construction. According to energy information provider Platts, power companies
have already canceled or delayed construction of 164,000 MW of power generation
in 2002, more than double the year before. Credit rating agency Standard & Poors
reported that in the first nine months of 2002 there were 135 credit downgrades
of utility holding companies and their subsidiaries, nearly quadruple the number
in the year-earlier period, and one-third of the major companies in the sector
were on watch for future downgrades. These current impediments to traditional
power plant financing provides us with near-term market opportunities as our DFC
power plants can be sited in smaller increments and more dispersed locations,
and time from order placement to initial start-up is less than the two to three
year time frame for larger, central generation units. We are finding sufficient
interest in regional markets to meet the needs for early adopter customers and
our focus for 2003 is to generate orders for our DFC products with competitive
terms and conditions.
OUR FUEL CELL DEVELOPMENT PROGRAM
Based on experience gained from over 68,000 accumulated operating hours (as of
December 2002) from our demonstrations and field trial program, we have
developed the next generation product, the DFC300A, which incorporates design
improvements throughout the power plant, including more efficient thermal
management and gas flow within the fuel cell module and enhancements to the
mechanical and electrical balance-of-plant systems which result in higher
performance, lower cost, and smaller footprint.
DEMONSTRATION PROJECTS. We have over 24,000 hours of experience with our
demonstration projects and "alpha" units. We've used these demonstration
projects to develop our core fuel cell component technology, including our
full-height vertical stack
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FUELCELL ENERGY, INC. - Form 10-K
design. We will continue to use demonstration projects as we expand our
development of fuel cell/ turbine and liquid fueled products. Significant
demonstrations include the following:
Santa Clara Demonstration Project. During 1996 and 1997, we operated
our "proof-of-concept" megawatt scale fuel cell plant in Santa Clara,
California. The Santa Clara plant achieved a peak power output of 1.93
MW, 7% above rated power, and an electrical efficiency of 44%, a record
for a single cycle fossil fuel power plant of this kind at that time.
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. The fuel cell stack design used at the Danbury,
Connecticut and Bielefeld, Germany sites were 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.
Commercial Design Endurance Project. Between April 1998 and July 2000,
we operated an 8 kW multiple fuel commercial design fuel cell located
at our Danbury, Connecticut facility. This unit operated for
approximately 17,500 hours. This project, together with other test
data, enabled us to project expected commercial performance.
Danbury Project. In February 1999, we began operating a 250 kW DFC
grid-connected power plant at our headquarters in Danbury, Connecticut.
The plant operated on pipeline natural gas and ran for approximately
11,800 hours before being disconnected for a scheduled evaluation.
Before being disconnected for post-test analysis, this power plant
delivered approximately 1.9 million kWh to our Danbury facility and
demonstrated a wear rate of 0.3% per 1,000 hours. The ruggedness of
this product design was demonstrated in planned stress tests, such as
rapid ramp-up and thermal cycling tests and simulated emergency fuel
loss. These tests verified that the DFC could be maintained in the
field despite operating stresses and fuel supply and power failures,
without decreasing performance, meeting our expectations and
projections.
Direct FuelCell/Turbine(R) (DFC/T(R)) Power Plant. During 2002, we
completed successful proof-of-concept testing of a DFC/T power plant
based on a 250 kW DFC integrated with a Capstone Turbine Corporation
modified Model 330 Microturbine. The combined system does not require
any combustion in the turbine. The DOE, through its Office of Fossil
Energy, funded the first-of-a-kind test of the high efficiency DFC/T
power plant. The National Energy Technology Laboratory, as part of the
DOE's Vision 21 program, manages the cooperative agreement. The power
plant was designed to operate in a dual mode: as a stand-alone fuel
cell system or in combination with a microturbine. Heat generated by
the fuel cell is used as the fuel to drive the modified microturbine to
generate additional electricity. This proof-of-concept demonstration
has provided information for the continued design of a 40 MW DFC/T
power plant that is expected to approach the 75 percent efficiency goal
as specified by the Vision 21 program, as well as to serve as a
platform for high efficiency DFC/T in smaller sizes. We will continue
the proof-of-concept testing of the DFC/T power plant with a 60 kW
microturbine.
In April 2002, we received a patent, titled "High Efficiency Fuel Cell
System," for our combined cycle DFC/T power plant.
In October 2002, we received a modification to the existing Vision 21
program agreement with the DOE to demonstrate two additional
sub-megawatt power plants based on the our DFC/T technology. This
modification provides an additional $16 million to the project's budget
that will be shared by the DOE and us. We will build and test the first
DFC/T power plant at our facility in Danbury, Connecticut, and then
demonstrate the second DFC/T power plant in Montana.
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FUELCELL ENERGY, INC. - Form 10-K
DFC Marine/Diesel. Currently we are working on DFC power plants for
marine applications under programs with the U.S. Navy. 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 stack was
tested on this fuel under conditions simulating marine requirements.
Another sub-scale stack was successfully tested for shock and vibration
tolerance. In May 2000, the U.S. Navy selected us for a $16.8 million
project ($13.2 million of which will be funded by the Navy) to continue
development work under Phase II of this program, leading to a 500 kW
land based demonstration at the Philadelphia Navy Yard. This power
plant will be tested at our Danbury, Connecticut facility in calendar
2003 and shipped to the Navy yard in calendar 2004.
FIELD TRIAL PROGRAM. Since the inception of our field trial program in 1999, we
have accumulated over 44,000 hours of combined operational experience with our
DFC300 product, including nine DFC300 field trial units in the U.S. and Germany,
in a variety of conditions and settings and on a range of fuels. We have used
this program for our DFC300 to test operational characteristics of our designs;
gain "end-user site" experience to better understand interconnection,
installation and operating issues; to identify design improvement opportunities;
and to test redesigned components and solutions. Significant field trials
include the following:
Bielefeld, Germany Project. In November 1999, MTU, commissioned a 250
kW power plant at the University of Bielefeld in Bielefeld, Germany.
This field trial, which ran for approximately 16,000 hours, was
terminated in February 2002. The power plant was a skid-based,
sub-megawatt power plant designed by MTU that incorporated our DFC as
its fuel cell component. The Bielefeld plant achieved a peak electrical
efficiency of 47%. Employing co-generation applications that used the
heat by-product to produce process steam for the University and
district heating, the plant achieved an overall energy efficiency of
77%.
Rhon ClinicProject. 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 are
operating a 250 kW power plant designed by MTU that incorporates our
DFC as its fuel cell component. The purpose of this field trial is to
demonstrate the viability of a fuel cell power plant in a hospital
environment. The power plant was commissioned and began operation in
May 2001. The electrical power is being fed into the local clinic grid
and the hot exhaust air is used to produce process steam for clinic
Southern Company Services, Inc. -- Alabama Municipal Electric Authority
-- Mercedes-Benz U.S. International, Inc. In conjunction with Southern
Company Services, Inc. (Southern), the Alabama Municipal Electric
Authority (AMEA) and Mercedes-Benz U.S. International, Inc.
(Mercedes-Benz), we have built and installed a 250 kW fuel cell power
plant at the Mercedes-Benz facility in Tuscaloosa, Alabama utilizing
MTU's design. We delivered the unit to the customer site in July 2001.
Southern and AMEA have each contributed $1 million to this project, and
have options to negotiate exclusive arrangements with us for the sale,
distribution and service of our DFC power plants in several southern
states that must be exercised upon completion of the field trial.
Los Angeles Department of Water and Power. In August 1999, LADWP
selected us to install a 250 kW DFC power plant at its headquarters in
Los Angeles. The installation of this power plant has helped LADWP gain
knowledge and experience in the installation, maintenance and operation
of fuel cell power plants. The agreement we entered into in May 2000
provided for LADWP to contribute $2.4 million to this project. This
field trial unit was delivered to the customer site in July 2001.
MTU. Between April and November 2002, MTU installed, and is currently
operating, five 250 kW power plants based on our DFC technology
utilizing fuel cells manufactured at our Torrington, Connecticut
facility. These include a unit to provide heat and power at a fuel cell
energy park in Essen, Germany for RWE, Germany's largest utility; at
IZAR, Europe's largest shipbuilder based in Cartagena, Spain, to
provide energy for this ship building company; in Munich, Germany at a
telecommunications center owned by a subsidiary of Deutsche-Telekom, to
provide DC power back-up; in Germany at the University Clinic of
Magdeburg, to provide back-up power and heat, which will be maintained
by IPF KG; and at a tire manufacturing plant owned by EnBW/Michelin, to
provide electricity and process steam.
In 2003, we will initiate our field trial program for our 1 MW DFC1500 and 2 MW
DFC3000 power plants and build and install a 250 kW coal mine methane power
plant.
King County, Washington. In January of 2001, we signed an agreement
with King County, Washington to
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FUELCELL ENERGY, INC. - Form 10-K
deliver a 1 MW (DFC1500) DFC power plant using municipal wastewater
digester gas. The two-year demonstration project is being cost-shared
equally by King County, through a cooperative grant to the county from
the Environmental Protection Agency (EPA), and us. The total value of
the contract is approximately $18.8 million (of which approximately
$9.4 million has been funded by us). We completed the design of the one
megawatt DFC power plant, which includes four 250 kW stacks in a
module. Balance-of-plant equipment was factory tested, delivered and
installed at our Torrington, CT facility. The DFC1500 field trial unit
will be installed at a municipal wastewater treatment facility in King
County in the first calendar half of 2003. While final site
preparations are being completed at the customer location, the unit
will operate on natural gas, grid-connected, at the company's
Torrington facility.
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 the
first clean coal technology plant to employ a fuel cell. The objective
of this project is to demonstrate coal gasification technology along
with a megawatt class carbonate fuel cell power plant. The clean,
low-cost fuel generated by the gasifier will be used to fire gas
turbines and to demonstrate the operation of a 2 MW (DFC3000) fuel cell
power plant. We have entered into a sub-contract, with Global Energy,
Inc., for the design, construction and operation of the power plant. We
have designed the two megawatt DFC power plant, which includes eight
250 kW stacks in two modules. Factory testing of balance-of-plant
equipment is ongoing and equipment deliveries have begun.
In July of 2002, the DOE accelerated the timetable of this
demonstration by approving the relocation from the Kentucky Pioneer
integrated gasification combined cycle (IGCC) site, which is still in
development, to the Wabash River Energy IGCC site in Indiana, which is
in operational status. Both sites are owned by Global Energy, Inc.
Contract modifications approved by the DOE and Global Energy, Inc.
include appropriation of the funding for the remainder of the project
and the site relocation. The remaining project cost will be $32.3
million, with 50% of the cost shared by the DOE. This plant will
operate initially on natural gas, grid-connected, at our Torrington,
Connecticut facility before being delivered to the customer during the
second half of calendar year 2003.
Ohio Coal Mine Methane Project. In October 2000, the DOE's National
Energy Technology Laboratory selected us to design, construct and
operate a 250 kW DFC power plant, utilizing coal mine methane gas, at
the Harrison Mining Corporation coal mine in Cadiz, Ohio. The cost for
the three-year program will be shared equally by the DOE and us,
subject to the annual congressional appropriations process. We were
selected for this project to demonstrate the ability of our DFC to
generate electricity using coal mine methane emissions that otherwise
escape into the atmosphere. We anticipate delivery of this DFC power
plant in the second half of calendar year 2003 assuming funding is
authorized by the DOE.
FIELD FOLLOW PROGRAM FOR OUR DFC300A DESIGN: Our field follow program will be
used to monitor fleet performance including additional instrumentation, field
service and data gathering, to build operational history (availability, kWh
output, etc.), of our DFC300A power plants in order to further enhance our
product design to allow for cost reduction, performance improvement, increased
reliability and serviceability. Field follow projects in our backlog include the
following:
PPL Spectrum, Inc. (PPL). In October of 2001, we received an order from
PPL Spectrum, Inc., a subsidiary of PPL, for a 250 kW DFC power plant
slated for installation at the United States Coast Guard Air Station
Cape Cod located in Bourne, Massachusetts. The power plant will provide
electricity and heating for the base, which includes barracks, hangars
and administrative buildings. The contract value is $1.25 million. This
power plant is scheduled for delivery and installation in the first
half of calendar year 2003.
In April of 2002, PPL announced the customer siting of two 250 kW DFC
power plants for installation at New Jersey hotels owned by Starwood
Hotels & Resorts Worldwide, Inc. PPL will install one 250kW DFC power
plant at the Sheraton Edison Raritan Center and another at the Sheraton
Parsippany Hotel. Both power plants are expected to be used in a
combined heat and power application. The total value of these projects
is $3.3 million. The New Jersey Clean Energy Fund will be providing
approximately $1.7 million in funding to PPL in support of these
projects. These power plants are scheduled for delivery and
installation in the first half of calendar year 2003.
In August of 2002, we announced that PPL will install a 250 kW DFC
power plant at Ocean County College in New Jersey. The power plant is
to be operated in co-generation mode, supplying electricity and heat to
several buildings on campus. The total value of the project is $1.65
million. The New Jersey Clean Energy
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FUELCELL ENERGY, INC. - Form 10-K
Fund will provide $827,000 in the form of grants. This power plant is
scheduled for delivery and installation in the first half of calendar
year 2003.
On October 31, 2002, PPL signed a contract with Zoot Enterprises to
install two of our 250 kW DFC power plants a Zoots' Galactic Park
high-technology campus in Montana. Zoot plans to use the power plants
to help meet the electrical reliability requirements of its
headquarters building, and to support future development at the campus.
Total value of the project is $3.8 million, with $1.4 million provided
in the form of a grant from the DOE. Site preparation has begun, and
installation of the power plants is scheduled to begin in the first
half of calendar year 2003.
Marubeni. In December 2001, Marubeni announced the customer and siting
of its first 250 kW fuel cell power plant, Kirin Brewery in Japan
located outside of Tokyo. The unit will operate in cogeneration mode,
with the thermal output of the fuel cell to be used by the anaerobic
digester, which treats the brewery effluent. The power plant was
shipped to the customer site in November 2002.
In May 2002, Marubeni Corporation and us announced the customer and
siting of a Direct FuelCell power plant for a municipal wastewater
treatment facility in Japan, the first of its kind in this country.
Marubeni will install a 250 kW fuel cell power plant at a wastewater
treatment facility in the City of Fukuoka, which will consume the
electricity and steam generated by the unit. This power plant is
scheduled for delivery and installation in the first half of calendar
year 2003.
LADWP. In October 2000, we entered into an agreement to provide LADWP
with two 250 kW DFC power plants. This agreement provides for LADWP to
pay $2.45 million for these power plants. These units are scheduled for
delivery in the first half of calendar 2003.
Connecticut Innovations. In August of 2001, we received a $1.25 million
contract from the Connecticut Clean Energy Fund (which is managed by
Connecticut Innovations, Inc.) for a 250 kW DFC power plant. The power
plant is scheduled for delivery and installation in the first half of
calendar year 2003.
STRATEGIC ALLIANCES AND LICENSE AGREEMENTS
In the past three years, we entered into significant strategic alliance,
distribution, and market development agreements. Our partners include
Caterpillar, Inc.; Marubeni Corporation; PPL; CMS Viron Energy Services; MWH
Energy Solutions, Inc; and Chevron Energy Solutions L.P.
Caterpillar. On November 15, 2001, we announced the signing of an agreement with
Caterpillar to distribute ultra-low emission fuel cell products for industrial
and commercial use. Under the agreement, Caterpillar will distribute our
products through selected Caterpillar dealers in the United States. Both
companies will also pursue an alliance to jointly develop fuel cell systems,
including highly efficient hybrid products integrating Caterpillar's turbine
engine technology.
On April 26, 2002, we signed an alliance agreement with Caterpillar, Inc. Under
the ten-year agreement, customers will be able to purchase our Direct FuelCell
systems from Caterpillar dealers in selected regions in North America. The
agreement calls for the companies to jointly develop Caterpillar-branded power
plants in the 250 kW to 3 MW size range, incorporating our fuel cell module. We
will also explore the development of a hybrid power system utilizing
Caterpillar's turbine engine technology and our energy products.
As part of the agreement, Caterpillar received warrants to purchase 1,500,000
shares of our common stock with exercise prices ranging from $17 to $23 per
share. The warrants will be earned on a graduated scale contingent upon the
first 45 MW's of order commitments to purchase our products. For accounting
purposes, the fair value of these warrants will be netted against the revenues
attributable to the purchase of our products by Caterpillar.
CMS Viron. On January 8, 2002, we entered into a market development agreement
with CMS Viron Energy Services to jointly pursue fuel cell projects in the State
of California. Under the agreement, we will jointly market and sell DFC power
plants and will perform project, customer and site development, system
integration, permitting and project financing for those plants.
Chevron Energy Services. On December 21, 2001, we announced the signing of a
marketing development agreement with Chevron Energy Services L.P., a subsidiary
of ChevronTexaco, to jointly pursue fuel cell projects. Under the agreement,
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FuelCell Energy and Chevron Energy Solutions will jointly market and sell DFC
power plants and will perform project, customer and site development, system
integration, permitting and project financing. Initial projects will be targeted
for development in the Northeastern United States and California.
Marubeni. On June 18, 2001, we announced the signing of a comprehensive
strategic alliance agreement with Marubeni. Under the agreement, Marubeni will
initially order 3 MW of Direct FuelCell power plants, in addition to the 1.25
megawatts previously ordered, and is targeting orders of at least 45 MW over the
next two years in Japan and Asia. We plan to form a joint venture with Marubeni
for the purpose of assembling Direct FuelCell modules in Asia from fuel cells
provided by us.
Marubeni has invested $10 million in FuelCell Energy through the purchase of
268,114 shares of our common stock and is expected to invest an additional $30
million over the term of the agreement. In addition, we have granted Marubeni
warrants to purchase 1,140,000 shares of our common stock, with exercise prices
ranging from approximately $37 to $48 per share. These warrants will vest over
the next year, based on Marubeni reaching 45 MW of orders for DFC power plants.
For accounting purposes, the fair value of these warrants will be netted against
the revenues attributable to the purchase of our products by Marubeni. The
warrants will expire in September 2003.
PPL. In September 2000, we entered into a distributor agreement with PPL
pursuant to which PPL agreed to become the first distributor of our Direct
FuelCell products in North America. PPL has agreed to use its reasonable efforts
to promote and sell our products, on a non-exclusive basis, throughout North
America. Pursuant to the agreement, PPL has ordered 1.75 MW of our products at
agreed-upon prices, and will need to establish the next minimum order amount by
the end of 2003. In connection with this distributor agreement, an affiliate of
PPL purchased 425,216 shares of our common stock for $10 million. The agreement
terminates on December 31, 2004, subject to three-year extensions. Prior to
December 31, 2004, PPL may terminate the agreement upon 60 days' written notice
to us and, after December 31, 2004, either party may terminate the agreement
upon 60 days' written notice.
Los Angeles Department of Water and Power. We signed an agreement with LADWP in
May of 2000 for the installation of a 250 kW DCF power plant at LADWPs corporate
headquarters in Los Angeles. This unit has been operating since July 2001. Under
this agreement, we are 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.
In October of 2000, we entered into a second agreement to provide LADWP with two
additional 250 kW DFC power plants. This agreement provides for LADWP to pay
$2.45 million dollars for these power plants.
On May 14, 2002, we announced the signing of an agreement with MWH Energy
Solutions, Inc. to distribute our Direct FuelCell power plants in municipal,
utility support, commercial and industrial applications. Initial focus will be
on wastewater treatment facilities throughout the United States.
We expect to establish additional long-term relationships that will facilitate
the marketing, development and installation of our fuel cell power plants
throughout the world.
Our other significant relationships include the following:
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 DFC power plant for defense marine applications. We expect this
agreement to lead to the development of the first new power generation
technology for surface ships since nuclear power was adopted 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. In connection with the King County field
trial, for example, we have subcontracted with Fluor Daniel for design and
engineering support.
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FUELCELL ENERGY, INC. - Form 10-K
In addition to our strategic relationships, we have entered into several
licensing agreements, including the following:
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 granted MTU an exclusive license to use our
Direct FuelCell 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 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 components and stacks
to MTU at cost, plus a modest fee. The new MTU agreement continues through
December 2004 and may be extended for additional 5-year terms, 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 patent rights
and know-how for a royalty.
In 1992, MTU formed a European consortium (ARGE) with RWE Energie, the largest
electric utility in Germany, Ruhrgas, the largest natural gas supplier in
Germany and Elkraft, a large Danish utility. 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 co-generation fuel cell unit that
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 co-generation 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. Each party is
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.
Santa Clara. In 1993, we obtained an exclusive license, including rights to
sublicense, to use the balance of plant technology we developed under the Santa
Clara plant contract. The license specifically excludes fuel cell and fuel cell
stack technology. The license becomes non-exclusive after 2005 or earlier, at
the option of Santa Clara, if we do not meet certain commercialization
milestones. Under this license, royalties are $15 per kilowatt (subject to
consumer price index and other upward adjustments) on North American sales of
commercial fuel cell power plant stacks of capacities of 100 kW or more that use
the licensed balance of plant technology.
In addition to the above royalties, the license to use the Santa Clara balance
of plant technology in connection with fuel cell plants sold or licensed outside
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 Santa Clara balance of plant
technology or (b) 1% of the total gross revenue from the sale of each fuel cell
plant that uses the Santa Clara balance of plant technology. We must also pay
Santa Clara 25% of any fees we receive for sublicensing the Santa Clara balance
of plant technology.
Electric Power Research Institute. In 1988, we entered into a license agreement
with the Electric Power Research Institute (EPRI), granting us an unreserved,
non-exclusive, worldwide license to use carbonate fuel cell proprietary data we
developed under certain contracts with EPRI. We have agreed to pay EPRI a
one-time 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 using the
carbonate fuel cell proprietary data we developed under the EPRI contracts and a
royalty of 0.5% to 1% of net commercial sales of carbonate fuel cell stacks
which use this proprietary data. Our obligation to make royalty payments
continues 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 which uses EPRI's proprietary data.
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FUELCELL ENERGY, INC. - Form 10-K
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 most other fuel cell designs. These benefits include
higher fuel efficiency (which leads to lower fuel cost), significantly lower
emissions, scalability and potentially lower operating, maintenance and
generation costs because of a less complex balance of plant. 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 engaged in significant
manufacturing and commercialization of carbonate fuel cells in the sub-megawatt
and megawatt classes. Emerging fuel cell technologies in our target distributed
generation market include PEM fuel cells, phosphoric acid fuel cells and solid
oxide fuel cells. Competitors using or developing these technologies include
Ballard Power Systems, Inc., UTC Fuel Cells, and Plug Power Inc., in the case of
PEM fuel cells; UTC Fuel Cells in the case of phosphoric acid fuel cells; and
SiemensWestinghouse Electric Company, Sulzer Hexis, McDermott, GE/Honeywell and
Delphi in the case of solid oxide fuel cells. Each of these competitors has the
potential to capture market share in our target market.
In Asia, at least three manufacturers have demonstrated varying levels of
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, a company in Italy is actively engaged in carbonate fuel cell
development and is a potential competitor. Our licensee in Germany, MTU, and its
partners have conducted the most significant activity in Europe.
We must also compete with companies such as Caterpillar, Cummins, and Detroit
Diesel, who manufacture more mature combustion equipment, including various
engines and turbines, that have more established manufacturing, distribution,
operating and cost features. Significant competition also comes from gas turbine
companies such as General Electric, Ingersall Rand, Solar Turbines and Kawasaki,
that have recently made progress in improving fuel efficiency and reducing
pollution in large size combined cycle natural gas fueled generators. Efforts
are underway by companies such as these to extend these advantages to smaller
sizes. We believe that these smaller gas turbines will not be able to match our
fuel efficiency or favorable environmental characteristics.
OUR STRATEGY
Our business objective 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 our proprietary fuel
cell stack components and to purchase balance of plant equipment from suppliers
as modularized packages that will either be delivered to the power plant site
for assembly with our fuel cell stack components or be assembled at our
manufacturing facility for delivery to the power plant site. We plan on
continuing to be an industry leader in carbonate fuel cell technology focused on
expanding our proprietary technology and developing future applications,
products and markets for that technology, including diesel fueled marine-based
and DCF/Turbine applications. To accomplish our objective, we plan to:
FOCUS ON OUR DIRECT FUELCELL TECHNOLOGY FOR STATIONARY MARKETS. We believe that
our Direct FuelCell is the fuel cell technology most suited to stationary power
generation based on its highly efficient operating characteristics,
co-generation capabilities and the ability to use multiple hydrocarbon fuels
such as natural gas, diesel, methanol, biogas, coal gas, coal mine methane and
propane. 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,
including our DFC/T product, and for marine and stationary applications
utilizing diesel fuel.
NEAR TERM PRODUCT STRATEGY. In order to achieve our overall product goals of
cost reduction, performance improvement, reliability and serviceability, we will
continue to focus on our near term product strategy:
- Develop standard products -- We've made significant progress towards the
development of our standard products, particularly with the development
of our DFC300A. Each of our overall product goals is affected by product
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FUELCELL ENERGY, INC. - Form 10-K
standardization. In order to continue down this path with our
sub-megawatt and megawatt products, we need to:
- continue the qualification of multiple suppliers of equipment
components and materials;
- initiate new, and complete current, factory acceptance tests of
mission critical systems;
- enhance power plant sub-system design;
- develop system design of our megawatt-class units and initiate
field trial program;
- incorporate field trial improvements; and
- receive OEM design support.
- Increase Volume Production. We successfully installed and tested the
equipment necessary to produce 50 megawatts of fuel cells per year at
our manufacturing facility in Torrington, Connecticut. The ability to
increase throughput while enhancing product quality and reducing waste
is critical for us to achieve our cost reduction goals. We plan to
achieve this by:
- verifying our production capacity for cell production and
assembly and testing;
- continuing to implement process controls to improve quality and
enhance productivity;
- improving product design to increase manufacturability;
- further development of our parts and service infrastructure; and
- continued information systems development to improve cost
tracking and to safeguard assets.
- Distribution Network Development. We have established strong commercial
distribution alliances with electric power equipment sales and service
companies (OEMs), including Caterpillar, Marubeni, and MTU; energy
services and solutions providers (ESCOs) including PPL, Chevron Energy
Solutions, and CMS Viron Energy Services; and specialty application
developers such as MWH Energy Solutions, Inc., who will focus on the
wastewater treatment market. In 2002, the company conducted multiple
training sessions for distribution partners that focused on
applications, sales, installation and service of DFC power plants. We
will continue to focus on developing our distribution network as we
enhance our products and develop new applications and new markets.
We plan to leverage our relationships with our current partners, as well
as initiate and establish similar new strategic relationships, to ensure
maximum exposure and distribution of our Direct FuelCell products. We
further expect these alliances will develop into mutually beneficial
relationships where the ability of each party to lower costs of their
respective components of the DFC power plant will make competitive
pricing more achievable.
INITIATE OUR FIELD FOLLOW PROGRAM. We plan to deliver and commission our current
backlog of DFC300A power plants and begin our field follow program with these
units. Our field follow program will be used to monitor fleet performance
including additional instrumentation, field service, and data gathering, to
build operational history (availability, kWh output, etc.), of our DFC300A in
order to further enhance our product design to allow for cost reduction,
performance improvement, increased reliability and serviceability.
INITIATE OUR MEGAWATT-CLASS FIELD TRIAL PROGRAM FOR OUR DFC1500 AND DFC3000
PRODUCTS. We plan to install our one-megawatt, DFC1500 field trial unit, which
includes four 250kW stacks in a module, at a municipal wastewater treatment
facility in King County, Washington, in the first calendar half of 2003. While
final site preparations are being completed at the customer location, the unit
will operate on natural gas, grid-connected, at the company's Torrington
facility. We've completed the design of our two-megawatt, DFC3000 power plant
which includes eight 250 kW stacks in two modules. This
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FUELCELL ENERGY, INC. - Form 10-K
plant will also operate initially on natural gas, grid-connected in Torrington,
before being delivered to the customer during the second half of calendar year
2003. The balance-of-plant will be installed in Torrington after the DFC1500
testing is complete. As with our DFC300, field trial experience will be
incorporated into the design of our megawatt-class products.
EXPAND MANUFACTURING. We continued to expand our production capabilities in
Danbury and Torrington, and our partner, MTU, expanded their assembly and
testing facility in Munich. The Danbury facility was expanded to test and
condition 50 megawatts of fuel cell power plants per year. A second tape casting
line was installed at the manufacturing plant in Torrington in December 2002,
and initial operations have begun. While this brings manufacturing capacity to
50 megawatts, production levels will be determined consistent with market
demand. We believe that within our current facility in Torrington, there is
space to expand to 150 megawatts of production capacity, annually. We have
additional land access surrounding our current facility, for which we could
expand, we believe, to 400 megawatts of annual production.
COST REDUCTION. As a result of the simple design of our Direct FuelCell, 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.
CREATE BRAND AWARENESS. We are working to develop in our target markets the
association of our Direct FuelCell name with the highest quality stationary fuel
cell products. We are also working to have the design of our Direct FuelCell
accepted as the industry standard for stationary fuel cell systems.
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 MARKETS. We plan to
continue our research and development, leveraging our existing technology to
develop additional commercial applications for the 10 to 50 MW distributed
generation market. In connection with the DOE's Vision 21 program, we are in the
process of designing a 40 MW ultra-high efficiency system that will combine our
Direct FuelCell and an unfired gas turbine. In the larger 10-50 MW
combined-cycle design, the DFC/T is expected to approach the 75 percent
electrical efficiency target as specified by the DOE's Vision 21 program while
retaining the ultra-low emissions attribute of the company's DFC power plants.
DEVELOP DIESEL FUELED APPLICATIONS FOR ADDITIONAL MARKETS. We plan to continue
our research and development related to diesel-fueled applications for our
technology. In conjunction with the U.S. Navy, we are developing a fuel
processing system to convert diesel fuel into a fuel compatible with our
existing fuel cell technology. This product would have significant opportunities
for "hotel" power on military and civilian ships as well as 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 developing 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.
MANAGE CASH FOR MARKET PENETRATION. Our cash requirements depend on numerous
factors, including the implementation of our field follow program for our
DFC300A products, the initiation of our megawatt class field trial program, and
development of our DFC/T and diesel DFC products. We expect to devote
substantial capital resources to achieve our overall product goals of cost
reduction, performance improvement, reliability and serviceability. We believe
that we can achieve these goals through our near term product strategy of
developing standard products, increasing volume production and the further
development of our distribution network. We expect such activities will be
funded from existing cash, cash equivalents, investments and cash from
operations. Once we've completed our near term strategy, we believe we will have
the financial flexibility to maintain, reduce or accelerate our business
activities consistent with market demand.
COST REDUCTION PROGRESS
We regularly review and revise our cost reduction plans. Although subject to a
number of assumptions and uncertainties, some of which are beyond our control,
including the price of fuel, we believe that at volume production of 400 MW we
will produce combined heat and power DFC power plants that will generate
electricity between 5 and 8 cents per kWh for MW plants. If this cost reduction
is achieved, from a cost per kWh standpoint, our Direct FuelCell will be an
economically
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FUELCELL ENERGY, INC. - Form 10-K
attractive source of energy in many places in the United States. According to
the EIA, electricity prices vary substantially depending on the region of the
country. For example, in July 2002, industrial electricity prices ranged from as
low as 4.9-cents/kWh in Alabama (Huntsville Utilities) to as high as
15.1-cents/kWh in New York (Consolidated Edison) and 15.7-cents/kWh in
California (Southern California Edison). In March 2002, commercial electricity
prices ranged from as low as 6.6-cents/kWh in Delaware (Connectiv) to as high as
13-cents/kWh in New York (Consolidated Edison) and 13.8-cents per kWh in
Massachusetts (Commonwealth Electric Co.). In 2000, average statewide
residential electricity prices ranged from a low of 5.13-cents/kWh in Washington
to as high as 14.03-cents/kWh in New York, 13.14-cents/kWh in New Hampshire and
12.82-cents/kWh in Vermont. In Japan, industrial electricity prices are in the
10-16 cents/kWh with commercial electricity prices slightly higher at 14-20
cents/kWh. We believe that our Direct FuelCell 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 with
our products.
We believe that the sale of commercial products before achievement of our cost
reduction goals is possible to a market of "early adopters." Energy users that
are unable to or choose not to site traditional combustion based generation due
to environmental or energy efficiency concerns or users that need more reliable
electricity sources than that provided by the grid, diesel back-up generators,
microturbines and batteries may be willing to pay higher prices per kW to obtain
the power that they need. We believe that these "early adopters" will likely be
municipalities and commercial and industrial customers in pollution
non-attainment zones and customers in grid constrained regions, as well as
hospitals, schools or universities. We expect that these "early adopters" will
include energy users that are able to take advantage of government subsidies
that provide funding for fuel cell installations. We believe that these initial
customers will enable us to increase volume and subsequently implement our cost
reduction plans. As a result, we believe we eventually will be able to provide a
lower cost product and therefore achieve greater market potential with more
traditional commercial and industrial customers.
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 described below:
Manufacturing cost reduction: Manufacturing costs are being reduced by
multi-faceted efforts including supplier management, material and labor
utilization, vertical integration and engineering for manufacturing
efficiencies.
Economies of scale: Volume directly affects purchased material cost and
reduces fixed cost allocation. Volume also has a secondary effect on
direct labor by providing justification to invest in capital projects
for improved productivity.
First time costs: The elimination of first time development and
engineering costs is a large and straightforward element of our cost
reduction plan. At commercial volumes, power plant installations are
expected to be virtually identical. Furthermore, indirect costs
associated with developing the initial field trial projects will not
exist.
Improved performance: Power plant performance is a critical factor.
Power output has a direct impact on capital cost as measured in cost
per kW, and efficiency, decay rate and availability all affect the cost
of electricity, which is the best measure of the value of our products.
Our research and development activities have made and are expected to
continue to make substantial progress in these areas. For example, if
we are successful in our ongoing research and development efforts, we
might expect that stack life could increase from five years for the
first stack replacement in a 30 year plant, to between seven and eight
years for the last stack replacement, with additional gains in power
and efficiency.
Value engineering programs have generated significant cost reductions in the
cost of stack hardware. For example, the purchase price for compression packs
has been reduced from $32,000 to $3,600 per stack in small quantities. Similarly
the price of the manifold retention system has been reduced from $31,000 to
$4,500 per stack. In both cases, functionality has been improved.
MANUFACTURING, TESTING AND CONDITIONING
We manufacture fuel cells at our 65,000 square foot facility in Torrington,
Connecticut. This facility currently has production capacity of 50 MW per year,
on a three-shift basis. We believe that within our current facility in
Torrington, there is space to expand to 150 megawatts of production capacity,
annually. We have additional land access surrounding our current facility, for
which we could expand, we believe, to 400 megawatts of annual production.
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FUELCELL ENERGY, INC. - Form 10-K
Prior to shipment to customer sites, we test and condition MW fuel cell modules
and sub-megawatt power plants at our Danbury facility. This facility has the
capacity to test and condition 50 MW of fuel cell power plants per year.
RESEARCH AND DEVELOPMENT
A significant portion of our research and development has been funded by
government contracts, and is classified as cost of research and development
contracts in our consolidated financial statements. For the fiscal years ended
2002, 2001 and 2000, 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 $52.5 million, $22.1 million and $14.4 million
respectively.
PRINCIPAL GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACTS
Since 1975, we have worked on the development of our Direct FuelCell technology
with various United States government agencies, including the DOE, the Navy, the
Coast Guard, the DOD, the Defense Advance Research Projects Agency and the
National Aeronautics and Space Administration. Our revenues have been
principally derived from U.S. government and industry research and development
contracts. Government funding, principally from the DOE, provided approximately
81%, 78%, and 87% of our revenue for the fiscal years ended 2002, 2001 and 2000,
respectively. From the inception of our carbonate fuel cell development program
in the mid-1970s to date, approximately $382 million has been invested via DOE
and related utility programs to support the development, demonstration and
field-testing of our Direct FuelCell technology. This includes funding we have
received from the DOE of approximately $232 million. We have complemented the
DOE's funding with additional support from a variety of other sources that have
contributed approximately $150 million.
We have historically performed our services under government-funded contracts or
agreements that usually require performance over a period of one to five years
and often require cost share funding as a condition to receiving any amounts
allocated under these agreements. However, congressional budget limits could
prolong the contracts. Generally, U.S. government 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 government contract funds after Congress makes
them available as a result of the annual appropriations process.
We currently receive the majority of our government funding from the DOE and the
Navy. Funded DOE projects include our Cooperative agreement, the Clean Coal and
Coal Mine Methane projects and the DFC/T project. The U.S. Navy is funding the
DFC marine application, liquid fuel project
We entered into the original cooperative agreement with the DOE in 1994. This
agreement was extended in 2000 for three additional years, through 2003, to
provide $40 million of funding over this period, subject to annual approval by
the U.S. Congress. Of that amount, approximately $16 million remains to be
funded by the DOE. The current aggregate dollar amount of the DOE contract is
approximately $213 million, with the DOE providing approximately $135 million in
funding. As a condition to receiving any amounts allocated under this agreement,
the balance of the funding must be provided by us, our partners or licensees and
other private agencies and utilities, including any amounts spent by our
customers and other third parties on development, field test and demonstration
projects. 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 a total of $500,000.
In October 2002, we received a modification to the existing Vision 21 program
agreement with the DOE to demonstrate two additional sub-megawatt power plants
based on the our DFC/T technology. This modification provides an additional $16
million to the project's budget that will be shared by the DOE and us.
In May 2000, the U.S. Navy selected us for a $16.8 million project ($13.2
million of which will be funded by the Navy) to continue development work under
Phase II of this program, leading to a 500 kW land based demonstration at the
Philadelphia Navy Yard.
BACKLOG
The backlog for the Company as of October 31, 2002 was approximately $57 million
compared with backlog of approximately $74 million as of October 31, 2001.
Backlog refers to the aggregate revenues remaining to be earned at a specified
date under contracts held by us. For U.S. government contracts, we include the
total contract value including any unfunded portion of the total contract value.
The unfunded portion of our contracts amounted to approximately $24 million
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FUELCELL ENERGY, INC. - Form 10-K
and $49 million respectively as of October 31, 2002 and 2001. Due to the
long-term nature of our government contracts fluctuations from year to year are
not an indication of any future trend. Although backlog reflects business that
is considered firm, cancellations or scope adjustments may occur and will be
reflected in our backlog when known.
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, subcontractors,
vendors, suppliers, consultants 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 40 U.S. and 88
international patents covering our fuel cell technology (in certain cases
covering the same technology in multiple jurisdictions). Of the 40 U.S. patents,
37 relate to our Direct FuelCell technology. We also have submitted 8 U.S. and
41 international patent applications. The patents that we have obtained will
expire between 2003 and 2021, and the average remaining life of our patents is
approximately 9.4 years. Seven new U.S patents were allowed during 2002, and
three U.S. patents expired. We also have 19 invention disclosures in process
with our patent counsel that may result in additional patent applications. 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 have been licensed to us on
a non-exclusive basis from third parties that may also license such intellectual
property to others, including our competitors.
Many of our United States patents are the result of government-funded research
and development programs, including the DOE cooperative agreement. Four of 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" for the remainder of the three-year extension of the DOE
cooperative agreement.
Fourteen of our United States patents that we own have resulted from
government-funded research are subject to the risk of 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. 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
and there was a compelling national need to use the patents.
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. We believe that emissions of sulfur dioxide and nitrogen oxide from
our fuel cell power plants will be much lower than conventional combustion-based
generating stations, and well within existing and proposed regulatory limits.
The primary emissions from our megawatt class DFC power plants, assuming no
co-generation application, will be humid flue gas (that will be discharged at a
temperature of approximately 700-800degree F), water (that will be discharged
at a temperature of approximately 10-20degree F above ambient air
temperatures) and carbon dioxide. In light of the high temperature of the gas
emissions, we will likely be required by regulatory authorities to site or
configure our power plants in a way that will allow the gas to be vented at
acceptable and safe distances. We believe that this regulation of the gas
emissions will be similar to the regulation of other power plants with similar
heat and discharge temperatures. The discharge of water from our power plants
will likely require permits whose terms will depend on whether the water is
permitted to be discharged into a storm drain or into the local wastewater
system. Lastly, as with any use of hydrocarbon fuel, the discharge of
particulates will have to meet emissions standards. While industrial plants will
have very low carbon monoxide emissions, there could be additional permitting
requirements in smog non-attainment areas with respect to carbon monoxide if a
number of our units are aggregated together.
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
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FUELCELL ENERGY, INC. - Form 10-K
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 October 31, 2002 we had 425 full-time employees, of whom 191 were located
at the Torrington, Connecticut manufacturing plant, and 234 were located at the
Danbury, Connecticut facility or various field offices.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages are as follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Jerry D. Leitman 60 President, Chief Executive Officer and Chairman of the Board
Dr. Hansraj C. Maru 58 Executive Vice President, Chief Technical Officer and Director
Christopher R. Bentley 60 Executive Vice President, Chief Operating Officer and Director
Joseph G. Mahler 50 Senior Vice President, Chief Financial Officer, Treasurer & Corporate
Secretary
Herbert T. Nock 53 Senior Vice President of Marketing and Sales
JERRY D. LEITMAN. Mr. Leitman has been President, Chief Executive Officer and a
director since August 1997. In June of 2002, Mr. Leitman was elected to serve as
Chairman of the Board. Mr. Leitman was previously President of ABB Asea Brown
Boveri's global air pollution control businesses from 1992 to 1995. Prior to
joining ABB, Mr. Leitman was Group Executive Vice President of FLAKT AB, a
Swedish multinational company, responsible for FLAKT's worldwide industrial
businesses from 1989 to 1992. Mr. Leitman is also a director and a member of the
Compensation Committee of Esterline Technologies Inc. Mr. Leitman obtained both
a BS and MS in Mechanical Engineering from the Georgia Institute of Technology
in 1965 and 1967, respectively.
DR. HANSRAJ C. MARU. Dr. Maru has been Executive Vice President and a director
since December 1992 and was appointed Chief Technology Officer in August 2000.
Dr. Maru was Chief Operating Officer from December 1992 to December 1997. Prior
to that he was Senior Vice President-Research and Development. Prior to joining
us in 1977, Dr. Maru was involved in fuel cell development at the Institute of
Gas Technology. Dr. Maru received a Ph.D. in Chemical Engineering from the
Illinois Institute of Technology in 1975.
CHRISTOPHER R. BENTLEY. Mr. Bentley has been a director since June 1993,
Executive Vice President since September 1990 and Chief Operating Officer since
August 2000. Mr. Bentley was President of Fuel Cell Manufacturing Corporation,
our former subsidiary, from September 1990 to December 1997. From 1985 through
1989, he was Director of Manufacturing (1985), Vice President and General
Manager (1985-1988) and President (1988-1989) of the Turbine Airfoils Division
of Chromalloy Gas Turbine Corporation, a major manufacturer of gas turbine
hardware. Mr. Bentley received a BSME from Tufts University in 1966.
JOSEPH G. MAHLER. Mr. Mahler joined us in October 1998 as Senior Vice President,
Chief Financial Officer, Corporate Secretary and Treasurer. From 1993 to 1998,
Mr. Mahler was Vice President--Chief Financial Officer at Earthgro, Inc. and
prior to that, he was a partner at Ernst & Young. Mr. Mahler received a BS in
Accounting from Boston College in 1974.
HERBERT T. NOCK. Mr. Nock joined us in August 2000 as Senior Vice President of
Marketing and Sales. Mr. Nock previously worked for General Electric's Power
Systems business for 29 years, most recently as Product General Manager for
small gas turbine products. Mr. Nock received his BS in Mechanical Engineering
from Worcester Polytechnic Institute in 1971 and his MBA from Boston College in
1977.
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FUELCELL ENERGY, INC. - Form 10-K
RISK FACTORS
You should carefully consider the risks described below as well as the other
information included or incorporated by reference in this Annual Report on Form
10K. If any of these risks occur, our business, prospects, results of operations
and financial condition could be harmed.
WE HAVE RECENTLY INCURRED LOSSES AND ANTICIPATE CONTINUED LOSSES AND NEGATIVE
CASH FLOW
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
and generate negative cash flow until we can produce sufficient revenues to
cover our costs. We incurred net losses of $48,840,000 for the fiscal year ended
October 31, 2002. Even if we achieve our objective of bringing our first
commercial product to market in calendar 2003, we anticipate that we will
continue to incur losses and generate negative cash flow until we can
cost-effectively produce and sell our Direct FuelCell 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. We may never
become profitable. 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, engineering design and technology (including
projected power output) that, to a large degree, are currently not
ascertainable. A failure by us to achieve a lower cost structure through
economies of scale, improvements in the manufacturing process and engineering
design and technology maturation would have a material adverse effect on our
commercialization plans and, therefore, our business, prospects, results of
operations and financial condition.
We expect the production costs of our initial commercial products to be higher
than their sales prices. 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 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 products at
competitive prices relative to alternative technologies and products, our target
market customers will be unlikely to buy our Direct FuelCell products.
Our Direct FuelCell has been demonstrated using a variety of hydrocarbon fuels,
including natural gas, methanol, diesel, biogas, coal gas, coal mine methane and
propane. If these fuels are not readily available or if their prices are such
that electricity produced by our products costs more than electricity provided
through other generation sources, our products would be less economically
attractive to potential energy users. In addition, we have no control over the
prices of several types of competitive energy sources such as oil, gas or coal.
Significant decreases in the price of these inputs could also have a material
adverse effect on our business because other generation sources could be more
economically attractive to consumers than our Direct FuelCell 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 demonstration,
field trial, and field follow projects into long-term distributor-type
relationships that will result in these distributors marketing our Direct
FuelCell products directly to energy customers. For example, MTU is currently
field-testing six 250 kW power plants in Germany that incorporate our Direct
FuelCell as their fuel cell components. We believe that our fuel cell
commercialization program is dependent upon us conducting additional commercial
field trials and demonstration projects of our power plants and completing
substantial additional research and development. We have planned several field
trials and demonstration projects for our sub-megawatt and megawatt class
stationary fuel cell power plants. We have not yet, however, conducted any field
trials of our proposed commercial design megawatt class products.
Demonstration, field trial, and field follow projects may encounter problems and
delays for a number of reasons, including the failure of our technology, the
failure of the technology of others (including balance of plant), the failure to
combine these technologies properly (including control system coordination) 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
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FUELCELL ENERGY, INC. - Form 10-K
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 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 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 products currently face and will continue to face
significant competition. Technological advances in alternative energy products
or 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 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 engaged in significant
manufacturing and commercialization of carbonate fuel cells in the sub-megawatt
and megawatt classes. In Asia, at least three manufacturers have demonstrated
varying levels of 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
Italy, there is one company engaged in carbonate fuel cell development that is a
potential competitor. Our licensee in Germany, MTU, and its partners have
conducted the most significant activity in Europe.
Other types of fuel cell and alternative energy technologies are being actively
pursued by a number of companies. Customers have not yet identified the
technologies of choice for alternative energy sources. Emerging fuel cell
technologies in the target distributed generation market include PEM fuel cells,
phosphoric acid fuel cells and solid oxide fuel cells. Competitors using or
developing these technologies include Ballard Power Systems, Inc., UTC Fuel
Cells, Plug Power, Inc. in the case of PEM fuel cells; UTC Fuel Cells in the
case of phosphoric acid fuel cells; and SiemensWestinghouse Electric Company,
Sulzer Hexis, McDermott, GE/Honeywell and Delphi 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
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 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 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. Failure to meet publicly announced milestones might have a
material adverse effect on our operations and our stock price.
WE HAVE LIMITED EXPERIENCE MANUFACTURING OUR DIRECT FUELCELL PRODUCTS ON A
COMMERCIAL BASIS
To date, we have focused primarily on research and development and conducting
demonstrations and field trials. We have limited experience manufacturing our
Direct FuelCell products on a commercial basis. We have recently installed
additional equipment that will allow us to produce 50 MW per year. We expect
that we will then increase our manufacturing capacity based on market demand. We
can expand our manufacturing capacity to 150 MW at our current facility. We
cannot be sure that we will be able to achieve our planned increases in
production capacity. Also, as we scale up our production capacity, we
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FUELCELL ENERGY, INC. - Form 10-K
cannot be sure that unplanned failures or other technical problems relating to
the manufacturing process will not occur.
If our business grows more quickly than we anticipate, our existing and planned
manufacturing facilities may become inadequate and we may need to seek out new
or additional space, at considerable cost to us. If our business does not grow
as quickly as we expect, our existing and planned manufacturing facilities would
in part represent excess capacity for which we may not recover the cost; in that
circumstance, our revenues may be inadequate to support our committed costs and
our planned growth, and our gross margins and business strategy would suffer.
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 continue 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 (including automation) that will enable us to meet our cost goals
and profitability projections. Our failure to shorten the sales cycle for our
Direct FuelCell 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.
OUR COMMERCIALIZATION PLANS ARE DEPENDENT ON MARKET ACCEPTANCE OF OUR DIRECT
FUELCELL PRODUCTS
Our commercialization plans, which include bringing our sub-megawatt and
megawatt class products to market in calendar year 2003, are dependent upon
market acceptance of, as well as enhancements to, our Direct FuelCell 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
products may be affected by many factors that are out of our control, including:
- The cost competitiveness of our Direct FuelCell products;
- The future costs of natural gas and other fuels used by our Direct
FuelCell products;
- Consumer reluctance to try a new product;
- Consumer perceptions of the safety of our Direct FuelCell products;
- The pace of utility deregulation nationwide, which could affect the
market for distributed Generation;
- Local permitting and environmental requirements; and
- The emergence of newer, more competitive technologies and products.
If a sufficient market fails to develop or develops more slowly than we
anticipate we may be unable to recover the losses we will have incurred in the
development of our Direct FuelCell products and may never achieve profitability.
As we continue to commercialize our Direct FuelCell products, we will continue
to develop warranties, production guarantees and other terms and conditions
relating to our products that will be acceptable to the marketplace, continue to
develop a service organization that will aid in servicing our products and
obtain self-regulatory certifications, if available, with respect to our
products. Failure to achieve any of these objectives may also slow the
development of a sufficient market for our products and, therefore, have a
material adverse effect on our results of operations.
OUR GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACTS ARE IMPORTANT TO THE
IMPLEMENTATION OF OUR COMMERCIALIZATION PLANS
Our revenues have been principally derived from a long-term cooperative
agreement and other contracts with the DOE, the
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FUELCELL ENERGY, INC. - Form 10-K
DOD, the Navy, and the EPA. These agreements are important 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 whether or not we will receive the full amount allocated by the
DOE under the DOE cooperative agreement or the full amounts allocated under our
other government research and development contracts. Failure to receive 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. Four of 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.
Fourteen United States patents that we own have resulted from government-funded
research and are subject to the risk of 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. 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. In addition, our DOE-funded research and
development agreements also require us to agree that we will not provide to a
foreign entity any fuel cell technology subject to that agreement unless the
fuel cell technology will be substantially manufactured in the U.S.
The failure to continue to qualify as a "small business" under applicable
government regulations, and the related inability to own patents developed with
government funds if we do not so qualify (unless we obtain a waiver from the
government), or the exercise or enforcement of "march-in" or other 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 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 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.
We cannot assure you that we will enter into distributor relationships that are
consistent with, or sufficient to support, our commercialization plans or our
growth strategy or that these relationships will be on terms favorable to us.
Even if we enter into these types of relationships, we cannot assure you that
the distributors with which we form relationships will focus adequate resources
on selling our products or will be successful in selling them. Some of these
distributor arrangements have or will require that we grant exclusive
distribution rights to companies in defined territories. These exclusive
arrangements could result in us being unable to enter into other arrangements at
a time when the distributor with which we form a relationship is not successful
in selling our products or has reduced its commitment to marketing our products.
In addition, two of our current distributor arrangements include, and some
future distributor arrangements may also include, the issuance of equity and
warrants to purchase our equity, which may have an adverse effect on our stock
price. To the extent we enter into distributor relationships, the failure of
these distributors in assisting us with the marketing and distribution of our
products may adversely affect our financial condition and results of operations.
We cannot be sure that MTU will continue to, or OEMs will, manufacture or
package products using our Direct FuelCell
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FUELCELL ENERGY, INC. - Form 10-K
components. In this area, our success will largely depend upon our ability to
make our products compatible with the power plant products of OEMs and the
ability of these OEMs to sell their products containing our products. In
addition, some OEMs may need to redesign or modify their existing power plant
products to fully incorporate our products. Accordingly, any integration,
design, manufacturing or marketing problems encountered by MTU or OEMs could
adversely affect the market for our Direct FuelCell products and, therefore, our
business, prospects, results of operations and financial condition.
WE DEPEND ON THIRD PARTY SUPPLIERS FOR THE DEVELOPMENT AND SUPPLY OF KEY
COMPONENTS FOR OUR DIRECT FUELCELL PRODUCTS
We purchase several key components of our products from other companies and will
rely on third-party suppliers for the balance-of-plant components in our Direct
FuelCell products. There are a limited number of suppliers for some of the key
components of our Direct FuelCell products. A supplier's failure to develop and
supply components in a timely manner or to supply components that meet our
quality, quantity or cost requirements or technical specifications or our
inability to obtain alternative sources of these components on a timely basis or
on terms acceptable to us could harm our ability to manufacture our Direct
FuelCell products. In addition, to the extent the processes that our suppliers
use to manufacture components are proprietary, we may be unable to obtain
comparable components from alternative suppliers.
We do not know when or whether we will secure long-term supply relationships
with any of our suppliers or whether such relationships will be on terms that
will allow us to achieve our objectives. Our business, prospects, results of
operations and financial condition could be harmed if we fail to secure
long-term relationships with entities that will supply the required components
for our Direct FuelCell products.
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 2003 and 2021 and the average remaining life of our patents is
approximately 9.4 years. Some of our intellectual property is not covered by any
patent or patent application and includes trade secrets and other know-how that
is not patentable, particularly as it relates to our manufacturing processes and
engineering design. In addition, some of our intellectual property includes
technologies and processes that may be similar to the patented technologies and
processes of third parties. If we are found to be infringing third-party
patents, we do not know whether we will able to obtain licenses to use such
patents on acceptable terms, if at all. Our patent position is subject to
complex factual and legal issues that may give rise to uncertainty as to the
validity, scope and enforceability of a particular patent. Accordingly, we
cannot assure you that:
- any of the U.S. patents or foreign patents owned by us or other patents
that third parties license to us will not be invalidated, circumvented,
challenged, rendered unenforceable or licensed to others; or
- any of our pending or future patent applications will be issued with the
breadth of claim coverage sought by us, if issued at all.
In addition, effective patent, trademark, copyright and trade secret protection
may be unavailable, limited or not applied for in certain foreign countries.
We also seek to protect our proprietary intellectual property, including
intellectual property that may not be patented or patentable, in part by
confidentiality agreements and, if applicable, inventors' rights agreements with
our subcontractors, vendors, suppliers, consultants, strategic partners and
employees. We cannot assure you that these agreements will not be breached, that
we will have adequate remedies for any breach or that such persons or
institutions will not assert rights to intellectual property arising out of
these relationships. Certain of our intellectual property have been licensed to
us on a non-exclusive basis from third parties that 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
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FUELCELL ENERGY, INC. - Form 10-K
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 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 to rapidly 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 MAY BE AFFECTED BY ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION
As we begin to commercialize our Direct FuelCell products, we will be subject to
federal, state or local regulation with respect to, among other things,
emissions and siting. Assuming no co-generation applications are utilized in
conjunction with our larger plants, they will discharge humid flue gas at
temperatures of approximately 700-800degree F, water at temperatures of
approximately 10-20degree F above ambient air temperatures and carbon dioxide.
These emissions will require permits that we expect (but cannot assure) will be
similar to those applicable to generating units.
In addition, it is possible that industry specific laws and regulations will be
adopted covering matters such as transmission scheduling, distribution and the
characteristics and quality of our products, including installation and
servicing. This 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 products.
Accordingly, compliance with existing or future laws and regulations as we begin
to commercialize and site our products could have a material adverse effect on
our business, prospects, and results of operations and financial condition.
UTILITY COMPANIES COULD IMPOSE CUSTOMER FEES OR INTERCONNECTION REQUIREMENTS TO
OUR CUSTOMERS THAT COULD MAKE OUR PRODUCTS LESS DESIRABLE
Utility companies commonly charge fees to larger, industrial 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 products and could make our
products less desirable, thereby harming our business, prospects, results of
operations and financial condition.
H-31
FUELCELL ENERGY, INC. - Form 10-K
Several states (Texas, New York, California and others) have created and adopted
or are in the process of creating their own interconnection regulations covering
both technical and financial requirements for interconnection to utility grids.
Depending on the complexities of the requirements, installation of our systems
may become burdened with additional costs and have a negative impact on our
ability to sell systems. There is also a burden in having to track the
requirements of individual states and design equipment to comply with the
varying standards. The Institute of Electrical and Electronics Engineers has
been working to create an interconnection standard addressing the technical
requirements for distributed generation to interconnect to utility grids. Many
parties are hopeful that this standard will be adopted nationally when it is
completed to help reduce the barriers to deployment of distributed generation
such as fuel cells.
CHANGES IN GOVERNMENT REGULATIONS AND ELECTRIC UTILITY INDUSTRY RESTRUCTURING
MAY AFFECT DEMAND FOR OUR DIRECT FUELCELL 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.
Many states have recently delayed the implementation of deregulation as a result
of the energy situation in California. Changes in government and public policy
over time could further delay or otherwise affect deregulation and, therefore,
adversely affect our prospects for commercializing our Direct FuelCell 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 products.
WE COULD BE LIABLE FOR ENVIRONMENTAL DAMAGES RESULTING FROM OUR RESEARCH,
DEVELOPMENT OR MANUFACTURING OPERATIONS
Our business exposes us to the risk of harmful substances escaping into the
environment, resulting in personal injury or loss of life, damage to or
destruction of property, and natural resource damage. Depending on the nature of
the claim, our current insurance policies may not adequately reimburse us for
costs incurred in settling environmental damage claims, and in some instances,
we may not be reimbursed at all. Our business is subject to numerous federal,
state and local laws and regulations that govern environmental protection and
human health and safety. These laws and regulations have changed frequently in
the past and it is reasonable to expect additional and more stringent changes in
the future. Our operations may not comply with future laws and regulations and
we may be required to make significant unanticipated capital and operating
expenditures. If we fail to comply with applicable environmental laws and
regulations, governmental authorities may seek to impose fines and penalties on
us or to revoke or deny the issuance or renewal of operating permits and private
parties may seek damages from us. Under those circumstances, we might be
required to curtail or cease operations, conduct site remediation or other
corrective action, or pay substantial damage claims.
OUR PRODUCTS USE INHERENTLY DANGEROUS, FLAMMABLE FUELS, OPERATE AT HIGH
TEMPERATURES AND USE CORROSIVE CARBONATE MATERIAL, EACH OF WHICH COULD SUBJECT
OUR BUSINESS TO PRODUCT LIABILITY CLAIMS
Our business exposes us to potential product liability claims that are inherent
in hydrogen and products that use hydrogen. Hydrogen is a flammable gas and
therefore a potentially dangerous product. Hydrogen is typically generated from
gaseous and liquid fuels that are also flammable and dangerous, such as propane,
natural gas or methane, in a process known as reforming. Natural gas and propane
could leak into a residence or commercial location and combust if ignited by
another source. In addition, our Direct FuelCell products operate at high
temperatures and use corrosive carbonate material, which could each expose us to
potential liability claims. Any accidents involving our products or other
hydrogen-based products could materially impede widespread market acceptance and
demand for our Direct FuelCell products. In addition, we may be held responsible
for damages beyond the scope of our insurance coverage. We also cannot predict
whether we will be able to maintain our insurance coverage on acceptable terms.
WE ARE SUBJECT TO RISKS INHERENT IN INTERNATIONAL OPERATIONS
Since we plan to market our Direct FuelCell products both inside and outside the
United States, our success depends, in part, on our ability to secure foreign
customers and our ability to manufacture products that meet foreign regulatory
and commercial requirements. We have limited experience developing and
manufacturing our products to comply with the commercial and legal requirements
of international markets. In addition, we are subject to tariff regulations and
requirements for export licenses, particularly with respect to the export of
certain technologies. We face numerous challenges in our international
expansion, including unexpected changes in regulatory requirements, fluctuations
in currency exchange rates, longer accounts receivable requirements and
collections, difficulties in managing international operations, potentially
adverse tax consequences, restrictions on repatriation of earnings and the
burdens of complying with a wide variety of foreign laws.
H-32
FUELCELL ENERGY, INC. - Form 10-K
WE HAVE LARGE AND INFLUENTIAL STOCKHOLDERS
MTU currently owns approximately 7.0% of our outstanding common stock (based
upon the shares of our common stock outstanding as of October 31, 2002). Loeb
Investors Co. LXXV and Warren Bagatelle (a managing director of an affiliate of
Loeb Investors Co. LXXV) collectively own approximately 4.0% of our outstanding
common stock (based upon the shares of our common stock outstanding as of
October 31, 2002). These ownership levels could make it difficult for a third
party to acquire our common stock or have input into the decisions made by our
board of directors, which include Michael Bode of MTU, Warren Bagatelle and
Thomas L. Kempner (Chairman and Chief Executive Officer of an affiliate of Loeb
Investors Co. LXXV). MTU is also a licensee of our technology and a purchaser of
our Direct FuelCell products. Therefore, it may be in MTU's interest to possess
substantial influence over matters concerning our overall strategy and
technological and commercial development. In addition, MTU's ownership interest
could raise a conflict of interest if MTU is experimenting with competing
technologies for its own products.
OUR STOCK PRICE HAS BEEN AND COULD REMAIN VOLATILE
The market price for our common stock has been and may continue to be volatile
and subject to extreme price and volume fluctuations in response to market and
other factors, including the following, some of which are beyond our control:
- failure to meet our product development and commercialization
milestones;
- due to our stage of development, variations in our quarterly operating
results from the expectations of securities analysts or investors;
- downward revisions in securities analysts' estimates or changes in
general market conditions;
- announcements of technological innovations or new products or services
by us or our competitors;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- investor perception of our industry or our prospects;
- insider selling or buying;
- demand for our common stock; and
- general technological or economic trends.
In the past, following periods of volatility in the market price of their stock,
many companies have been the subjects of securities class action litigation. If
we became involved in securities class action litigation in the future, it could
result in substantial costs and diversion of management's attention and
resources and could harm our stock price, business, prospects, and results of
operations and financial condition.
PROVISIONS OF DELAWARE AND CONNECTICUT LAW AND OF OUR CHARTER AND BY-LAWS MAY
MAKE A TAKEOVER MORE DIFFICULT
Provisions in our certificate of incorporation and by-laws and in Delaware and
Connecticut corporate law may make it difficult and expensive for a third party
to pursue a tender offer, change in control or takeover attempt that is opposed
by our management and board of directors. Public stockholders who might desire
to participate in such a transaction may not have an opportunity to do so. These
anti-takeover provisions could substantially impede the ability of public
stockholders to benefit from a change in control or change our management and
board of directors.
H-33
FUELCELL ENERGY, INC. - Form 10-K
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE
Substantial sales of our common stock in the public market, or the perception by
the market that such sales could occur, could lower our stock price or make it
difficult for us to raise additional equity capital in the future. As of October
31, 2002, we had 39,228,828 shares of common stock outstanding. As of that date,
all shares of our common stock are freely tradable subject, in some cases, to
the volume and manner of sale limitations under Rule 144 under the Securities
Act.
In addition, as of October 31, 2002, 6,179,172 shares of our common stock were
required to be reserved for issuance under our stock option and other benefit
plans and 2,640,000 shares of our common stock were required to be reserved for
issuance pursuant to outstanding warrants. As of October 31, 2002, 5,133,586
options to purchase shares of our common stock were issued and outstanding under
our stock option plans at a weighted average exercise price of $10.57 per share,
of which options to purchase shares had vested. The outstanding warrants to
purchase 2,640,000 shares of our common stock have not yet vested.
As of October 31, 2002, the holders of 853,910 shares of our common stock had
the right, subject to various conditions, to require us to file registration
statements covering their shares or to include their shares in registration
statements that we may file for ourselves or for other stockholders. By
exercising their registration rights and selling a large number of shares, these
holders could cause the price of our common stock to fall.
We cannot predict if future sales of our common stock, or the availability of
our common stock for sale, will harm the market price for our common stock or
our ability to raise capital by offering equity securities.
ITEM 2. PROPERTIES
We currently own and occupy approximately 72,000 square feet in two
interconnected single story buildings on 10.8 acres, of which approximately 7.9
acres are currently used, in Danbury, Connecticut.
In December 2001, we signed a ten-year lease agreement for a 65,000 square foot
facility in Torrington, Connecticut for our manufacturing operations. The annual
lease cost is approximately $448,000 in the first five years and $512,000 for
the last five years, in addition to taxes, utilities and operating expenses. We
have an option to extend the lease for an additional five years with an annual
lease cost of approximately $569,000. We have a term loan facility from the
Connecticut Development Authority that was used for the purchase of equipment at
this facility. As of October 31, 2002, we had $1,981,000 outstanding under this
facility.
In May of 2002, we signed an eighteen-month lease agreement for approximately
38,000 square feet of space in Danbury, Connecticut for additional manufacturing
operations. The annual lease cost is approximately $213,000 in the first year
and $127,000 for the remaining six months, in addition to taxes, utilities and
operating expenses. We have options to extend the lease for two additional
five-year periods. The average annual lease cost for option periods one and two
would be approximately $242,000 and $280,000, respectively.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings that, either individually
or taken as a whole, could materially harm our business, prospects, results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
H-34
FUELCELL ENERGY, INC. - Form 10-K
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been publicly traded since June 25, 1992. From September
21, 1994 through February 25, 1997, it was quoted on the Nasdaq National Market,
and from February 26, 1997 through June 6, 2000 it was traded on the American
Stock Exchange. Since June 7, 2000, it has been quoted on the Nasdaq National
Market under the symbol "FCEL." On January 22, 2003, there were approximately
619 common stockholders of record.
The following table sets forth the range of high and low prices of our common
stock on the Nasdaq National Market.
High Low
------ ------
YEAR ENDED OCTOBER 31, 2001
First Quarter $41.75 $22.63
Second Quarter 36.25 19.25
Third Quarter 46.72 15.50
Fourth Quarter 20.45 10.48
YEAR ENDED OCTOBER 31, 2002
First Quarter $22.80 $13.23
Second Quarter 18.65 15.02
Third Quarter 17.24 6.10
Fourth Quarter 8.24 4.54
We have never paid a cash dividend on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We currently anticipate
retaining all of our earnings to finance future growth.
UNREGISTERED SECURITIES
None
H-35
FUELCELL ENERGY, INC. - Form 10-K
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data presented below as of the end
of each of the years in the five-year period ended October 31, 2002 have been
derived from our audited consolidated financial statements together with the
notes thereto included elsewhere in this Report (the "Consolidated Financial
Statements"). The data set forth below is qualified by reference to, and should
be read in conjunction with, the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Report.
(Dollars in thousands, except for per share amounts)
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Revenues:
Research and development contracts $ 33,575 $ 20,882 $ 17,986 $ 18,553 $ 24,318
Product sales and revenues 7,656 5,297 2,729 1,412 --
------------ ------------ ------------ ------------ ------------
Total revenues 41,231 26,179 20,715 19,965 24,318
Costs and expenses:
Cost of research and development
contracts 45,664 19,033 12,508 12,690 16,106
Cost of product sales and revenues 32,129 16,214 4,968 1,025 --
Administrative and selling expenses 10,451 9,100 8,055 6,684 6,999
Research and development expenses 6,806 3,108 1,917 1,813 2,258
------------ ------------ ------------ ------------ ------------
Loss from operations (53,819) (21,276) (6,733) (2,247) (1,045)
License fee income, net 270 270 266 1,527 678
Interest expense (160) (116) (141) (169) (269)
Interest and other income, net 4,876 5,684 2,138 195 267
------------ ------------ ------------ ------------ ------------
Loss before provision for income taxes (48,833) (15,438) (4,470) (694) (369)
Provision for income taxes 7 -- -- 291 13
Minority interest -- -- 11 -- --
------------ ------------ ------------ ------------ ------------
Net loss $ (48,840) $ (15,438) $ (4,459) $ (985) $ (382)
============ ============ ============ ============ ============
Basic and diluted loss per share: $ (1.25) $ (0.45) $ (0.16) $ (0.04) $ (0.02)
Basic and diluted shares outstanding 39,135,256 34,359,320 28,297,594 24,906,856 24,486,108
------------ ------------ ------------ ------------ ------------
Working capital $ 218,334 $ 276,173 $ 71,576 $ 7,204 $ 10,234
Total assets 289,803 334,020 91,028 19,831 26,843
Long - term debt 1,696 1,252 -- 1,625 1,944
Total shareholders' equity 271,702 319,716 83,251 14,815 15,870
H-36
FUELCELL ENERGY, INC. - Form 10-K
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We currently obtain our revenues from government and industry funded research
and development contracts, demonstration and field trial projects, and license
fees. These contracts are generally multi-year, cost reimbursement type
contracts. The majority of these are United States Government contracts that are
dependent upon the government's continued allocation of funds. We are currently
transitioning from a research and development company to a commercial products
company.
Under cost-reimbursement contracts, we are reimbursed for reasonable and
allocable costs of the materials, subcontracts, direct labor, overhead, general
and administrative expenses, independent research and development costs, and bid
and proposal preparation costs, provided the total of such costs do not exceed
the reimbursement limits set by the contract. In addition, some of these
contracts bear a fixed fee or profit. We manage these contracts by charging
costs directly, maintaining adequate control of overhead costs and general and
administrative expenses so they do not exceed the approved billing rates, and
limiting the aggregate reimbursable costs to the allowable amounts set by the
contract.
In performance of firm fixed price contracts, we are paid the price that is set
in advance without regard to the costs actually incurred in performance, subject
to certain excess profit limitations. In a cost sharing type contract, we agree
in advance to contribute or cause to be contributed an agreed upon amount of
funds, third party services or in-kind services toward fulfilling the objective
of the contract. Except for our cost contributions, the contract operates in
substantially the same manner as a cost reimbursement type contract. At present,
most of our contracts are cost shared and no fee or profit is allowed. The
government contracts and agreements provide for a cost-of-money recovery based
upon capital investment in facilities employed in contract performance.
Our research and development expenses reflect costs incurred for research and
development projects conducted without specific customer-sponsored contracts.
These costs consist primarily of labor, overhead, materials to build prototype
units, materials for testing, consulting fees and other costs associated with
our internal research and development expenses.
Since 1983, when we began to shift our emphasis from fuel cells for military use
to commercial applications, our primary focus has been researching and
developing carbonate fuel cells. The funding received for this research has
represented a substantial portion of our revenues.
We will continue to seek research and development contracts for all of our
product lines. To obtain contracts, we must continue to prove the benefits of
our technologies and be successful in our competitive bidding. Failure to obtain
these contracts could have an adverse effect upon us.
Because we receive a significant portion of our revenues from contracts with the
DOE and other government agencies, our future revenues and income could be
materially affected by changes in government agency procurement policies, a
reduction in expenditures for the services provided by us, and other risks
generally associated with government contracts. In general, our government
contracts may be terminated, in whole or in part, at the convenience of the
government. A reduction or delay in our government funding could have a material
adverse effect on our ability to commercialize our fuel cell technology.
In July 2000, the DOE extended the cooperative agreement for three additional
years. Approximately $15,534,000 remains to be funded by the DOE for the
remaining period, and we anticipate extending this contract until December 2004.
RESULTS OF OPERATIONS
2002 COMPARED TO 2001. Total revenues increased 57% to $41,231,000 in the 2002
period from $26,179,000 in the 2001 period. Revenues from research and
development contracts increased 61% to $33,575,000 from $20,882,000 in the 2001
period, while product sales increased 45% to $7,656,000 from $5,297,000 in the
2001 period. The additional $12,693,000 of research and development contract
revenue was due to activities on King County, Clean Coal, Coal Mine Methane, and
Navy Phase II. The additional $2,359,000 of product sales revenue was related to
the manufacture of DFC power plants for our distribution partners and sales of
fuel cell components to MTU.
Cost of research and development contracts increased to $45,664,000 in the 2002
period from $19,033,000 in the 2001 period. This was due to sales and activities
on cost-shared research and development contracts, including King County, Clean
Coal, Navy Phase II and Coal Mine Methane.
Cost of product sales and revenues increased 98%, to $32,129,000 in the 2002
period from $16,214,000 in the 2001 period, due to additional sales of fuel cell
components to MTU, an overall increase in the procurement for and manufacturing
of DFC power plants for our distribution partners, and development costs on our
initial field trial units.
Administrative and selling expenses increased 15% to $10,451,000 in the 2002
period from $9,100,000 in the 2001 period. These additional costs were driven by
our commercialization efforts and consisted of employment costs of $637,000,
professional services costs of $714,000 related to hiring, systems
implementation, marketing efforts and other.
Research and development expenses increased to $6,806,000 in the 2002 period
from $3,108,000 in the 2001 period. This was due to development costs associated
with design improvements of our sub-megawatt products and first article testing
and design costs related to our megawatt class products.
Loss from operations increased to $53,819,000 in the 2002 period from
$21,276,000 in the 2001 period. The additional losses resulted from activities
on our field trials and cost shared contracts, and a higher level of sales and
marketing activity.
Interest expense increased to $160,000 in the 2002 period from $116,000 in the
2001 period. This was attributable to additional borrowings in the 2002 period.
H-37
FUELCELL ENERGY, INC. - Form 10-K
Interest and other income, net, decreased to $4,876,000 in the 2002 period from
$5,684,000 in the 2001 period. This was due to our lower cash and investments
balances and lower interest rates.
We believe that due to our efforts to commercialize our Direct FuelCell
technology, we have and will continue to incur losses. Based on projections for
future taxable income over the period in which the deferred tax assets are
realizable, management believes that significant uncertainty exists surrounding
the recoverability of the deferred tax assets. Therefore, no tax benefit has
been recognized related to current year losses and other deferred tax assets.
2001 COMPARED TO 2000. Revenues increased 26% to $26,179,000 in the 2001 period
from $20,715,000 in the 2000 period. This was due to $2,896,000 of additional
revenue from our research and development contracts including King County, Navy
Phase II, Clean Coal, Vision 21 and Coal Mine Methane, and $2,568,000 of added
product sales revenue from the manufacture of DFC power plants for our
distribution partners and MTU.
Cost of research and development contracts increased to $19,033,000 in the 2001
period from $12,508,000 in the 2000 period. This was due to an increased number
of cost-shared research and development contracts.
Cost of product sales and revenues increased to $16,214,000 in the 2001 period
from $4,968,000 in the 2000 period due to an overall increase in the procurement
and manufacturing of DFC power plants for our distribution partners and an
increase in development costs on our initial field trial units.
Administrative and selling expenses increased 13% to $9,100,000 in the 2001
period from $8,055,000 in the 2000 period. This was driven by sales and
marketing efforts including higher employment and other costs of
commercialization.
Research and development expenses increased 62% to $3,108,000 in the 2001 period
from $1,917,000 in the 2000 period. This was due to the incurring of development
costs associated with design improvements of our fuel cells.
Loss from operations increased to $21,276,000 in the 2001 period from $6,733,000
in the 2000 period. The additional losses resulted from activities on our field
trials and cost shared contracts, and a higher level of sales and marketing
activity.
Interest expense decreased to $116,000 in the 2001 period from $141,000 in the
2000 period. This was attributable to the repayment of indebtedness offset by
incurring new indebtedness at lower rates in the second half of the 2001 period.
Interest and other income, net, increased to $5,684,000 in the 2001 period from
$2,138,000 in the 2000 period. This was due to the investment of the
$241,200,000 net cash proceeds from our equity offering in June 2001, and the
$10,000,000 of proceeds from the sale of common stock to our strategic Asian
partner, Marubeni, in July 2001.
We believe that due to our efforts to commercialize our Direct FuelCell
technology, we have and will continue to incur losses. Based on projections for
future taxable income over the period in which the deferred tax assets are
realizable, management believes that significant uncertainty exists surrounding
the recoverability of the deferred tax assets. Therefore, no tax benefit has
been recognized related to current year losses and other deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Our operations are funded primarily through sales of equity, cash generated from
operations and borrowings. Cash from operations includes revenue from government
contracts and cooperative agreements, field trial projects, sale of fuel cell
components primarily to MTU, license fees and interest income.
Our cash requirements depend on numerous factors, including the implementation
of our field follow program for our DFC300A products, the initiation of our
megawatt class field trial program, and development of our DFC/Turbine and
diesel DFC products. We expect to devote substantial capital resources to
achieve our overall product goals of cost reduction, performance improvement,
reliability and serviceability. We believe that we can achieve these goals
through our near term product strategy of developing standard products,
increasing volume production and the further development of our distribution
network. We expect such activities will be funded from existing cash, cash
equivalents, investments and cash from operations. Once we've completed our near
term strategy, we believe we will have the financial flexibility to maintain,
reduce or accelerate our business activities consistent with market demand.
At October 31, 2002, we had cash, cash equivalents and investments (U.S.
Treasuries) of $220,583,000, compared to cash,
H-38
FUELCELL ENERGY, INC. - Form 10-K
cash equivalents and investments of $290,533,000 at October 31, 2001. The
decrease in cash was attributable to $45,066,000 used to fund the net loss, a
net reduction in working capital of $10,891,000, which includes an inventory
increase of $7,647,000, capital expenditures of $15,373,000, and by net
financing activities of $1,380,000.
We anticipate that our existing capital resources together with anticipated
revenues will be adequate to satisfy our planned financial requirements and
agreements through at least the next twelve months.
In December 1994, we entered into a Cooperative Agreement with the DOE pursuant
to which they agreed to provide funding through 1999 to support the continued
development and improvement of our commercial product. This agreement was
extended for three additional years, through 2003, with funding subject to
annual approval by the U.S. Congress. We anticipate extending this agreement
through 2004. The current aggregate dollar amount of that contract is
$212,679,000 with the DOE providing $134,712,000 in funding. Approximately
$15,534,000 remains to be funded by the DOE. The balance of the funding is
expected to be provided by us, our partners or licensees, other private agencies
and utilities. Approximately 95% of the non-DOE portion has been committed or
credited to the project in the form of in-kind or direct cost share from
non-U.S. government sources.
In addition to the DOE Cooperative Agreement, we have received a $19,356,000 39%
cost-shared contract under the Vision 21 program to demonstrate Direct
FuelCell/turbine power plants, a $34,573,000, 50% cost shared contract from the
DOE to demonstrate a 2 MW fuel cell power plant operating on coal-derived gas, a
$16,806,000, 21% cost-shared contract from the U.S. Navy to demonstrate a marine
fuel cell power plant operating on diesel fuel and a $5,362,000, 50% cost-shared
contract with the DOE to develop a Direct FuelCell utilizing coal methane gas.
As of October 31, 2002, there was approximately $26,979,000 of backlog related
to these contracts, of which approximately $18,703,000 was funded and $8,276,000
was unfunded.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 revises the guidance for business combinations and
eliminates the pooling method. SFAS No. 142 eliminates the amortization
requirement for goodwill and certain other intangible assets and requires that
such assets be reviewed periodically for impairment. We adopted SFAS No. 141
upon its issuance with no impact on our financial condition or results of
operations. We are required to adopt SFAS No. 142 effective November 1, 2002 and
this adoption is not anticipated to have a significant impact on our financial
condition, results from operations or cash flows upon adoption.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, and development and (or) normal use of the asset. We are required
to adopt the provisions of SFAS No. 143 effective November 1, 2002. To
accomplish this, we must identify all legal obligations for asset retirements,
if any, and determine the fair value of these obligations on the date of
adoption. The adoption of SFAS No. 143 is not anticipated to have a significant
impact on our financial condition, results from operations or cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
also extends the reporting requirements to report separately, as discontinued
operations, components of an entity that have either been disposed of or are
classified as held-for-sale. We are required to adopt the provisions of SFAS No.
144 effective November 1, 2002. The adoption of SFAS No. 144 is not anticipated
to have a significant impact on our financial condition or results from
operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,".
Under SFAS No. 145, among other things, gains and losses related to the
extinguishment of debt should no longer be segregated on the income statement as
extraordinary items. Instead, such gains and losses should be included as a
component of income from continuing operations. The provisions of SFAS No. 145
are effective for us on November 1, 2002. The adoption of SFAS No. 145 is not
anticipated to have a significant impact on our financial position, results of
operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," was issued. This statement nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)."
H-39
FUELCELL ENERGY, INC. - Form 10-K
SFAS No. 146 requires that a liability for the fair value of the costs
associated with an exit or disposal activity be recognized when the liability is
incurred. The provisions of SFAS No. 146 are effective for exit or disposal
activities initiated after December 31, 2002 and thus will become effective for
us as of January 1, 2003. The adoption of SFAS No. 146 is currently not expected
to have a material impact on our financial position, results of operations or
cash flows upon adoption.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." Interpretation No. 45 requires the guarantor to
recognize a liability for the non-contingent component of a guarantee; that is,
the obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple elements. Interpretation No. 45 also requires
additional disclosures related to guarantees. We are required to adopt the
disclosure provisions of the Interpretation beginning in the first quarter of
fiscal 2003. Additionally, the recognition and measurement provisions of
Interpretation No. 45 are effective for all guarantees entered into or modified
after December 31, 2002. We are in the process of evaluating the effect of this
Interpretation on its financial statements and disclosures.
In December 2001, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 01-6, "Accounting by Certain Entities
(Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others". The SOP applies to any entity that lends to or finances
the activities of others, and specifies accounting and disclosure requirements
for entities that extend trade credit to customers and also provides specific
guidance for other types of transactions specific to certain financial
institutions. The SOP is effective for the Company beginning November 1, 2002
and we do not believe the recognition and measurement provisions within this SOP
will result in a change in practice for its trade receivables or any other
activities of the Company. The SOP also provides certain presentation and
disclosure changes for entities with trade receivables as part of the objective
of requiring consistent accounting and reporting for like transactions, which
will be incorporated into the Company's disclosures upon adoption.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
Revenues represent reimbursement by commercial and government entities for all
or a portion of the research and development costs we incur on long-term
contracts. We recognize our revenues on long-term contracts on a method similar
to the percentage of completion method. Revenues are recognized proportionally
as research and development costs are incurred and compared to the estimated
total research and development costs for each contract or field trial. Costs are
considered research and development in nature as the benefit to be obtained from
incurring such costs may represent the design, development, manufacture, and the
conditioning and testing of our fuel cell stacks. In many cases, the amount we
are reimbursed is exceeded by the costs incurred or to be incurred on a
contract.
As we commercialize, our fuel cell technology costs will relate entirely to the
fulfillment of individual contracts with customers. At the point that our fuel
cells are commercialized, estimated costs to complete an individual contract in
excess of revenue will be accrued immediately.
Inventories
As discussed above, we recognize research and development costs for contracts as
incurred. When we incur costs for material, labor and overhead to build fuel
stacks which have not yet been dedicated to a particular contract, we include
them in WIP inventory to the extent we estimate them to be recoverable based on
anticipated use of the fuel stacks and anticipated cost reimbursement on these
anticipated contracts. At October 31, 2002, there was $3,767,000 in WIP
inventory related to such costs. During the normal course of business, we will
dedicate the fuel stacks in WIP inventory to a contract, at which point in time
the inventory costs are charged to cost of research and development contracts or
cost of product sales and revenues, and when appropriate, revenue will be
recognized on these costs.
As we increase our commercial activities, we anticipate that our assessment of
recoverability of inventory costs will become increasingly dependent upon the
amount we believe we can sell the fuel stacks in the commercial market, and less
on the extent to which costs are reimbursed pursuant to government contracts.
H-40
FUELCELL ENERGY, INC. - Form 10-K
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
Our exposure to market risk for changes in interest rates, relates primarily to
our investment portfolio and long term debt obligations. Our investment
portfolio includes both short-term United States Treasury instruments with
maturities averaging three months or less, as well as U.S. Treasury notes with
fixed interest rates with maturities of up to twenty months. Cash is invested
overnight with high credit quality financial institutions. Based on our overall
interest exposure at October 31, 2002, including all interest rate sensitive
instruments, a near-term change in interest rate movements of 1% would affect
our consolidated results of operations by approximately $1,000,000 annually,
based on the investment of our cash and cash equivalents and outstanding debt at
October 31, 2002.
CURRENCY RATE EXPOSURE
Our functional currency is the U.S. dollar. To the extent we expand our
international operations, we will be exposed to increased risk of currency
fluctuation. In fiscal 2003 and beyond, we have or will be purchasing materials
for various projects in foreign countries. Many of these purchases will be
denominated in the currency of the related region. In order to protect the
purchase price from currency fluctuations, we may, from time to time, enter into
forward contracts to purchase foreign currency. It is expected that changes in
the market value of the futures contracts will be included as part of the
acquisition price of the materials inventory and realized when the project is
ultimately completed, along with the offsetting foreign currency gains or
losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and Supplementary Data are listed under
Part IV, Item 14, in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
H-41
FUELCELL ENERGY, INC. - Form 10-K
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Company" contained in Part I hereof and the remainder
is incorporated herein by reference to "Election of Directors" in our Proxy
Statement for our Annual Meeting of Shareholders to be held on March 25, 2003
(the "2003 Proxy Statement") to be filed with the SEC within 120 days from the
fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the
Section captioned "Executive Compensation " to be contained in the 2003 Proxy
Statement to be filed with the SEC within 120 days from fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the
Section captioned "Security Ownership of Certain Beneficial Owners and
Management" to be contained in the 2003 Proxy Statement to be filed with the SEC
within 120 days from fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
Section captioned "Certain Relationships and Related Transactions" to be
contained in the 2003 Proxy Statement to be filed with the SEC within 120 days
from fiscal year end.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic SEC reports. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
H-42
FUELCELL ENERGY, INC. - Form 10-K
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
1) Independent Auditors' Report
KPMG LLP (See page F-2, hereof.)
2) Consolidated Balance Sheets as of October 31, 2002 and 2001 (See page
F-3 hereof.)
3) Consolidated Statements of Loss for the Years Ended October 31, 2002,
2001, and 2000 (See page F-4, hereof.)
4) Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended October 31, 2002, 2001 and 2000 (See page F-5, hereof.)
5) Consolidated Statements of Cash Flows for the Years Ended October 31,
2002, 2001 and 2000 (See page F-6, hereof.)
6) Notes to Consolidated Financial Statements
(A) (2) FINANCIAL STATEMENT SCHEDULES
Supplement schedules are not provided because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or notes thereto.
H-43
FUELCELL ENERGY, INC. - Form 10-K
(A) (3) EXHIBITS
(A) (3) EXHIBITS TO THE 10-K
EXHIBIT NO. DESCRIPTION METHOD OF FILING
-----------------------------------------------------------------------------------------------------------
2 Distribution Agreement between the Company and Evercel, dated as of
February 16, 1999 (incorporated by reference to exhibit of the same
number contained in the Company's 8-K dated February 22, 1999)
3.1 Certificate of Incorporation of the Registrant, as amended, July 12,
1999 (incorporated by reference to exhibit of the same number
contained in the Company's 8-K dated September 21, 1999)
3.2 Restated By-Laws of the Registrant, dated July 13,1999 (incorporated
by reference to exhibit of the same number contained in the Company's
8-K dated September 21, 1999)
4 Specimen of Common Share Certificate (incorporated by reference to
exhibit of the same number contained in the Company's Annual Report
on form 10KA for fiscal year ended October 31, 1999)
10.6 **License Agreement, dated February 11, 1988, between EPRI and the
Company (confidential treatment requested) (incorporated by reference
to exhibit of the same number contained in the Company's Registration
Statement on Form S-1 (File No. 33-47233) dated April 14, 1992)
10.21 *FuelCell Energy, Inc. 1988 Stock Option Plan (incorporated by
reference to exhibit of the same number contained in the Company's
Amendment No. 1 to its Registration Statement on Form S-1 (File No.
33-47233) dated June 1, 1992)
10.26 Addendum to License Agreement, dated as of September 29, 1989,
between Messerschmitt-Bolkow-Blohm and the Company (incorporated by
reference to exhibit of the same number contained in the Company's
Amendment No. 3 to its Registration Statement on Form S-1 (File No.
33-47233) dated June 24, 1992)
10.27 Cross-Licensing and Cross-Selling Agreement, as amended December 15,
1999, between the Company and MTU Motoren-Und Turbinen-Union
Friedrichshafen GmbH ("MTU") (incorporated by reference to exhibit of
the same number contained in the Company's 10-Q for the period ended
January 31, 2000).
10.31 License Agreement For The Santa Clara Demonstration Project between
the Company and the Participants in the Santa Clara Demonstration
Project, dated September 16, 1993 (incorporated by reference to
exhibit of the same number contained in the Company's 10-KSB for
fiscal year ended October 31, 1993, dated January 18, 1994)
10.32 Security Agreement for the Santa Clara Demonstration Project, dated
September 16, 1993 (incorporated by reference to exhibit of the same
number contained in the Company's 10-KSB for fiscal year ended
October 31, 1993, dated January 18, 1994)
10.33 Guaranty By FuelCell Energy, Inc., dated September 16, 1993 for the
Santa Clara Demonstration Project (incorporated by reference to
exhibit of the same number contained in the Company's 10-KSB for
fiscal year ended October 31, 1993, dated January 18, 1994)
10.34 Guaranty by Fuel Cell Manufacturing Corporation, dated September 16,
1993 for the Santa Clara Demonstration Project (incorporated by
reference to exhibit of the same number contained in the Company's
10-KSB for fiscal year ended October 31, 1993,
H-44
FUELCELL ENERGY, INC. - Form 10-K
dated January 18, 1994)
10.36 *The FuelCell Energy, Inc. Section 423 Stock Purchase Plan
(incorporated by reference to exhibit of the same number contained in
the Company's 10-KSB for fiscal year ended October 31, 1994 dated
January 18, 1995)
10.39 **Cooperative Agreement, dated December 20, 1994, between the Company
and the United States Department of Energy, Cooperative Agreement
#DE-FC21-95MC31184 (confidential treatment requested) (incorporated
by reference to exhibit of the same number contained in the Company's
10-KSB for fiscal year ended October 31, 1994 dated January 18, 1995)
10.40 Loan and Security Agreement between the Company and MetLife Capital
Corporation. (incorporated by reference to exhibit of the same number
contained in the Company's 10-KSB for fiscal year ended October 31,
1995 dated January 17, 1996)
10.41 *Amendment No. 2 to the FuelCell Energy, Inc. Section 423 Stock
Purchase Plan (incorporated by reference to exhibit of the same
number contained in the Company's 10-Q for the period ended April 30,
1996 dated June 13, 1996)
10.42 *Amendments to the FuelCell Energy, Inc. 1988 Stock Option Plan
(incorporated by reference to exhibit of the same number contained in
the Company's 10-Q for the period ended April 30, 1996 dated June 13,
1996)
10.43 Loan Agreements with First Union Bank of Connecticut, dated June 28,
1996 (incorporated by reference to exhibit of the same number
contained in the Company's 10-Q for the period ended July 31, 1996
dated September 12, 1996)
10.44 Notes in favor of First Union Bank of Connecticut, dated June 28,
1996 (incorporated by reference to exhibit of the same number
contained in the Company's 10-Q for the period ended July 31, 1996
dated September 12, 1996)
10.45 Security Agreements with First Union Bank of Connecticut, dated June
28, 1996 (incorporated by reference to exhibit of the same number
contained in the Company's 10-Q for the period ended July 31, 1996
dated September 12, 1996)
10.47 Amendment of Cooperative Agreement dated September 5, 1996 between
the Company and the United States Department of Energy, Cooperative
Agreement #DE-FC21-95MC31184 (incorporated by reference to exhibit of
the same number contained in the Company's 10-K for the fiscal year
ended October 31, 1998)
10.48 *Employment Agreement between FuelCell Energy, Inc. and the Chief
Financial Officer, Treasurer and Secretary, dated October 5, 1998
(incorporated by reference to exhibit of the same number contained in
the Company's 10-K for the fiscal year ended October 31, 1998)
10.49 *Employment Agreement between FuelCell Energy, Inc. and the President
and Chief Executive Officer, dated August 1, 1997 (incorporated by
reference to exhibit of the same number contained in the Company's
10-K for the fiscal year ended October 31, 1997)
10.50 Technology Transfer and License Agreement between the Company and the
Joint Venture owned jointly by the Xiamen Daily-Used Chemicals Co.,
Ltd. of China and Nan Ya Plastics Corporation of Taiwan, dated
February 21, 1998 (incorporated by reference to exhibit of the same
number contained in the Company's 10-Q for the period ended April 30,
1998)**.
10.51 Technology Transfer and License Contract, dated May 29, 1998 for
Ni-Zn Battery Technology among Xiamen ERC Battery Corp., Ltd., and
Xiamen Daily-Used
H-45
FUELCELL ENERGY, INC. - Form 10-K
Chemicals Co., Ltd. And the Company (incorporated
by reference to exhibit of the same number contained in the Company's
10-Q for the period ended July 31, 1998)**.
10.52 Cooperative Joint Venture Contract, dated as of July 7, 1998, between
Xiamen Three Circles Co., Ltd. And the Company for the establishment
of Xiamen Three Circles-ERC Battery Corp., Ltd., a Sino Foreign
Manufacturing Joint Venture (incorporated by reference to exhibit of
the same number contained in the Company's 10-Q for the period ended
July 31, 1998)**.
10.53 Amendment to the FuelCell Energy, Inc. 1988 Stock Option Plan, as
amended (incorporated by reference to exhibit of the same number
contained in the Company's 10-Q for the period ended July 31, 1998).
10.54 The FuelCell Energy, Inc. 1998 Equity Incentive Plan (incorporated by
reference to exhibit of the same number contained in the Company's
10-Q for the period ended July 31, 1998).
10.55 Lease agreement dated March 8, 2000 between the Company and
Technology Park Associates, L.L.C. (incorporated by reference to
exhibit of the same number contained in the Company's 10-Q for the
period ended April 30, 2000).
10.56 Security agreement dated June 30, 2000 between the Company and the
Connecticut Development Authority (incorporated by reference to
exhibit of the same number contained in the Company's 10-Q for the
period ended July 31, 2000).
10.57 Loan agreement dated June 30, 2000 between the Company and the
Connecticut Development Authority (incorporated by reference to
exhibit of the same number contained in the Company's 10-Q for the
period ended July 31, 2000).
10.58 *Modification, dated June 20, 2002, to the Employment Agreement
between FuelCell Energy, Inc. and the President and Chief Executive
Officer (incorporated by reference to exhibit of the same number
contained in the Company's 10-Q for the period ended July 31, 2002).
21 Subsidiaries of the Company (incorporated by reference to exhibit of
the same number contained in the Company's Registration Statement on
Form S-1, (File No. 33-47233) dated April 14, 1992)
23.1 Consent of KPMG LLP
* Management Contract or Compensatory Plan or Arrangement
**Confidential Treatment has been granted for portions of this
document
(b) The following Current Reports on Form 8-K were filed by the Registrant
during the last quarter of the fiscal year 2002.
None
H-46
FUELCELL ENERGY, INC. - Form 10-K
TABLE OF CONTENTS
Independent Auditors' Report H-48
Consolidated Balance Sheets - October 31, 2002 and 2001 H-49
Consolidated Statements of Loss for the Years ended October 31, 2002,
2001 and 2000 H-50
Consolidated Statements of Changes in Shareholders' Equity for the Years
ended October 31, 2002, 2001 and 2000 H-51
Consolidated Statements of Cash Flows for the Years ended October 31,
2002, 2001 and 2000 H-52
Notes to Consolidated Financial Statements H-53
H-47
FUELCELL ENERGY, INC. - Form 10-K
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
FuelCell Energy, Inc.:
We have audited the accompanying consolidated balance sheets of FuelCell Energy,
Inc. and subsidiary as of October 31, 2002 and 2001, and the related
consolidated statements of loss, changes in shareholders' equity and cash flows
for each of the years in the three-year period ended October 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FuelCell Energy,
Inc. as of October 31, 2002 and 2001, and the results of their operations and
their cash flows for the each of the years in the three-year period ended
October 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
/s/ KPMG LLP
----------------------
KPMG LLP
Hartford, CT
December 9, 2002
H-48
FUELCELL ENERGY, INC. - Form 10-K
FUELCELL ENERGY, INC.
Consolidated Balance Sheets
October 31, 2002 and 2001
(Dollars in thousands, except per share amounts)
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $102,495 $256,870
Investments: U.S. Treasury securities 103,501 17,890
Accounts receivable, net 10,438 7,110
Inventories 13,981 6,334
Deferred income taxes -- 25
Other current assets 4,324 996
-------- --------
Total current assets 234,739 289,225
Property, plant and equipment, net 38,710 27,188
Investments: U.S. Treasury securities 14,587 15,773
Deferred income taxes -- 266
Other assets, net 1,767 1,568
-------- --------
Total assets $289,803 $334,020
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 285 $ 175
Accounts payable 4,712 4,679
Accrued liabilities 7,904 6,763
Deferred license fee income 38 37
Customer advances 3,466 1,398
-------- --------
Total current liabilities 16,405 13,052
Long-term debt 1,696 1,252
-------- --------
Total liabilities 18,101 14,304
-------- --------
Commitments and contingencies -- --
Shareholders' equity:
Common stock ($.0001 par value); 150,000,000 shares
authorized at October 31, 2002 and October 31, 2001
respectively: 39,228,828 and 38,998,788 shares
issued and outstanding at October 31, 2002 and
October 31, 2001, respectively 4 4
Additional paid-in capital 339,762 338,936
Accumulated deficit (68,064) (19,224)
-------- --------
Total shareholders' equity 271,702 319,716
-------- --------
Total liabilities and shareholders' equity $289,803 $334,020
======== ========
The accompanying footnotes are an integral part of the consolidated financial
statements.
H-49
FUELCELL ENERGY, INC. - Form 10-K
FUELCELL ENERGY, INC.
Consolidated Statements of Loss
October 31, 2002, 2001 and 2000
(Dollars in thousands, except per share amounts)
2002 2001 2000
------------ ------------ ------------
Revenues:
Research and development contracts $ 33,575 $ 20,882 $ 17,986
Product sales and revenue 7,656 5,297 2,729
------------ ------------ ------------
Total revenues 41,231 26,179 20,715
Costs and expenses:
Cost of research and development contracts 45,664 19,033 12,508
Cost of product sales and revenues 32,129 16,214 4,968
Administrative and selling expenses 10,451 9,100 8,055
Research and development costs 6,806 3,108 1,917
------------ ------------ ------------
Total costs and expenses 95,050 47,455 27,448
------------ ------------ ------------
Loss from operations (53,819) (21,276) (6,733)
License fee income, net 270 270 266
Interest expense (160) (116) (141)
Interest and other income, net 4,876 5,684 2,138
------------ ------------ ------------
Loss before provision for Income taxes (48,833) (15,438) (4,470)
Provision for income taxes 7 -- --
Minority interest -- -- 11
------------ ------------ ------------
Net loss $ (48,840) $ (15,438) $ (4,459)
------------ ------------ ------------
Loss per share:
Basic and diluted loss per share $ (1.25) $ (0.45) $ (0.16)
------------ ------------ ------------
Basic and diluted shares outstanding 39,135,256 34,359,320 28,297,594
------------ ------------ ------------
The accompanying footnotes are an integral part of the consolidated financial
statements.
H-50
FUELCELL ENERGY, INC. - Form 10-K
FUELCELL ENERGY, INC.
Statements of Changes in Shareholders' Equity
October 31, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
SHARES OF ADDITIONAL RETAINED TOTAL
COMMON COMMON PAID-IN EARNINGS SHAREHOLDER
STOCK STOCK CAPITAL (DEFICIT) EQUITY
---------- ------------ ------------ ----------- -----------
Balance at October 31, 1999 25,303,488 $ 2 $ 14,140 $ 673 $ 14,815
Compensation for stock options granted 134 134
Issuance of common stock under benefit
plans 17,896 59 59
Issuance of common stock for follow-on
offering in April 2000 5,200,000 1 61,099 61,100
Issuance of common stock 585,796 15,000 15,000
Common stock retired for cashless
exercise of options (20,844) (258) (258)
Stock options exercised 375,084 394 394
Common stock costs (3,534) (3,534)
Net loss (4,459) (4,459)
---------- ------------ ------------ ----------- -----------
Balance at October 31, 2000 31,461,420 $ 3 $ 87,034 $ (3,786) $ 83,251
Compensation for stock options granted 100 100
Issuance of common stock under benefit
plans 16,414 213 213
Issuance of common stock for follow-on
offering in June 2001 6,900,000 1 241,500 241,501
Issuance of common stock 268,114 10,000 10,000
Stock options exercised 354,382 1,110 1,110
Common stock retired for cashless
exercise of options (1,542) (60) (60)
Common stock and equity investment
costs (708) (708)
Deconsolidation of Xiamen Joint Venture (253) (253)
Net loss (15,438) (15,438)
---------- ------------ ------------ ----------- -----------
Balance at October 31, 2001 38,998,788 $ 4 $ 338,936 $ (19,224) $ 319,716
Issuance of common stock under benefit
plans 16,324 219 219
Stock options exercised 213,716 307 307
Common stock and equity investment
costs 300 300
Net loss (48,840) (48,840)
---------- ------------ ------------ ----------- -----------
Balance at October 31, 2002 39,228,828 $ 4 $ 339,762 $ (68,064) $ 271,702
The accompanying footnotes are an integral part of the consolidated financial
statements.
H-51
FUELCELL ENERGY, INC. - Form 10-K
FUELCELL ENERGY, INC.
Consolidated Statements of Cash Flows
October 31, 2002, 2001 and 2000
(Dollars in thousands, except per share amounts)
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net loss $ (48,840) $ (15,438) $ (4,459)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Compensation for options granted -- 100 134
Depreciation and amortization 3,420 2,034 1,880
Amortization of treasury note premium 363 -- --
Deferred income taxes 291 -- --
(Gain) loss on disposal of property 63 (4) 82
Minority interest -- -- (11)
(Increase) decrease in operating assets:
Accounts receivable (3,328) (3,651) (1,127)
Inventories (7,647) (6,029) 899
Other current assets (3,159) (400) (191)
Increase (decrease) in operating liabilities:
Accounts payable 33 3,053 1,142
Accrued liabilities 1,141 3,216 1,770
Customer advances 2,068 656 192
Deferred license fee income and other 1 48 9
--------- --------- ---------
Net cash (used in) provided by operating activities (55,594) (16,415) 320
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (15,373) (19,094) (4,155)
Treasury notes matured 82,500 -- --
Treasury notes purchased (167,288) (33,663) --
Payments on other assets -- -- 6
--------- --------- ---------
Net cash used in investing activities (100,161) (52,757) (4,149)
--------- --------- ---------
Cash flows from financing activities:
Long term debt borrowings 787 1,427 --
Repayment on long-term debt (233) (1,625) (341)
Sales of common stock -- 251,501 76,100
Deconsolidation of Xiamen Joint Venture -- (570) --
Common stock and equity investment costs 300 (708) (3,534)
Common stock issued for Option and Stock Purchase Plans 526 1,263 195
--------- --------- ---------
Net cash provided by financing activities 1,380 251,288 72,420
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (154,375) 182,116 68,591
Cash and cash equivalents-beginning of year 256,870 74,754 6,163
--------- --------- ---------
Cash and cash equivalents-end of year $ 102,495 $ 256,870 $ 74,754
========= ========= =========
Cash paid during the period for:
Interest $ 160 $ 116 $ 129
Income taxes 218 135 210
The accompanying footnotes are an integral part of the consolidated financial
statements.
H-52
FUELCELL ENERGY, INC. - Form 10-K
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
FuelCell Energy, Inc. is engaged in the development and
commercialization of carbonate fuel cell technology for stationary
power generation. We manufacture carbonate fuel cells, generally on a
contract basis. We are currently in the process of commercializing our
Direct FuelCell technology and expect to incur losses as we expand our
product development, commercialization program and manufacturing
operations.
Our revenue is primarily generated from agencies of the U.S. government
and customers located throughout the United States, Europe and Asia. We
generally require a down payment with the acceptance of a purchase
order with a customer.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements as of and for the years ended
October 31, 2002 and 2001 include only our accounts. Prior to October
31, 2000, the accounts of our former subsidiary, Xiamen-ERC High
Technology Joint Venture, Inc. (the "Joint Venture"), a joint venture
formed between the City of Xiamen, Peoples Republic of China, and us,
were included. In October of 2000, we transferred 42.17% of our 66.67%
ownership to Evercel, Inc. Our remaining 24.5% ownership in the Xiamen
joint venture has been accounted for under the equity method since that
transfer.
Certain reclassifications have been made to our prior year financial
statements to conform to the 2002 presentation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist primarily of investments in money market funds
and United States Treasury securities with original maturities
averaging three months or less at date of acquisition. We place our
temporary cash investments with high credit quality financial
institutions.
INVESTMENTS
Investments consist of United States Treasury securities with original
maturities of greater than three months at the date of acquisition. The
notes are classified as held to maturity since we have the ability and
intention to hold them until maturity. The notes are being carried at
amortized cost, which is par value, plus or minus unamortized premium
or discount. Such notes are classified as current assets when remaining
maturities are one year or less, and as non-current assets when
remaining maturities are greater than one year.
INVENTORIES
Inventories consist principally of raw materials and work-in-process
and are stated at the lower of cost or
H-53
FUELCELL ENERGY, INC. - Form 10-K
market.
Raw materials consist mainly of various nickel powders and steels, and
various other components used in producing cell stacks.
Work-in-process inventory is comprised of material, labor, and overhead
costs incurred by us to build fuel cell stacks, which are subcomponents
of power generation systems, which have not yet been dedicated to a
particular research and development contract, field trial, or
commercial customer, (collectively the "end users"), and which are
estimated to be fully recovered from the end users. In instances where
costs incurred exceed anticipated recovery, those excess costs are
charged to cost of product sales and revenues as incurred.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation provided on the straight-line method over the estimated
useful lives of the respective assets. Leasehold improvements are
amortized on the straight-line method over the shorter of the estimated
useful lives of the assets or the term of the lease.
When property is sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations for the period.
INTELLECTUAL PROPERTY
Intellectual property, including internally generated patents and
know-how, is carried at no value.
IMPAIRMENT OF LONG LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. If events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable,
we compare the carrying amount of the assets to future undiscounted net
cash flows, excluding interest costs, expected to be generated by the
assets and their ultimate disposition. If the sum of the undiscounted
cash flows is less than the carrying value, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less
costs to sell.
REVENUE/LICENSE FEE REVENUE RECOGNITION
Revenues and fees on long-term contracts are recognized on a method
similar to the percentage-of-completion method.
Percentage-of-completion is measured by costs incurred and accrued to
date as compared with the estimated total costs for each contract or
field trial. Costs are considered research and development in nature as
the benefit to be obtained may represent the design, development,
manufacture, conditioning and testing of our fuel cell stacks. In many
cases, we are reimbursed only a portion of the costs incurred or to be
incurred on the contract. As we commercialize our fuel cell technology,
costs will relate entirely to the delivery of fuel cell products to
customers. At the point that our fuel cells are commercialized,
estimated costs to complete an individual contract in excess of revenue
will be accrued immediately.
Contracts typically extend over a period of one or more years. In
accordance with industry practice, accounts receivable include amounts
relating to contracts and programs having production cycles longer than
one year and a portion thereof will not be realized within one year. We
recognized approximately $7,267, $3,427, and $469, of long-term
contract revenues from customers who are also corporate shareholders
during fiscal years ended October 31, 2002, 2001 and 2000,
respectively.
License fee income arises from an agreement with MTU-Friedrichshafen
GmbH ("MTU"), a division of DaimlerChrysler, our European partner, in
which we granted MTU an exclusive license to use our Direct FuelCell
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 others and us, in each case for a royalty. Amounts received
are deferred and recognized ratably over the term of the agreement. We
recognized approximately $300, $300, and $292 of license fee income
during each of the fiscal years ended October 31, 2002, 2001 and 2000.
We have also agreed to sell our Direct FuelCell components and stacks
to MTU at cost, plus a modest fee.
H-54
FUELCELL ENERGY, INC. - Form 10-K
Revenues recognized for such sales totaled $4,183, $2,179, and $469 for
the fiscal years ended October 31, 2002, 2001, and 2000, respectively.
This agreement continues through December 2004.
Revenues from the U.S. Government and its agencies directly and through
primary contractors were $33,575, $20,837, and $17,961 for the years
ended October 31, 2002, 2001 and 2000, respectively.
WARRANT VALUE RECOGNITION
Warrants have been issued as sales incentives to certain of our
business partners. As we recognize the associated revenue for orders
placed in accordance with these sales agreements, a proportional amount
of the fair value of the warrants will be recorded against the revenue.
RESEARCH AND DEVELOPMENT
Our cost of research and development contracts reflects costs incurred
under specific customer-sponsored research and development contracts.
These costs consist of both manufacturing and engineering labor,
including applicable overhead expenses, materials to build prototype
units, materials for testing, and other costs associated with our
research and development contracts.
Our research and development expenses reflect costs incurred for
internal research and development projects conducted without specific
customer-sponsored contracts. These costs consist primarily of labor,
overhead, materials to build prototype units, materials for testing,
consulting fees and other costs associated with our internal research
and development expenses.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
A valuation allowance is recorded against deferred tax assets if it is
unlikely that some or all of the deferred tax assets will be realized.
STOCK OPTION PLAN
Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," encourages entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. We
apply the recognition provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123, and therefore record
no compensation expense in our financial statements.
In accordance with APB No. 25, compensation expense is recorded over
the respective service period to the extent that the market price of
the underlying stock on the measurement date exceeds the exercise
price.
EARNINGS PER SHARE (EPS)
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding during the period. The computation of diluted EPS is
similar to the computation of basic EPS except that it gives effect to
all potentially dilutive instruments that were outstanding during the
period. In 2002, 2001 and 2000, we computed diluted EPS without
consideration to potentially dilutive instruments due to the fact that
the losses incurred by us made them antidilutive. All per share data
and the number of shares of common stock in this report have been
retroactively adjusted to reflect the three-for-two stock dividend,
which became effective November 16, 1999, the two-for-one stock
dividend, which became effective September 13, 2000, and the
two-for-one stock dividend, which became effective
H-55
FUELCELL ENERGY, INC. - Form 10-K
June 19, 2001.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 141 revises the guidance for
business combinations and eliminates the pooling method. SFAS No. 142
eliminates the amortization requirement for goodwill and certain other
intangible assets and requires that such assets be reviewed
periodically for impairment. We adopted SFAS No. 141 upon its issuance
with no impact on our financial condition or results of operations. We
are required to adopt SFAS No. 142 effective November 1, 2002 and this
adoption is not anticipated to have a significant impact on our
financial condition, results from operations or cash flows upon
adoption.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, and
development and (or) normal use of the asset. We are required to adopt
the provisions of SFAS No. 143 effective November 1, 2002. To
accomplish this, we must identify all legal obligations for asset
retirements, if any, and determine the fair value of these obligations
on the date of adoption. The adoption of SFAS No. 143 is not
anticipated to have a significant impact on our financial condition,
results from operations or cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement also extends the reporting
requirements to report separately, as discontinued operations,
components of an entity that have either been disposed of or are
classified as held-for-sale. We are required to adopt the provisions of
SFAS No. 144 effective November 1, 2002. The adoption of SFAS No. 144
is not anticipated to have a significant impact on our financial
condition or results from operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections," Under SFAS No. 145, among other things, gains
and losses related to the extinguishment of debt should no longer be
segregated on the income statement as extraordinary items. Instead,
such gains and losses should be included as a component of income from
continuing operations. The provisions of SFAS No. 145 are effective for
us on November 1, 2002. The adoption of SFAS No. 145 is not anticipated
to have a significant impact on our financial position, results of
operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," was issued. This
statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for the fair
value of the costs associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of SFAS No.
146 are effective for exit or disposal activities initiated after
December 31, 2002 and thus will become effective for us as of January
1, 2003. The adoption of SFAS No. 146 is currently not expected to have
a material impact on our financial position, results of operations or
cash flows upon adoption.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." Interpretation No. 45
requires the guarantor to recognize a liability for the non-contingent
component of a guarantee; that is, the obligation to stand ready to
perform in the event that specified triggering events or conditions
occur. The initial measurement of this liability is the fair value of
the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required
under the guarantee or if the
H-56
FUELCELL ENERGY, INC. - Form 10-K
guarantee was issued with a premium payment or as part of a transaction
with multiple elements. Interpretation No. 45 also requires additional
disclosures related to guarantees. We are required to adopt the
disclosure provisions of the Interpretation beginning in the first
quarter of fiscal 2003. Additionally, the recognition and measurement
provisions of Interpretation No. 45 are effective for all guarantees
entered into or modified after December 31, 2002. We are in the process
of evaluating the effect of this Interpretation on its financial
statements and disclosures.
In December 2001, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 01-6,
"Accounting by Certain Entities (Including Entities with Trade
Receivables) That Lend to or Finance the Activities of Others". The SOP
applies to any entity that lends to or finances the activities of
others, and specifies accounting and disclosure requirements for
entities that extend trade credit to customers and also provides
specific guidance for other types of transactions specific to certain
financial institutions. The SOP is effective for the Company beginning
November 1, 2002 and we do not believe the recognition and measurement
provisions within this SOP will result in a change in practice for its
trade receivables or any other activities of the Company. The SOP also
provides certain presentation and disclosure changes for entities with
trade receivables as part of the objective of requiring consistent
accounting and reporting for like transactions, which will be
incorporated into the Company's disclosures upon adoption.
(2) DEPRECIATION
Depreciation is calculated using the straight-line method. Buildings
and improvements are depreciated over periods from 10 to 30 years,
machinery and equipment from 3 to 8 years and furniture and fixtures
from 6 to 10 years. Depreciation expense was $3,131, $1,693 and $1,473
at October 31, 2002, 2001 and 2000, respectively.
(3) INVESTMENTS
Investments consist of United States Treasury Securities.
SHORT-TERM INVESTMENTS:
These securities have maturity dates ranging from November 30, 2002 to
August 31, 2003, and estimated yields ranging from 3.567% to 5.625%. As
of October 31, 2002, the aggregate fair value of these securities was
$103,811, the gross unrealized holding gains were $310, and the gross
unrealized holding losses were zero. As of October 31 2001, the
aggregate fair value of these securities was $17,918, the gross
unrealized holding gains were $43, and the gross unrealized holding
losses were $15.
LONG-TERM INVESTMENTS:
These securities have maturity dates ranging from December 31, 2003 to
April 30, 2004, and estimated yields ranging from 3.000% to 3.375%. As
of October 31, 2002, the aggregate fair value of these securities was
$14,670, the gross unrealized holding gains were $86 and the gross
unrealized holding losses were $3. As of October 31 2001, the aggregate
fair value of these securities was $16,010, the gross unrealized
holding gains were $237, and the gross unrealized holding losses were
zero.
(4) INVENTORIES
The components of inventory at October 31, 2002 and October 31, 2001
consisted of the following:
2002 2001
------- -------
Raw materials $10,214 $ 3,519
Work-in-process 3,767 2,815
------- -------
Total $13,981 $ 6,334
======= =======
H-57
FUELCELL ENERGY, INC. - Form 10-K
(5) ACCOUNTS RECEIVABLE
Accounts receivable at October 31, 2002 and 2001 consisted of the
following:
2002 2001
------- -------
U.S. Government:
Amount billed $ 6,151 $ 2,601
Unbilled recoverable costs 2,427 -
Retainage 679 239
------- -------
9,257 2,840
------- -------
Commercial Customers:
Amount billed 39 2,505
Unbilled recoverable costs 1,141 1,764
Retainage 1 1
------- -------
1,181 4,270
------- -------
$10,438 $ 7,110
======= =======
Retainage represents amounts billed but not paid by customers pursuant
to retainage provisions in the contracts that will be due upon
completion of the contracts and acceptance by the customer and that may
be collected over more than one year.
Unbilled recoverable costs represent amounts of revenue recognized on
costs incurred on contracts in progress that will be billed within the
next 30 days.
(6) OTHER CURRENT ASSETS, NET
The components of other current assets at October 31, 2002 and October
31, 2001 consisted of the following:
2002 2001
------- -------
Advance payments to vendors $ 2,902 $ 362
Prepaid expenses and other 1,422 634
------- -------
Total $ 4,324 $ 996
======= =======
H-58
FUELCELL ENERGY, INC. - Form 10-K
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 2002 and 2001 consisted of
the following:
ESTIMATED
2002 2001 USEFUL LIFE
--------- -------- -------------
Land $ 524 $ 524 --
Building and improvements 4,842 4,811 10-30 years
Machinery and equipment 37,785 16,717 3-8 years
Furniture and fixtures 1,750 1,304 6-10 years
Construction in progress 8,110 15,300
--------- --------
$ 53,011 $ 38,656
Less, accumulated depreciation
and amortization (14,301) (11,468)
--------- --------
Total $ 38,710 $ 27,188
========= ========
(8) OTHER ASSETS
Other assets at October 31, 2002 and 2001 consisted of the following:
2002 2001
------ ------
Power Plant License $1,087 $1,370
Other 680 198
------ ------
Total $1,767 $1,568
====== ======
The Power Plant License is being amortized over 10 years on a
straight-line basis. Accumulated amortization was $1,748 and $1,465 at
October 31, 2002 and 2001, respectively.
(9) ACCRUED LIABILITIES
Accrued liabilities at October 31, 2002 and 2001 consisted of the
following:
2002 2001
------ ------
Accrued payroll and employee benefits $3,250 $2,026
Accrued contract and operating costs 4,263 4,080
Accrued taxes and other 391 657
------ ------
Total $7,904 $6,763
====== ======
(10) LONG-TERM DEBT
Long-term debt at October 31, 2002 and 2001 consisted of the following:
2002 2001
------- -------
Note payable $ 1,981 $ 1,427
------- -------
Less - current portion (285) (175)
------- -------
Long-term debt, less current portion $ 1,696 $ 1,252
======= =======
H-59
FUELCELL ENERGY, INC. - Form 10-K
On June 29, 2000, we entered into a loan agreement, secured by
machinery and equipment, and have borrowed an aggregate of $2,214. The
loan is payable over seven years, with payments of interest only for
the first six months and then repaid in monthly installments over the
remaining six and one-half years with interest computed annually based
on the ten-year U.S. Treasury note plus 2.5%. Our current interest
rates at October 31, 2002 and October 31, 2001 were 7.6% and 7.9%,
respectively. Our weighted-average interest rates at October 31, 2002
and October 31, 2001 were 7.8% and 7.9%, respectively.
(11) COMMITMENTS AND CONTINGENCIES
We lease certain computer and office equipment, the Torrington, CT
manufacturing facility, additional manufacturing space in Danbury, CT,
and office space in Pasadena, CA, under operating leases expiring on
various dates through 2005. Rent expense was $984, $807, and $611 for
the fiscal years ended October 31, 2002, 2001 and 2000, respectively.
Aggregate minimum annual payments under the lease agreements for the
five years subsequent to October 31, 2002 are: 2003, $791; 2004, $652;
2005, $455; 2006, $502 and 2007, $512.
We have royalty agreements with MTU, Santa Clara, Electric Power
Research Institute (EPRI) and LADWP pursuant to which we have agreed to
pay royalties based upon certain milestones or events relating to the
sale of carbonate fuel cells. Through October 31, 2002, we have not
paid any royalties. In connection with certain contracts and grants
from the United States Department of Energy (DOE), we have agreed to
pay DOE 10% of the annual license income received from MTU, up to $500
in total. Through 2002, we have paid to the DOE a total of $340.
(12) SHAREHOLDERS' EQUITY
At October 31, 2002, 6,179,172 shares of common stock have been
reserved for issuance pursuant to our stock option plans and our
Section 423 Stock Purchase Plan.
We have issued warrants enabling Caterpillar to purchase up to
1,500,000 shares of our common stock, with exercise prices ranging from
$17 to $23 per share. The warrants will be earned on a graduated scale
contingent upon the first 45 MW's of order commitments to purchase our
products. For accounting purposes, the fair value of these warrants
will be netted against the revenues attributable to the purchase of our
products by Caterpillar.
We have issued warrants enabling Marubeni to purchase up to 1,140,000
shares of our common stock, with exercise prices ranging from
approximately $37 to $48 per share. The warrants will only be
exercisable if Marubeni purchases at least 45 MW of our products by
September 2003. For accounting purposes, the fair value of these
warrants will be netted against the revenues attributable to the
purchase of our products by Marubeni.
In June 2001, Marubeni invested $10 million in FuelCell Energy through
the purchase of 268,114 shares of our common stock. In September 2000,
PPL EnergyPlus LLC (PPL), an affiliate of PPL Corporation, purchased
425,216 shares of our common stock for $10 million and others purchased
160,580 for $5 million.
(13) STOCK OPTION PLAN
The Board has adopted 1988 and 1998 Stock Option Plans (collectively
the Plans). Under the terms of the Plans, options to purchase up to
8,706,000 shares of common stock may be granted to our officers, key
H-60
FUELCELL ENERGY, INC. - Form 10-K
employees and directors. Pursuant to the Plans, the Board is authorized
to grant incentive stock options or nonqualified options and stock
appreciation rights to our officers and key employees and may grant
nonqualified options and stock appreciation rights to our directors.
Stock options and stock appreciation rights have restrictions as to
transferability. The option exercise price shall be fixed by the Board
but in the case of incentive stock options, shall not be granted at an
exercise price less than 100% of the fair market value of the shares
subject to the option on the date the option is granted. Stock
appreciation rights may be granted in conjunction with options granted
under the Plans. Stock options that have been granted are exercisable
commencing one year after grant at the rate of 25% of such shares in
each succeeding year. There were no stock appreciation rights
outstanding at October 31, 2002 and 2001. Costs for fixed awards with
pro-rata vesting are recognized on a straight-line basis.
The per share weighted-average fair value of stock options granted in
2002, 2001 and 2000 was $10.24, $17.75 and $5.91, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions:
RISK FREE
DIVIDEND INTEREST RATE VOLATILITY
YEAR RATE RANGE EXPECTED LIFE FACTOR
---- -------- ------------- -------------- ------
2002 0% 3.22 - 5.28% 7.5 years .8760
2001 0% 3.85 - 5.76% 7.5 years .7554
2000 0% 5.79 - 6.80% 7.7 years .6884
The following table summarizes the Plan's activity for the years ended
October 31, 2002, 2001 and 2000:
WEIGHTED
NUMBER OF AVERAGE
SHARES OPTION PRICE
--------- ------------
Outstanding at October 31, 1999 3,006,012 $ 1.57
Granted 1,076,006 $ 16.82
Exercised (375,084) $ 1.05
Cancelled (12,000) $ 6.60
---------
Outstanding at October 31, 2000 3,694,934 $ 6.04
Granted 869,250 $ 23.83
Exercised (354,382) $ 3.14
Cancelled (53,000) $ 37.23
---------
Outstanding at October 31, 2001 4,156,802 $ 9.62
Granted 1,283,250 $ 12.70
Exercised (213,716) $ 1.55
Cancelled (92,750) $ 17.94
---------
Outstanding at October 31, 2002 5,133,586 $ 10.57
=========
H-61
FUELCELL ENERGY, INC. - Form 10-K
The following table summarizes information about stock options
outstanding and exercisable at October 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBERS CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
$ 1.00 - 10.00 2,563,718 5.6 $ 2.62 2,094,718 $ 1.92
10.01 - 20.00 1,846,618 8.6 15.10 454,930 16.68
20.01 - 30.00 659,250 8.3 26.09 174,000 25.98
30.01 - 40.00 60,000 7.9 38.00 30,000 38.00
40.01 - 46.00 4,000 8.0 45.97 2,000 45.97
--------------- ---------- --- -------- --------- --------
$ 1.00 - 46.00 5,133,586 7.1 $ 10.57 2,755,648 $ 6.30
=============== ========== === ======== ========= ========
EMPLOYEE STOCK PURCHASE PLAN
Our shareholders adopted a Section 423 Stock Purchase Plan (the "ESPP")
on April 30, 1993, and the plan was last amended on October 6, 1999.
The total shares allocated to the Plan are 900,000. Under the ESPP, our
eligible employees have the right to subscribe to purchase shares of
common stock at the lesser of 85% of the mean between the high and low
market prices on the first day of the purchase period or the last day
of the purchase period. An employee may elect to have up to 25% of
annual base pay withheld in equal installments throughout the
designated payroll-deduction period for the purchase of shares. The
value of the employee's subscription may not exceed $25,000 or 1,800
shares in any one calendar year. An employee may not participate in the
ESPP if such employee, immediately after the option is granted, owns
stock possessing 5% or more of the total combined voting power or value
of our capital stock. As of October 31, 2002, there were 499,464 shares
of Common Stock reserved for issuance under the ESPP. These shares may
be adjusted for any future stock splits. The ESPP will terminate when
all shares reserved have been subscribed for and purchased, unless
terminated earlier or extended by the Board of Directors. The
Compensation Committee of the Board of Directors administers the ESPP.
As of October 31, 2002, the number of employees enrolled and
participating in the ESPP was 63 and the total number of shares
purchased under the ESPP was 400,536. For purposes of the pro-forma
calculation, compensation cost is recognized for the fair value of the
employee's purchase rights, which was estimated using the Black Scholes
option pricing model with the following assumptions for subscription
periods beginning in fiscal 2002, 2001 and 2000:
DIVIDEND RISK FREE EXPECTED VOLATILITY
YEAR RATE INTEREST RATE LIFE FACTOR
---- -------- ------------- -------- ----------
2002 0% 2.93% 6 months 89.2%
2001 0% 6.29% 6 months 69.8%
2000 0% 4.77% 6 months 62.5%
The weighted average fair value of those purchase rights granted in
2002, 2001 and 2000 was $8.41, $9.16 and $.79, respectively.
H-62
FUELCELL ENERGY, INC. - Form 10-K
Plan activity for the years ended October 31, 2002, 2001 and 2000, was
as follows:
NUMBER OF
SHARES
---------
Balance at October 31, 1999 550,098
Issued @ $7.28 (17,896)
-------
Balance at October 31, 2000 532,202
Issued @ $8.57 (12,904)
Issued @ $29.28 (3,510)
-------
Balance at October 31, 2001 515,788
Issued @ $13.29 (6,338)
Issued @ $13.47 (9,986)
-------
Balance at October 31, 2002 499,464
=======
No compensation cost has been recognized for stock options and employee
stock purchase rights in the consolidated statements of loss. Had we
determined compensation cost based on the fair value at the grant date
for the stock options and employee stock purchase rights in the ESPP,
our net loss and loss per share would have been the pro forma amounts
indicated below:
2002 2001 2000
------------ ------- ------
Net loss: As reported $ (48,840) (15,438) (4,459)
Pro forma $ (51,518) (18,121) (5,564)
As reported - Basic &
Loss per share: Diluted $ (1.25) (0.45) (0.16)
Pro forma - Basic &
Diluted $ (1.32) (0.53) (0.20)
(14) EMPLOYEE BENEFITS
The Capital Accumulation Plan for employees of FuelCell Energy, Inc.
was established by us on January 19, 1987 and was last amended on June
15, 1999. A three-member pension committee administers the Plan. The
plan is a 401(k) plan covering our full time employees who have
completed one year of service. We contribute a cash amount equal to 5%
of each participant's W-2 compensation to the plan on a monthly basis.
Participants are required to contribute a minimum of 3% in order to be
eligible to participate and receive a company match. An employee may
then choose to make voluntary contributions up to an additional 12% of
W-2 compensation out of pretax earnings. Effective June 1, 1997,
participants may make voluntary contributions up to an additional 6% of
W-2 compensation out of after-tax earnings. Under the plan, there is no
option available to the employee to receive or purchase our common
stock. We charged $568, $402, and $328 to expense during the years
ended October 31, 2002, 2001 and 2000, respectively.
The FuelCell Energy, Inc. Money Purchase Plan, a defined contribution
plan was established by us on May 10, 1976 and was last amended on June
1, 1997. The Plan covers our full-time employees who have completed one
year of service. We contribute a cash amount equal to 4% of each
participant's W-2 compensation to the plan on a monthly basis. There is
no option available to receive or purchase our common stock. We charged
$478, $340, and $264 to expense during the years ended October 31,
2002, 2001 and 2000, respectively.
Effective February 1, 2003, the Money Purchase Plan will cease and all
funds will be merged into the Capital Accumulation Plan. The balance in
each participant's Money Purchase Plan will be transferred to the
Capital
H-63
FUELCELL ENERGY, INC. - Form 10-K
Accumulation Plan investment fund as currently elected. Under the new
consolidated plan, the company match will increase to a maximum of 6%
and the vesting period will be adjusted to five years.
(15) INCOME TAXES
The components of Federal income tax expense (benefit) were as follows
for the years ended October 31, 2002, 2001 and 2000:
2002 2001 2000
------- --------- ----------
Current:
Federal $ (284) $ - $ -
Foreign - - -
------- --------- ----------
(284) - -
------- --------- ----------
Deferred:
Federal 291 - -
Foreign - - -
------- --------- ----------
291 - -
------- --------- ----------
Total income tax expense $ 7 $ - $ -
======= ========= ==========
State income tax expense (income), which is included in administrative
and selling expenses, was $(130), $210, and $180, for the years ended
October 31, 2002, 2001 and 2000, respectively.
The reconciliation of the federal statutory income tax rate to our
effective income tax rate for the years ended October 31, 2002, 2001
and 2000 was as follows:
2002 2001 2000
------- ------- ------
Statutory Federal income tax rate (34.0%) (34.0%) (34.0%)
Nondeductible expenditures - - -
Other, net - - -
Valuation Allowance 34.0% 34.0% 34.0%
----- ----- -----
Effective income tax rate 0.0% 0.0% 0.0%
----- ----- -----
H-64
FUELCELL ENERGY, INC. - Form 10-K
Our federal and state deferred tax assets and liabilities consisted of
the following at October 31, 2002, 2001, and 2000:
2002 2001 2000
-------- -------- --------
Deferred tax assets:
Compensation and benefit accruals $ 348 $ 767 $ 495
Bad debt and other reserves 361 300 257
Capital loss and tax credit
carryforwards 140 319 321
Net Operating Loss 26,328 8,842 1,666
Inventory reserve 3,069 28 -
Other - 78 64
-------- -------- --------
Gross deferred tax assets 30,246 10,334 2,803
Valuation allowance (28,811) (9,452) (2,244)
-------- -------- --------
Deferred tax assets after
valuation allowance 1,435 882 559
-------- -------- --------
Deferred tax liability:
Accumulated depreciation (1,435) (591) (268)
-------- -------- --------
Gross deferred tax liability (1,435) (591) (268)
Net deferred tax assets (State and Federal) $ - $ 291 $ 291
======== ======== ========
The valuation allowance increased approximately $19,400 for the year
ended October 31, 2002. This increase relates primarily to the current
year net operating loss. Approximately $1,500 of the valuation
allowance will reduce additional paid in capital upon subsequent
recognition of any related tax benefits.
We continually evaluate our deferred tax asset as to whether it is
"more likely than not" that the deferred tax assets will be realized.
In assessing the realizability of its deferred tax assets, management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies. Based on the
projections for future taxable income over the periods in which the
deferred tax assets are realizable, management believes that
significant uncertainty exists surrounding the recoverability of the
deferred tax assets. As a result, we recorded a full valuation
allowance against our net deferred tax assets.
At October 31, 2002, we had available, for federal and state income tax
purposes, net operating loss carry-forwards of approximately $68,000
and $64,000, respectively, expiring in varying amounts from 2020
through 2022.
(16) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
data:
2002 2001 2000
---------- ---------- ----------
Weighted average basic
Common shares 39,135,256 34,359,320 28,297,594
Effect of dilutive securities - - -
---------- ---------- ----------
Weighted average basic
Common shares adjusted for diluted
calculations 39,135,256 34,359,320 28,297,594
========== ========== ==========
The computation of diluted loss per share for fiscal years 2002, 2001
and 2000 follows the basic calculation since common stock equivalents
were antidilutive. The weighted average shares of dilutive securities
that would have been used to calculate diluted EPS had their effect not
been antidilutive would have been 4,965,118, 3,982,456 and 3,497,126,
in 2002, 2001 and 2000 respectively.
H-65
FUELCELL ENERGY, INC. - Form 10-K
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Net income Earnings per share
Revenues (loss) Basic and diluted
-------- ---------- ------------------
YEAR ENDED 10/31/2002
First quarter $ 7,001 $ (6,027) $ (0.15)
Second quarter 8,565 (8,877) (0.23)
Third quarter 11,962 (13,190) (0.34)
Fourth quarter 13,703 (20,746) (0.53)
Net income Earnings per share
Revenues (loss) Basic and diluted
-------- ---------- ------------------
YEAR ENDED 10/31/2001
First quarter $ 5,333 $ (2,792) $ (0.09)
Second quarter 6,493 (5,073) (0.16)
Third quarter 7,622 (2,765) (0.08)
Fourth quarter 6,731 (4,808) (0.12)
H-66
FUELCELL ENERGY, INC. - Form 10-K
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
H-67
FUELCELL ENERGY, INC. - Form 10-K
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
--------- -------- ----
/s/ Jerry D. Leitman Chief Executive Officer, President, Chairman of January 24, 2003
--------------------- the Board (Principal Executive Officer)
Jerry D. Leitman
/s/ Joseph G. Mahler Chief Financial Officer, Senior Vice President, January 24, 2003
--------------------- Corporate Secretary, Treasurer (Principal
Joseph G. Mahler Accounting and Financial Officer)
/s/ Warren D. Bagatelle Director January 24, 2003
-----------------------
Warren D. Bagatelle
/s/ Christopher R. Bentley Executive Vice President, Chief Operating Officer January 24, 2003
--------------------------- and Director
Christopher R. Bentley
/s/ Michael Bode Director January 24, 2003
--------------------
Michael Bode
/s/ James D. Gerson Director January 24, 2003
--------------------
James D. Gerson
/s/ Thomas L. Kempner Director January 24, 2003
----------------------
Thomas L. Kempner
/s/ William A. Lawson Director January 24, 2003
----------------------
William A. Lawson
/s/Hansraj C. Maru Executive Vice President, Chief Technology January 24, 2003
--------------------- Officer and Director
Hansraj C. Maru
/s/ Charles Murphy Director January 24, 2003
--------------------
Charles Murphy
/s/ John A. Rolls Director January 24, 2003
-------------------
John A. Rolls
/s/ Thomas R. Casten Director January 24, 2003
---------------------
Thomas R. Casten
H-68
FUELCELL ENERGY, INC. - Form 10-K
CERTIFICATIONS
I, Jerry D. Leitman, certify that:
1. I have reviewed this annual report on Form 10-K of FuelCell
Energy Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditor any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 24, 2003
/s/ Jerry D. Leitman
-------------------------------------
Jerry D. Leitman
President and Chief Executive Officer
H-69
FUELCELL ENERGY, INC. - Form 10-K
I, Joseph G. Mahler, certify that:
1. I have reviewed this annual report on Form 10-K of FuelCell
Energy, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditor any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 24, 2003
/s/ Joseph G. Mahler
-----------------------
Joseph G. Mahler
Chief Financial Officer
H-70
FUELCELL ENERGY, INC. - Form 10Q
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
--------- ----------
Commission file number 1-14204
FUELCELL ENERGY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0853042
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
3 Great Pasture Road, Danbury, Connecticut 06813
------------------------------------------- -----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (203) 825-6000
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's Common Stock, par value
$.0001, as of March 13, 2003 was 39,329,251.
================================================================================
H-71
FUELCELL ENERGY, INC. - Form 10Q
FUELCELL ENERGY, INC
FORM 10-Q
INDEX
PAGE
-----------
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Financial Statements:
Condensed Balance Sheets as of January 31, 2003 and October 31, 2002 (audited) H-73
Condensed Statements of Operations for the three months ended January 31, 2003 and January 31,
2002 H-74
Condensed Statements of Cash Flows for the three months ended January 31, 2003 and January 31,
2002 H-75
Notes to Unaudited Condensed Financial Statements H-76
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations H-79
Item 3. Quantitative and Qualitative Disclosures About Market Risk H-83
Item 4. Controls and Procedures H-83
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders H-84
Item 6. Exhibits and Reports on Form 8-K H-84
Signatures H-85
Certifications H-86 - H-87
H-72
FUELCELL ENERGY, INC. - Form 10Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FUELCELL ENERGY, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JANUARY 31, OCTOBER 31,
2003 2002
(UNAUDITED)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 83,060 102,495
Investments: U.S. treasury securities 97,475 103,501
Accounts receivable, net 9,187 10,438
Inventories, net 17,754 13,981
Other current assets 2,644 4,324
----------- -------
Total current assets 210,120 234,739
Property, plant and equipment, net 39,501 38,710
Investments: U.S. treasury securities 19,945 14,587
Other assets 1,731 1,767
----------- -------
Total assets $ 271,297 289,803
=========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 285 285
Accounts payable 5,589 4,712
Accrued liabilities 6,508 7,904
Deferred license fee income 262 38
Customer advances 1,169 3,466
----------- -------
Total current liabilities 13,813 16,405
Long-term debt 1,626 1,696
----------- -------
Total liabilities 15,439 18,101
=========== =======
Shareholders' equity:
Common stock ($.0001 par value); 150,000,000 shares authorized at January
31, 2003 and October 31, 2002: 39,318,251 and 39,228,828 shares issued
and outstanding at January 31, 2003 and October 31, 2002, respectively 4 4
Additional paid-in-capital 339,944 339,762
Accumulated deficit (84,090) (68,064)
----------- -------
Total shareholders' equity 255,858 271,702
----------- -------
Total liabilities and shareholders' equity $ 271,297 289,803
=========== =======
See notes to condensed financial statements
H-73
FUELCELL ENERGY, INC. - Form 10Q
FUELCELL ENERGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JANUARY 31,
2003 2002
-------------- ----------
REVENUES:
Research and development contracts $ 5,459 6,271
Product sales and revenues 4,834 730
-------------- ----------
Total revenues 10,293 7,001
COSTS AND EXPENSES:
Cost of research and development contracts 7,110 6,754
Cost of product sales and revenues 14,948 3,939
Administrative and selling expenses 3,130 2,597
Research and development expenses 2,081 1,304
-------------- ----------
Total costs and expenses 27,269 14,594
-------------- ----------
Loss from operations (16,976) (7,593)
License fee income, net 68 68
Interest expense (37) (33)
Interest and other income, net 919 1,531
-------------- ----------
Loss before provision for income taxes (16,026) (6,027)
Provision for income taxes -- --
-------------- ----------
Net loss $ (16,026) (6,027)
============== ==========
EARNINGS PER SHARE:
Basic and diluted loss per share $ (0.41) (0.15)
============== ==========
Basic and diluted shares outstanding 39,306,991 39,027,697
============== ==========
See notes to condensed financial statements
H-74
FUELCELL ENERGY, INC. - Form 10Q
FUELCELL ENERGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JANUARY 31,
2003 2002
----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (16,026) (6,027)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,326 686
Amortization of treasury note premium/discount 121 326
Changes in operating assets and liabilities:
Accounts receivable 1,251 (143)
Inventories (3,773) (4,948)
Other assets 1,643 (2,814)
Accounts payable 877 (1,948)
Accrued liabilities (1,396) (1,857)
Customer advances (2,297) 2,420
Deferred license fee income and other 225 224
------------ --------
Net cash used in operating activities (18,049) (14,081)
------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,045) (3,236)
Treasury notes matured 28,924 3,500
Treasury notes purchased (28,377) (20,191)
------------ --------
Net cash used in investing activities (1,498) (19,927)
------------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings -- 787
Repayment of debt (70) (35)
Common stock issued for stock plans 182 211
------------ --------
Net cash provided by financing activities 112 963
------------ --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (19,435) (33,045)
------------ --------
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 102,495 256,870
------------ --------
CASH AND CASH EQUIVALENTS -- END OF PERIOD $ 83,060 223,825
============ ========
Supplemental disclosure of cash paid during the period for:
Interest $ 37 33
See notes to condensed financial statements
H-75
FUELCELL ENERGY, INC. - Form 10Q
FUELCELL ENERGY, INC.
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1: NATURE OF THE BUSINESS
FuelCell Energy, Inc. is engaged in the development and manufacture of carbonate
fuel cell power plants for distributed power generation. We are currently in the
process of developing standard products that incorporate our Direct FuelCell(R)
(DFC(R)) technology. We expect to incur losses as we expand our product
development, increase our production volume and develop our distribution
network.
NOTE 2: BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The financial statements as of October 31, 2002 have been derived from
our audited financial statements. Certain information and footnote disclosures
normally included in our annual consolidated financial statements have been
condensed or omitted. The interim condensed financial statements, in the opinion
of management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly our financial position as of January
31, 2003, the results of operations for the three months ended January 31, 2003
and 2002, and cash flows for the three months ended January 31, 2003 and 2002.
The results of operations for the three months ended January 31, 2003 and 2002
are not necessarily indicative of the results to be expected for the full year.
The reader should supplement the information in this document with prior
disclosures in our 2002 Annual Report on Form 10-K.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations". Statement No. 143 requires recording the fair market
value of an asset retirement obligation as a liability in the period in which a
legal obligation associated with the retirement of tangible long-lived assets is
incurred. The Statement also requires recording the contra asset to the initial
obligation as an increase to the carrying amount of the related long-lived asset
and depreciation of that cost over the life of the asset. The liability is then
increased at the end of each period to reflect the passage of time and changes
in the initial fair value measurement. We adopted the provisions of Statement
No. 143 effective January 1, 2003 and the adoption did not have a significant
effect on our financial statements or disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." Interpretation No. 45 requires the guarantor to
recognize a liability for the contingent and non-contingent component of a
guarantee; which means (a) the guarantor has undertaken an obligation to stand
ready to perform in the event that specified triggering events or conditions
occur and (b) the guarantor has undertaken a contingent obligation to make
future payments if such triggering events or conditions occur. The initial
measurement of this liability is the fair value of the guarantee at inception.
We are required to recognize the liability even if it is not probable that
payments will be required under the guarantee or if the guarantee was issued
with a premium payment or as part of a transaction with multiple elements.
Interpretation No. 45 also requires additional disclosures related to guarantees
that have certain specified characteristics. We were required to adopt, and have
adopted the disclosure provisions of Interpretation No. 45 in our financial
statements as of and for the three months ended January 31, 2003. Additionally,
the recognition and measurement provisions of Interpretation No. 45 are
effective for all guarantees entered into or modified after December 31, 2002.
We have evaluated the effect of the recognition and measurement provisions of
this Interpretation. The adoption of this Interpretation did not have an effect
on our financial statements or disclosures.
H-76
FUELCELL ENERGY, INC. - Form 10Q
NOTE 3: LOSS PER SHARE
Basic and diluted loss per share is calculated based upon the provisions of SFAS
No. 128.
We computed EPS without consideration to potentially dilutive instruments due to
the fact that losses incurred would make them antidilutive. For the three months
ended January 31, 2003 and 2002, the weighted average shares of potentially
dilutive stock options were 5,063,266 and 4,755,978, respectively. For the three
months ended January 31, 2003 and 2002, there were 2,640,000 and 3,633,333
warrants to purchase our common stock, respectively, all of which were
out-of-the money. These warrants, if dilutive, would be excluded from the
calculation of EPS since their vesting is contingent upon certain future
performance requirements that are not yet probable.
NOTE 4: DEPRECIATION
Depreciation is calculated using the straight-line method. Buildings and
improvements are depreciated over periods from 10 to 30 years, machinery and
equipment from 3 to 8 years and furniture and fixtures from 6 to 10 years.
Depreciation expense for the three months ended January 31, 2003 and 2002 was
$1,253 and $615, respectively.
NOTE 5: INVESTMENTS: U.S. TREASURY SECURITIES
Investments, which are accounted for as held to maturity, consist of United
States Treasuries.
SHORT-TERM INVESTMENTS:
These treasuries have maturity dates ranging from March 13, 2003 to January 31,
2004 and estimated yields ranging from 2.75% to 5.25%. As of January 31, 2003,
and October 31, 2002, the aggregate fair value, gross unrealized holding gains
and gross unrealized holding losses were as follows:
JANUARY 31, OCTOBER 31,
2003 2002
Aggregate fair value $ 97,684 $ 103,811
Gross unrealized holding gains 257 310
Gross unrealized holding losses 48 --
LONG-TERM INVESTMENTS:
These notes have maturity dates ranging from February 29, 2004 to November 30,
2004, and estimated yields ranging from 2.000% to 5.875%. As of January 31,
2003, and October 31, 2002, the aggregate fair value, gross unrealized holding
gains and gross unrealized holding losses were as follows:
JANUARY 31, OCTOBER 31,
2003 2002
Aggregate fair value $ 19,986 $ 14,670
Gross unrealized holding gains 67 86
Gross unrealized holding losses 26 3
H-77
FUELCELL ENERGY, INC. - Form 10Q
NOTE 6: INVENTORIES, NET
The components of inventory at January 31, 2003 and October 31, 2002 consisted
of the following:
JANUARY 31, OCTOBER 31,
2003 2002
---------- ----------
Raw materials $11,113 $10,214
Work-in-process, net 6,641 3,767
------- -------
Total $17,754 $13,981
======= =======
NOTE 7: OTHER CURRENT ASSETS, NET
The components of other current assets at January 31, 2003 and October 31, 2002
consisted of the following:
JANUARY 31, OCTOBER 31,
2003 2002
----------- -----------
Advance payments to vendors $1,226 $2,902
Prepaid expenses and other 1,418 1,422
------ ------
Total $2,644 $4,324
====== ======
NOTE 8: ACCRUED LIABILITIES
The components of accrued liabilities at January 31, 2003 and October 31, 2002
consisted of the following:
JANUARY 31, OCTOBER 31,
2003 2002
----------- -----------
Accrued payroll and employee benefits $2,141 $3,250
Accrued contract and operating costs 3,629 4,263
Accrued taxes and other 738 391
------ ------
Total $6,508 $7,904
====== ======
H-78
FUELCELL ENERGY, INC. - Form 10Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Unaudited Condensed Financial Statements and Notes thereto included within this
report, and our audited financial statements and notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended October 31, 2002. In
addition to historical information, this Form 10-Q and the following discussion
contain forward-looking statements, including statements regarding our plans and
expectations regarding the development and commercialization of our fuel cell
technology. Our actual results could differ materially from those projected.
Factors that could cause such a difference include, but are not limited to,
those set forth under the caption "Risk Factors" in our Annual Report on Form
10-K filed for the fiscal year ended October 31, 2002.
OVERVIEW
We are a world leader in the development and manufacture of carbonate fuel cell
power plants for distributed power generation. We have designed and are
developing standard fuel cell power plants that offer significant advantages
compared to existing power generation technology. These advantages include
higher fuel efficiency than existing distributed generation equipment,
significantly lower emissions, quieter operation, lower vibration, flexible
siting and permitting requirements, scalability and potentially lower operating,
maintenance and generation costs. The exhaust heat by-product can be used for
combined cycle application utilizing an unfired gas turbine, and cogeneration
applications such as high-pressure steam, district heating and air conditioning.
From our founding in 1969, we focused on developing fuel cells and specialized
batteries. These efforts resulted in our obtaining various patents and expertise
in these electrochemical technologies. Since 1975, we have concentrated on
developing products in cooperation with United States Department of Energy
("DOE"), the United States Department of Defense ("DOD"), and other sources such
as an affiliate of MTU-Friedrichshafen GmbH ("MTU"), a unit of DaimlerChrysler,
our European partner, to whom we have licensed our fuel cell technology
internationally. In April 2000 and June 2001, we raised net proceeds of
approximately $299,000 from additional public offerings of our common stock.
Since September 2000, we have received an additional $25,000 from other equity
investment partners.
Our carbonate fuel cell, known as the Direct FuelCell, 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 to produce hydrogen. We
believe that this "one-step" 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 proton exchange membrane (PEM) and
phosphoric acid, generally use complex, external fuel processing equipment to
convert the fuel into hydrogen. This external equipment increases capital cost
and reduces electrical efficiency.
Our products are designed to meet the power requirements of a wide range of
customers such as utilities, industrial facilities, hotels, data centers,
wastewater treatment plants, office buildings, hospitals, universities and
shopping centers. Our initial market entry commercial products, the DFC300A,
DFC1500 and DFC3000, will be rated at 250 kW, 1 MW and 2 MW in capacity. We
expect our commercial products to mature to three configurations: 300 kW, 1.5 MW
and 3 MW for distributed applications generally up to 10 MW. We are also
developing new products, based on our existing power
H-79
FUELCELL ENERGY, INC. - Form 10Q
plant design, for applications in the 10 to 50 MW range. We are currently
conducting, and have successfully concluded, field trials of fuel cell power
plants ranging from 250 kW to 2 MW.
We believe that our initial commercial sales will be to "early adopters",
including energy users that may be willing to pay higher prices per kW to obtain
the power that they need. "Early adopters" include users that, due to
environmental or energy efficiency concerns, are unable to, or choose not to,
site traditional combustion-based generation, or energy users that need more
reliable electricity sources than provided by the grid, current diesel back-up
generators, or batteries. We expect that these "early adopters" will include
energy users that are able to take advantage of government subsidies that
provide funding for fuel cell installations. We believe examples of "early
adopters" will be institutions, commercial and industrial customers in pollution
non-attainment zones and customers in grid-constrained regions. "Early adopters"
will also include customers with opportunity fuels such as industrial or
municipal wastewater treatment gas, and co-generation and reliability
applications such as hotels, hospitals, schools, and universities.
Our current focus is to deliver and commission the DCF300A power plants in our
backlog and implement our field follow program to monitor fleet performance;
generate orders for our DFC products through our distribution network by
focusing on our targeted commercial and industrial markets; initiate our
megawatt field trial program for our DFC1500 and DFC3000 power plants; reduce
product cost, focusing on value engineering, performance improvements,
manufacturing cost efficiencies and supplier development; and manage cash
consistent with market demand.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
Our revenues and fees on long-term contracts are recognized on a method similar
to the percentage-of-completion method. Revenues are recognized proportionally
as research and development costs are incurred and compared to the estimated
total research and development costs for each contract or field trial. In many
cases, we are reimbursed only a portion of the costs incurred or to be incurred
on the contract. At the point that our fuel cells are commercial, estimated
costs to complete an individual contract in excess of revenue will be accrued
immediately.
Warrant Value Recognition
Warrants have been issued as sales incentives to certain of our business
partners. As we recognize the associated revenue for orders placed in accordance
with these sales agreements, a proportional amount of the fair value of the
warrants will be recorded against the revenue.
Inventories
As discussed above, we recognize research and development costs for contracts as
incurred. When we incur costs for material, labor and overhead to build fuel
stacks which have not yet been dedicated to a particular contract, we include
them in WIP inventory to the extent we estimate them to be recoverable based on
anticipated use of the fuel stacks and anticipated cost reimbursement on these
anticipated contracts. During the normal course of business, we will dedicate
the fuel stacks in WIP inventory to a contract, at which point in time the
inventory costs are charged to cost of research and development
H-80
FUELCELL ENERGY, INC. - Form 10Q
contracts or cost of product sales and revenues, and when appropriate, revenue
will be recognized on these costs.
As we increase our commercial activities, we anticipate that our assessment of
recoverability of inventory costs will become increasingly dependent upon the
amount we believe we can sell the fuel stacks in the commercial market, and less
on the extent to which costs are reimbursed pursuant to government contracts.
Research and Development
Our cost of research and development contracts reflect costs incurred under
specific customer sponsored research and development contracts. These costs
consist of both manufacturing and engineering labor, including applicable
overhead expenses, materials to build prototype units, materials for testing,
and other costs associated with our customer sponsored research and development
contracts.
Our research and development expenses reflect costs for research and development
projects conducted without specific customer sponsored contracts. These costs
consist primarily of engineering labor, overhead, materials to build prototype
units, materials for testing, consulting fees and other costs associated with
our internal research and development expenses.
RECENT DEVELOPMENTS
In February 2003, we announced that we and Caterpillar Inc. are expected to win
a contract to install one of the nation's first advanced utility-scale fuel cell
power plants designed to feed power from a substation into a local electric
distribution system. The innovative project award is the first by the state of
Ohio, which is investing more than $100 million in a three-year initiative to
expand fuel cell research and development, including increased fuel cell
generating capacity.
The award, which is subject to negotiation and execution of a contract, proposes
the installation of a 250 kW Direct FuelCell power plant manufactured by us and
distributed by Caterpillar. The formal contract is expected to be negotiated and
signed within weeks and installation of the unit is scheduled for the fourth
quarter of this year.
In February 2003, we also announced that we have received notice from the
California Energy Commission (CEC) that our DFC300A power plant is certified for
grid interconnection under California's "Rule 21" standard. This makes the
DFC300A the largest fuel cell power plant to receive such certification by the
CEC.
Rule 21, a collaborative effort of the CEC and California's three largest
investor-owned utilities, specifies standard interconnection, operating, and
metering requirements for distributed electric power generators such as fuel
cells. It is intended to streamline the process of permitting such generators
while ensuring safe connection to the electrical grid. This certification will
significantly reduce the time, cost and complexity for future interconnection
with the state's grid system, avoiding costly external equipment procurement
requirements and extensive site-by-site as well as utility-by-utility analyses.
H-81
FUELCELL ENERGY, INC. - Form 10Q
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JANUARY 31, 2003 AND JANUARY 31, 2002
Revenues increased 47%, to $10,293 in the 2003 period from $7,001 in the 2002
period. The additional product sales revenue was related to the manufacture of
DFC300A power plants for our distribution partners and sales of fuel cell
components to MTU for their field trial program. We increased activities on the
DOE's Clean Coal gasification project, the DOE co-operative agreement, and the
U.S. Navy marine/diesel program.
Cost of product sales and revenues increased to $14,948 in the 2003 period from
$3,939 in the 2002 period. This was due primarily to the production of DFC300A
power plants for our distribution partners.
Cost of research and development contracts increased 5%, to $7,110 in the 2003
period from $6,754 in the 2002 period primarily due to activities on government
contracts.
Administrative and selling expenses increased 21%, to $3,130 in the 2003 period
from $2,597 in the 2002 period. Higher business insurance premiums and franchise
taxes accounted for the increase.
Research and development expenses increased 60%, to $2,081 in the 2003 period
from $1,304 in the 2002 period. This was primarily development costs associated
with the design and engineering of our megawatt products, the DFC1500 and
DFC3000.
Loss from operations increased to $16,976 in the 2003 period from $7,593 in the
2002 period. This reflects our investment in the standardization of DFC power
plants, development of our distribution network, and increases in operating
costs including employee expenses, depreciation on new production equipment,
business insurance premiums, information systems and infrastructure.
Interest and other income, net decreased 40%, to $919 in the 2003 period from
$1,531 in the 2002 period. This was due to a lower overall cash balance and
declining interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Our operations are funded primarily through sales of equity, cash generated from
operations and borrowings. Cash from operations includes revenue from government
contracts and cooperative agreements, field trial projects, sale of fuel cell
components primarily to MTU, license fees and interest income.
Our cash requirements depend on numerous factors, including the implementation
of our field follow program for our DFC300A products, which will be used to
monitor fleet performance to build operational history of our DFC300A power
plants. This will enable us to further enhance our product design to allow for
cost reduction, performance improvement, increased reliability and
serviceability. Other factors include the initiation of our megawatt class field
trial program, and development of our DFC/Turbine and diesel DFC products. We
expect to devote substantial capital resources to achieve our overall product
goals of cost reduction, performance improvement, reliability and
serviceability. We believe that we can achieve these goals through our near term
product strategy of developing standard products, increasing volume production
and the further development of our distribution network. We expect such
activities will be funded from existing cash, cash equivalents, investments and
cash from operations. Once we've completed our near term strategy, we believe we
will have the financial flexibility to maintain, reduce or accelerate our
business activities consistent with market demand.
At January 31, 2003, we had cash, cash equivalents and investments (U.S.
Treasuries) of $200,480, compared to cash, cash equivalents and investments of
$220,583 at October 31, 2002. The use of cash
H-82
FUELCELL ENERGY, INC. - Form 10Q
was attributable to $14,700 to fund the net loss, an inventory increase of
$3,773, and capital expenditures of $2,045, partially offset by net financing
and other activities of $415.
Our research and development contracts are generally multi-year, cost
reimbursement type contracts. The majority of these are U. S. Government
contracts that are dependent upon the government's continued allocation of funds
and may be terminated in whole or in part at the convenience of the government.
We will continue to seek research and development contracts for all of our
product lines. To obtain contracts, we must continue to prove the benefits of
our technologies and be successful in our competitive bidding.
We anticipate that our existing capital resources, together with anticipated
revenues, will be adequate to satisfy our planned financial requirements and
agreements through at least the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
Our exposure to market risk for changes in interest rates, relates primarily to
our investment portfolio and long term debt obligations. Our investment
portfolio includes both short-term United States Treasury instruments with
maturities averaging three months or less, as well as U.S. Treasury notes with
fixed interest rates with maturities of up to twenty months. Cash is invested
overnight with high credit quality financial institutions. Based on our overall
interest exposure at January 31, 2003, including all interest rate sensitive
instruments, a near-term change in interest rate movements of 1% would affect
our results of operations by approximately $850 annually.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic SEC reports. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
H-83
FUELCELL ENERGY, INC. - Form 10Q
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
(a) EXHIBIT DESCRIPTION
3.1 Certificate of Incorporation of the Registrant, as amended,
July 12, 1999 (incorporated by reference to exhibit of the
same number contained in the Company's 8-K dated September 21,
1999)
3.2 Restated By-Laws of the Registrant, dated July 13,1999
(incorporated by reference to exhibit of the same number
contained in the Company's 8-K dated September 21, 1999)
4 Specimen of Common Share Certificate (incorporated by
reference to exhibit of the same number contained in the
Company's Annual Report on form 10KA for fiscal year ended
October 31, 1999)
(b) REPORTS ON FORM 8-K
None
H-84
FUELCELL ENERGY, INC. - Form 10Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FUELCELL ENERGY, INC.
/s/ Joseph G. Mahler
----------------------------------
Joseph G. Mahler
Senior Vice President, CFO
Treasurer/Corporate Secretary
Dated: March 14, 2003
H-85
FUELCELL ENERGY, INC. - Form 10Q
CERTIFICATION
I, Jerry D. Leitman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FuelCell
Energy Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 14, 2003
/s/ Jerry D. Leitman
----------------------------------
Jerry D. Leitman
President and Chief Executive Officer
H-86
FUELCELL ENERGY, INC. - Form 10Q
CERTIFICATION
I, Joseph G. Mahler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FuelCell
Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 14, 2003
/s/ Joseph G. Mahler
-------------------------------------
Joseph G. Mahler
Chief Financial Officer
H-87
FUELCELL ENERGY, INC. - Form 10-Q
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended April 30, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from --------- to ----------
Commission file number 1-14204
FUELCELL ENERGY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0853042
--------------------------------------------- --------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
3 Great Pasture Road, Danbury, Connecticut 06813
------------------------------------------ ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (203) 825-6000
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's Common Stock, par value
$.0001, as of June 13, 2003 was 39,349,016.
================================================================================
H-88
FUELCELL ENERGY, INC. - Form 10-Q
FUELCELL ENERGY, INC
FORM 10-Q
INDEX
PAGE
------
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Financial Statements:
Condensed Balance Sheets as of April 30, 2003 and October 31, 2002 (audited) H-90
Condensed Statements of Operations for the three months ended April 30, 2003 and April 30, 2002 H-91
Condensed Statements of Operations for the six months ended April 30, 2003 and April 30, 2002 H-92
Condensed Statements of Cash Flows for the six months ended April 30, 2003 and April 30, 2002 H-93
Notes to Unaudited Condensed Financial Statements H-94
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations H-98
Item 3. Quantitative and Qualitative Disclosures About Market Risk H-103
Item 4. Controls and Procedures H-103
PART II - OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders H-104
Item 6. Exhibits and Reports on Form 8-K H-105
Signatures H-106
Certifications H-107 - H-108
H-89
FUELCELL ENERGY, INC. - Form 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FUELCELL ENERGY, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
APRIL 30, OCTOBER 31,
2003 2002
(UNAUDITED)
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 67,806 102,495
Investments: U.S. treasury securities 93,218 103,501
Accounts receivable, net 9,748 10,438
Inventories, net 12,421 13,981
Other current assets 5,275 4,324
------------- -------
Total current assets 188,468 234,739
Property, plant and equipment, net 39,369 38,710
Investments: U.S. treasury securities 19,453 14,587
Other assets 1,658 1,767
------------- -------
Total assets $ 248,948 289,803
============= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 300 285
Accounts payable 4,637 4,712
Accrued liabilities 4,604 7,904
Deferred license fee income 188 38
Customer advances 2,791 3,466
------------- -------
Total current liabilities 12,520 16,405
Long-term debt 1,539 1,696
------------- -------
Total liabilities 14,059 18,101
------------- -------
Shareholders' equity:
Common stock ($.0001 par value); 150,000,000 shares authorized at April
30, 2003 and October 31, 2002: 39,329,251 and 39,228,828 shares issued
and outstanding at April 30, 2003 and October 31, 2002, respectively 4 4
Additional paid-in-capital 339,963 339,762
Accumulated deficit (105,078) (68,064)
------------- -------
Total shareholders' equity 234,889 271,702
------------- -------
Total liabilities and shareholders' equity $ 248,948 289,803
============= =======
See notes to condensed financial statements
H-90
FUELCELL ENERGY, INC. - Form 10-Q
FUELCELL ENERGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED APRIL 30,
2003 2002
------------- ----------
REVENUES:
Research and development contracts $ 4,138 6,845
Product sales and revenues 4,762 1,720
------------- ----------
Total revenues 8,900 8,565
COSTS AND EXPENSES:
Cost of research and development contracts 11,632 8,350
Cost of product sales and revenues 15,001 5,995
Administrative and selling expenses 3,212 2,869
Research and development expenses 1,954 1,433
------------- ----------
Total costs and expenses 31,799 18,647
------------- ----------
Loss from operations (22,899) (10,082)
License fee income, net 67 67
Interest expense (36) (48)
Interest and other income, net 1,880 1,186
------------- ----------
Loss before provision for income taxes (20,988) (8,877)
Provision for income taxes - -
------------- ----------
Net loss $ (20,988) (8,877)
============= ==========
LOSS PER SHARE:
Basic and diluted loss per share $ (0.53) (0.23)
============= ==========
Basic and diluted shares outstanding 39,325,987 39,111,022
============= ==========
See notes to condensed financial statements
H-91
FUELCELL ENERGY, INC. - Form 10-Q
FUELCELL ENERGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED APRIL 30,
2003 2002
------------- ----------
REVENUES:
Research and development contracts $ 9,597 13,116
Product sales and revenues 9,596 2,450
------------- ----------
Total revenues 19,193 15,566
COSTS AND EXPENSES:
Cost of research and development contracts 18,742 15,104
Cost of product sales and revenues 29,949 9,934
Administrative and selling expenses 6,342 5,466
Research and development expenses 4,035 2,737
------------- ----------
Total costs and expenses 59,068 33,241
------------- ----------
Loss from operations (39,875) (17,675)
License fee income, net 135 135
Interest expense (73) (81)
Interest and other income, net 2,799 2,717
------------- ----------
Loss before provision for income taxes (37,014) (14,904)
Provision for income taxes - -
------------- ----------
Net loss $ (37,014) (14,904)
============= ==========
LOSS PER SHARE:
Basic and diluted loss per share $ (0.94) (0.38)
============= ==========
Basic and diluted shares outstanding 39,316,437 39,068,669
============= ==========
See notes to condensed financial statements
H-92
FUELCELL ENERGY, INC. - Form 10-Q
FUELCELL ENERGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED APRIL 30,
2003 2002
------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (37,014) (14,904)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,697 1,462
Amortization of treasury note 280 445
Loss on disposal of property 3 15
Changes in operating assets and liabilities:
Accounts receivable 690 3,083
Inventories 1,560 (11,956)
Other assets (987) (4,359)
Accounts payable (75) (873)
Accrued liabilities (3,300) (825)
Customer advances (675) 904
Deferred license fee income and other 150 148
------------- ----------
Net cash used in operating activities (36,671) (26,860)
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,214) (5,848)
Treasury notes matured 79,374 9,500
Treasury notes purchased (74,237) (92,578)
------------- ----------
Net cash used in investing activities 1,923 (88,926)
------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings - 787
Repayment of debt (142) (96)
Common stock issued for stock plans 201 238
------------- ----------
Net cash provided by financing activities 59 929
------------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (34,689) (114,857)
------------- ----------
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 102,495 256,870
------------- ----------
CASH AND CASH EQUIVALENTS -- END OF PERIOD $ 67,806 142,013
============= ==========
Supplemental disclosure of cash paid during the period for:
Interest $ 73 81
See notes to condensed financial statements
H-93
FUELCELL ENERGY, INC. - Form 10-Q
FUELCELL ENERGY, INC.
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1: NATURE OF THE BUSINESS
FuelCell Energy, Inc. is engaged in the development and manufacture of carbonate
fuel cell power plants for distributed power generation. We are currently in the
process of developing standard products that incorporate our Direct FuelCell(R)
(DFC(R)) technology. We expect to incur losses as we expand our product
development, increase our production volume and develop our distribution
network.
NOTE 2: BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The financial statements as of October 31, 2002 have been derived from
our audited financial statements. Certain information and footnote disclosures
normally included in our annual consolidated financial statements have been
condensed or omitted. The interim condensed financial statements, in the opinion
of management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly our financial position as of April 30,
2003, the results of operations for the three and six months ended April 30,
2003 and 2002, and cash flows for the six months ended April 30, 2003 and 2002.
The results of operations for the three and six months ended April 30, 2003 and
2002 are not necessarily indicative of the results to be expected for the full
year. The reader should supplement the information in this document with prior
disclosures in our 2002 Annual Report on Form 10-K.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations". Statement No. 143 requires recording the fair market
value of an asset retirement obligation as a liability in the period in which a
legal obligation associated with the retirement of tangible long-lived assets is
incurred. The Statement also requires recording the contra asset to the initial
obligation as an increase to the carrying amount of the related long-lived asset
and depreciation of that cost over the life of the asset. The liability is then
increased at the end of each period to reflect the passage of time and changes
in the initial fair value measurement. We adopted the provisions of Statement
No. 143 effective January 1, 2003 and the adoption did not have a significant
effect on our financial statements or disclosures.
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FUELCELL ENERGY, INC. - Form 10-Q
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." Interpretation No. 45 requires the guarantor to
recognize a liability for the contingent and non-contingent component of a
guarantee; which means (a) the guarantor has undertaken an obligation to stand
ready to perform in the event that specified triggering events or conditions
occur and (b) the guarantor has undertaken a contingent obligation to make
future payments if such triggering events or conditions occur. The initial
measurement of this liability is the fair value of the guarantee at inception.
We are required to recognize the liability even if it is not probable that
payments will be required under the guarantee or if the guarantee was issued
with a premium payment or as part of a transaction with multiple elements.
Interpretation No. 45 also requires additional disclosures related to guarantees
that have certain specified characteristics. We were required to adopt, and have
adopted the disclosure provisions of Interpretation No. 45 in our financial
statements as of and for the three months ended January 31, 2003. Additionally,
the recognition and measurement provisions of Interpretation No. 45 are
effective for all guarantees entered into or modified after December 31, 2002.
We have evaluated the effect of the recognition and measurement provisions of
this Interpretation. The adoption of this Interpretation did not have an effect
on our financial statements or disclosures.
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee's stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. We apply the
intrinsic value method of recognition under APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
The following table illustrates the effect on net loss and net loss per basic
and diluted share as if we had applied the fair value method to our stock-based
compensation, as required under the disclosure provisions of SFAS No. 123:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss $(20,988) $ (8,877) $(37,014) $(14,904)
Add: Stock based compensation included in reporting net loss -- common
shareholders - - - -
Deduct: Stock based compensation determined under fair-value based
method for all awards (2,397) (2,017) (5,726) (5,436)
Proforma net loss (23,385) (10,894) (42,740) (20,340)
Basic and diluted loss per share:
As reported $ (0.53) $ (0.23) $ (0.94) $ (0.38)
Pro forma $ (0.60) $ (0.28) $ (1.09) $ (0.52)
The effects of applying SFAS No 123 in this pro-forma disclosure are not
necessarily indicative of future amounts.
NOTE 3: LOSS PER SHARE
Basic and diluted loss per share is calculated based upon the provisions of SFAS
No. 128.
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We computed EPS without consideration to potentially dilutive instruments due to
the fact that losses incurred would make them antidilutive. For the three and
six months ended April 30, 2003 and 2002, the weighted average shares of
potentially dilutive stock options were 5,470,266 and 4,850,486, respectively.
For the three and six months ended April 30, 2003 and 2002, there were 2,640,000
and 5,133,333 warrants to purchase our common stock, respectively, all of which
were out-of-the money. These warrants, if dilutive, would be excluded from the
calculation of EPS since their vesting is contingent upon certain future
performance requirements that are not yet probable.
NOTE 4: DEPRECIATION
Depreciation is calculated using the straight-line method. Buildings and
improvements are depreciated over periods from 10 to 30 years, machinery and
equipment from 3 to 8 years and furniture and fixtures from 6 to 10 years.
Depreciation expense for the three months ended April 30, 2003 and 2002 was
$1,299,000 and $703,000 respectively. Depreciation expense for the six months
ended April 30, 2003 and 2002 was $2,552,000 and $1,318,000 respectively.
NOTE 5: INVESTMENTS: U.S. TREASURY SECURITIES
Investments, which are accounted for as held to maturity, consist of United
States Treasuries.
SHORT-TERM INVESTMENTS:
These treasuries have maturity dates ranging from May 15, 2003 to April 30, 2004
and estimated yields ranging from 2.75% to 5.25%. As of April 30, 2003, and
October 31, 2002, the aggregate fair value, gross unrealized holding gains and
gross unrealized holding losses were as follows:
APRIL 30, OCTOBER 31,
2003 2002
------------ ----------
Aggregate fair value $ 93,329 $ 103,811
Gross unrealized holding gains 148 310
Gross unrealized holding losses 37 -
LONG-TERM INVESTMENTS:
These notes have maturity dates ranging from May 31, 2004 to January 31, 2005,
and estimated yields ranging from 1.625% to 5.875%. As of April 30, 2003, and
October 31, 2002, the aggregate fair value, gross unrealized holding gains and
gross unrealized holding losses were as follows:
APRIL 30, OCTOBER 31,
2003 2002
------------ ----------
Aggregate fair value $ 19,507 $ 14,670
Gross unrealized holding gains 74 86
Gross unrealized holding losses 20 3
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NOTE 6: INVENTORIES, NET
The components of inventory at April 30, 2003 and October 31, 2002 consisted of
the following:
APRIL 30, OCTOBER 31,
2003 2002
------------ ----------
Raw materials $ 6,516 $ 10,214
Work-in-process, net 5,905 3,767
------------ ----------
Total $ 12,421 $ 13,981
============ ==========
NOTE 7: OTHER CURRENT ASSETS, NET
The components of other current assets at April 30, 2003 and October 31, 2002
consisted of the following:
APRIL 30, OCTOBER 31,
2003 2002
------------ ----------
Advance payments to vendors $ 2,473 $ 2,902
Prepaid expenses and other 2,802 1,422
------------ ----------
Total $ 5,275 $ 4,324
============ ==========
NOTE 8: ACCRUED LIABILITIES
The components of accrued liabilities at April 30, 2003 and October 31, 2002
consisted of the following:
APRIL 30, OCTOBER 31,
2003 2002
------------ ----------
Accrued payroll and employee benefits $ 2,331 $ 3,250
Accrued contract and operating costs 1,608 4,263
Accrued taxes and other 665 391
------------ ----------
Total $ 4,604 $ 7,904
============ ==========
During the second quarter of 2003, we recorded charges of approximately $270,
principally for employee severance and other personnel benefits for
approximately 90 employees in our manufacturing operations as a result of our
cost savings measures. The remaining balance at April 30, 2003 for employee
severance and other personnel benefits of $270, which is included in accrued
payroll and employee benefits above, is expected to be paid by the end of the
third quarter of 2003.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Unaudited Condensed Financial Statements and Notes thereto included within this
report, and our audited financial statements and notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended October 31, 2002. All
dollar amounts are in thousands. In addition to historical information, this
Form 10-Q and the following discussion contain forward-looking statements,
including statements regarding our plans and expectations regarding the
development and commercialization of our fuel cell technology. Our actual
results could differ materially from those projected. Factors that could cause
such a difference include, but are not limited to, those set forth under the
caption "Risk Factors" in our Annual Report on Form 10-K filed for the fiscal
year ended October 31, 2002.
OVERVIEW
We are a world leader in the development and manufacture of carbonate fuel cell
power plants for distributed power generation. We have designed and are
developing standard fuel cell power plants that offer significant advantages
compared to existing power generation technology. These advantages include
higher fuel efficiency than existing distributed generation equipment,
significantly lower emissions, quieter operation, lower vibration, flexible
siting and permitting requirements, scalability and potentially lower operating,
maintenance and generation costs. The exhaust heat by-product can be used for
combined cycle applications utilizing an unfired gas turbine, and cogeneration
applications such as high-pressure steam, district heating and air conditioning.
From our founding in 1969, we focused on developing fuel cells and specialized
batteries. These efforts resulted in our obtaining various patents and expertise
in these electrochemical technologies. Since 1975, we have concentrated on
developing products in cooperation with the United States Department of Energy
("DOE"), the United States Department of Defense ("DOD"), and other sources such
as an affiliate of MTU CFC Solutions GmbH ("MTU"), a unit of DaimlerChrysler,
our European partner, to whom we have licensed our fuel cell technology
internationally. In April 2000 and June 2001, we raised net proceeds of
approximately $299,000 from additional public offerings of our common stock.
Since September 2000, we have received an additional $25,000 from other equity
investment partners.
Our carbonate fuel cell, known as the Direct FuelCell, 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 to produce hydrogen. We
believe that this "one-step" 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 proton exchange membrane (PEM) and
phosphoric acid, generally use complex, external fuel processing equipment to
convert the fuel into hydrogen. This external equipment increases capital cost
and reduces electrical efficiency.
Our products are designed to meet the power requirements of a wide range of
customers such as utilities, industrial facilities, hotels, data centers,
wastewater treatment plants, office buildings, hospitals, universities and
shopping centers. Our initial market entry commercial products, the DFC300A,
DFC1500 and DFC3000, will be rated at 250 kW, 1 MW and 2 MW in capacity. We
expect our commercial products to mature to three configurations: 300 kW, 1.5 MW
and 3 MW for distributed applications generally up to 10 MW. We are also
developing new products, based on our existing power plant design, for
applications in the 10 to 50 MW range. We are currently conducting, and have
successfully concluded, field trials of fuel cell power plants ranging from 250
kW to 2 MW.
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We believe that our initial commercial sales will be to "early adopters",
including energy users that may be willing to pay higher prices per kW to obtain
the power that they need. We expect "early adopters" to include users that, due
to environmental or energy efficiency concerns, are unable to, or choose not to,
site traditional combustion-based generation, or energy users that need more
reliable electricity sources than provided by the grid, current diesel back-up
generators, or batteries. We expect "early adopters" will include energy users
that are able to take advantage of government subsidies that provide funding for
fuel cell installations. We believe examples of "early adopters" will be
institutions, commercial and industrial customers in pollution non-attainment
zones and customers in grid-constrained regions. "Early adopters" will also
include customers with opportunity fuels such as industrial or municipal
wastewater treatment gas, and co-generation and reliability applications such as
hotels, hospitals, schools, and universities.
Our current focus is to deliver and commission the DCF300A power plants in our
backlog and implement our field follow program to monitor fleet performance;
generate orders for our DFC products through our distribution network by
focusing on our targeted commercial and industrial markets; initiate our
megawatt field trial program for our DFC1500 and DFC3000 power plants; reduce
product cost, focusing on value engineering, performance improvements,
manufacturing cost efficiencies and supplier development; and manage cash
consistent with market demand.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
Our revenues and fees on long-term contracts are recognized on a method similar
to the percentage-of-completion method. Revenues are recognized proportionally
as research and development costs are incurred and compared to the estimated
total research and development costs for each contract or field trial. In many
cases, we are reimbursed only a portion of the costs incurred or to be incurred
on the contract. At the point that our fuel cells are commercial, estimated
costs to complete an individual contract in excess of revenue will be accrued
immediately.
Revenues from Government funded research, development and demonstration programs
are generally multi-year, cost reimbursement and/or cost shared type contracts
or cooperative agreements. We are reimbursed for reasonable and allocable costs
up to the reimbursement limits set by the contract or cooperative agreement.
Warrant Value Recognition
Warrants have been issued as sales incentives to certain of our business
partners. As we recognize the associated revenue for orders placed in accordance
with these sales agreements, a proportional amount of the fair value of the
warrants will be recorded against the revenue.
Inventories
As discussed above, we recognize research and development costs for contracts as
incurred. When we incur costs for material, labor and overhead to build fuel
cell stacks which have not yet been dedicated to a particular contract, we
include them in WIP inventory to the extent we estimate them to be recoverable
based on anticipated use of the fuel cell stacks and anticipated cost
reimbursement on these anticipated contracts. During the normal course of
business, we will dedicate the fuel cell stacks in WIP inventory to a contract,
at which point in time the inventory costs are charged to cost of research and
development contracts or cost of product sales and revenues, and when
appropriate, revenue will be
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FUELCELL ENERGY, INC. - Form 10-Q
recognized on these costs.
As we increase our commercial activities, we anticipate that our assessment of
recoverability of inventory costs will become increasingly dependent upon the
amount we believe we can sell the fuel cell stacks in the commercial market, and
less on the extent to which costs are reimbursed pursuant to government
contracts.
Research and Development
`Our cost of research and development contracts reflect costs incurred under
specific customer sponsored research and development contracts. These costs
consist of both manufacturing and engineering labor, including applicable
overhead expenses, materials to build prototype units, materials for testing,
and other costs associated with our customer sponsored research and development
contracts.
Our research and development expenses reflect costs for research and development
projects conducted without specific customer sponsored contracts. These costs
consist primarily of engineering labor, overhead, materials to build prototype
units, materials for testing, consulting fees and other costs associated with
our internal research and development expenses.
RECENT DEVELOPMENTS
In May, the U.S. Department of Energy (DOE) selected FuelCell Energy as a prime
"awardee" in its Solid State Energy Conversion Alliance (SECA) program, subject
to final negotiation expected this summer. The goal of the SECA program is to
accelerate the commercialization of low-cost, high temperature solid oxide fuel
cells (SOFC) over the next decade. Engineering and technological developments in
this SECA program can also be used to further advance the Company's DFC
technology. The first phase, a three-year $24 million cost shared program, will
focus on the development of small, stationary modules for scalable applications
up to 100 kilowatts.
FuelCell Energy recently received three commercial product certifications that
will make it easier for customers to qualify for funding incentives and install
DFC power plants for onsite power generation. Certifications include:
- American National Standards Institute (ANSI) Z21.83 Products
Safety Standard -- a national product safety certification for
fuel cell power plants up to 1 megawatt in size.
- "Rule 21" Grid Interconnection -- a California certification that
specifies standard interconnection, operating and metering
requirements for distributed power generators such as fuel cells
to ensure safe connection to the electrical grid.
- California Air Resources Board (CARB) 2007 -- a California
distributed generation emissions standard that categorizes the
Company's sub-megawatt DFC power plants as 'ultra-clean'
technology, exempting it from air pollution control permitting
requirements and allowing preferential rate treatment by the
California Public Utilities Commission.
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FUELCELL ENERGY, INC. - Form 10-Q
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED APRIL 30, 2003 AND APRIL 30, 2002
Revenues increased 4%, to $8,900 in the 2003 period from $8,565 in the 2002
period. The additional product sales revenue was related to the manufacture of
DFC300A power plants for our distribution partners and sales of fuel cell
components to MTU for their field trial program. The decrease in revenues
associated with our research and development contracts reflect reduced funding
on certain government contracts.
Cost of product sales and revenues increased to $15,001 in the 2003 period from
$5,995 in the 2002 period. This was due primarily to the production of DFC300A
power plants for our distribution partners.
Cost of research and development contracts increased 39%, to $11,632 in the 2003
period from $8,350 in the 2002 period primarily due to activities on government
contracts.
Administrative and selling expenses increased 12%, to $3,212 in the 2003 period
from $2,869 in the 2002 period. Higher business insurance premiums and franchise
taxes accounted for the increase.
Research and development expenses increased 36%, to $1,954 in the 2003 period
from $1,433 in the 2002 period. This was due primarily to development costs
associated with the design and engineering of our megawatt products, the DFC1500
and DFC3000.
Loss from operations increased to $22,899 in the 2003 period from $10,082 in the
2002 period. This reflects our investment in the standardization of DFC power
plants, reduced funding on certain government contracts, development of our
distribution network, and increases in operating costs including employee
expenses, severance costs, depreciation on new production equipment, business
insurance premiums, information systems and infrastructure.
Interest and other income, net increased 58%, to $1,880 in the 2003 period from
$1,186 in the 2002 period. In the quarter we recognized a state research and
development incentive for $1,356. Declining interest on lower cash balances and
investments in U.S. treasury securities partially offset the incentive.
COMPARISON OF SIX MONTHS ENDED APRIL 30, 2003 AND APRIL 30, 2002
Revenues increased 23%, to $19,193 in the 2003 period from $15,566 in the 2002
period. The additional product sales revenue was related to the manufacture of
DFC300A power plants for our distribution partners and sales of fuel cell
components to MTU for their field trial program. The decrease in revenues
associated with our research and development contracts reflect reduced funding
on certain government contracts.
Cost of product sales and revenues increased to $29,949 in the 2003 period from
$9,934 in the 2002 period. This was due primarily to the production of DFC300A
power plants for our distribution partners.
Cost of research and development contracts increased 24%, to $18,742 in the 2003
period from $15,104 in the 2002 period primarily due to activities on government
contracts.
Administrative and selling expenses increased 16%, to $6,342 in the 2003 period
from $5,466 in the 2002 period. Higher business insurance premiums and franchise
taxes accounted for the increase.
Research and development expenses increased 47%, to $4,035 in the 2003 period
from $2,737 in the 2002 period. This was due primarily to development costs
associated with the design and engineering of our megawatt products, the DFC1500
and DFC3000.
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FUELCELL ENERGY, INC. - Form 10-Q
Loss from operations increased to $39,875 in the 2003 period from $17,675 in the
2002 period. This reflects our investment in the standardization of DFC power
plants, reduced funding on certain government contracts, development of our
distribution network, and increases in operating costs including employee
expenses, severance costs, depreciation on new production equipment, business
insurance premiums, information systems and infrastructure.
Interest and other income, net increased to $2,799 in the 2003 period from
$2,717 in the 2002 period. The increase reflects a state research and
development incentive for $1,356 recognized in the second quarter offset by
lower interest on declining interest rates on lower cash balances and
investments in U.S. treasury securities.
LIQUIDITY AND CAPITAL RESOURCES
Our operations are funded primarily through sales of equity, cash generated from
operations and borrowings. Cash from operations includes revenue from government
contracts and cooperative agreements, field trial projects, sale of fuel cell
components primarily to MTU, license fees and interest income.
Our cash requirements depend on numerous factors, including the implementation
of our field follow program for our DFC300A products, which will be used to
monitor fleet performance to build operational history of our DFC300A power
plants. We expect this will enable us to further enhance our product design to
allow for cost reduction, performance improvement, increased reliability and
serviceability. Other factors include the initiation of our megawatt class field
trial program, and development of our DFC/Turbine and diesel DFC products. We
expect to devote substantial capital resources to achieve our overall product
goals of cost reduction, performance improvement, reliability and
serviceability. We believe that we can achieve these goals through our near term
product strategy of developing standard products, increasing volume production
and the further development of our distribution network. We expect such
activities will be funded from existing cash, cash equivalents, investments and
cash from operations. Once we've completed our near term strategy, we believe we
will have the financial flexibility to maintain, reduce or accelerate our
business activities consistent with market demand.
At April 30, 2003, we had cash, cash equivalents and investments (U.S.
Treasuries) of $180,477, compared to cash, cash equivalents and investments of
$220,583 at October 31, 2002. The use of cash was attributable to $34,314 to
fund the net loss, capital expenditures of $3,214 and an increase in working
capital of $2,637. Net financing contributed $59.
Our research and development contracts are generally multi-year, cost
reimbursement type contracts. The majority of these are U. S. Government
contracts that are dependent upon the government's continued allocation of funds
and may be terminated in whole or in part at the convenience of the government.
In April, we were notified that Congressional appropriations for our cooperative
agreement with the DOE for the current fiscal period was reduced by
approximately $5 million as compared to historical annual funding levels.
Funding for the U.S. Navy marine diesel program (approximately $2.5 million) was
also delayed. We expect that the remainder of the funding will be made available
to us in the next fiscal year. In May, we were selected by the DOE as a prime
"awardee" for the SECA program. This is a ten-year, $139 million cost-share
co-operative agreement with three phases. The first phase is a three-year $24
million program cost-shared award. We expect to negotiate this award in the
summer. We will continue to seek research and development contracts for all of
our product lines. To obtain contracts, we must continue to prove the benefits
of our technologies and be successful in our competitive bidding.
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FUELCELL ENERGY, INC. - Form 10-Q
We anticipate that our existing capital resources, together with anticipated
revenues, will be adequate to satisfy our planned financial requirements and
agreements through at least the next twelve months.
NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities." The Interpretation may
have an effect on existing practice because it requires existing variable
interest entities to be consolidated if those entities do not effectively
disperse risks among the parties involved. The Interpretation is effective
immediately for all variable interest entities created after January 31, 2003.
We are required to apply the provisions of this Interpretation no later August
1, 2003 to all variable interest entities created before February 1, 2003. We
have determined that adoption of this Interpretation did not and based on the
Company's current structure will not have a material effect on our financial
statements and disclosure.
In April 2003, the FASB decided to require all companies to expense the value of
employee stock options. Companies will be required to measure the cost according
to the fair value of the options. The FASB also tentatively decided in principle
to measure employee equity-based awards at their date of grant. The FASB plans
to issue an exposure draft later this year that could become effective in 2004.
Until a new Statement is issued, the provisions of APB No. 25 and SFAS No. 123
will remain in effect. We will evaluate the impact of any new Statement
regarding employee equity-based awards as requirements are finalized and a new
Statement is issued.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." The
Statement requires issuers to classify as liabilities (or assets in some
circumstances) three classes of freestanding financial instruments that embody
obligations for the issuer. Generally, the Statement is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective for us beginning on August 1, 2003. We have not entered into any
financial instruments within the scope of the Statement to date during June
2003. However, we are in the process of evaluating the effect of this Statement
on our financial statements and disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
Our exposures to market risk for changes in interest rates, relate primarily to
our investment portfolio and long term debt obligations. Our investment
portfolio includes both short-term United States Treasury instruments with
maturities averaging three months or less, as well as U.S. Treasury notes with
fixed interest rates with maturities of up to twenty months. Cash is invested
overnight with high credit quality financial institutions. Based on our overall
interest exposure at April 30, 2003, including all interest rate sensitive
instruments, a near-term change in interest rate movements of 1% would affect
our results of operations by approximately $680 annually.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this
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FUELCELL ENERGY, INC. - Form 10-Q
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
PART II - OTHER INFORMATION
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were two matters submitted to a vote of securities holders during the
second quarter of the fiscal year covered in this report.
The FuelCell Energy, Inc. Annual Shareholders' Meeting was held on March 25,
2003.
1. The meeting involved the election of the following directors to hold office
until the next annual meeting of shareholders. All of the directors on the slate
were elected.
Jerry D. Leitman Warren D. Bagatelle Christopher R. Bentley
Michael Bode Thomas R. Casten James D. Gerson
Thomas L. Kempner William A. Lawson Hansraj C. Maru
Charles J. Murphy John A. Rolls
The results of the voting were as follows:
ELECTION OF DIRECTORS
NAME OF DIRECTOR VOTES FOR VOTES WITHHELD
---------------- --------- --------------
Jerry D. Leitman 28,868,302 2,190,163
Warren D. Bagatelle 29,571,062 1,487,378
Christopher R. Bentley 30,046,204 1,012,236
Michael Bode 29,898,414 1,160,026
Thomas R. Casten 29,573,009 1,485,456
James D. Gerson 29,585,946 1,472,519
Thomas L. Kempner 29,556,863 1,501,602
William A. Lawson 29,570,762 1,487,703
Hansraj C. Maru 30,043,829 1,014,636
Charles J. Murphy 29,560,329 1,498,136
John A. Rolls 30,043,695 1,014,770
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FUELCELL ENERGY, INC. - Form 10-Q
Additionally, the following matter was voted on and approved during the Annual
Shareholders' Meeting on March 25, 2003. The result of the voting was as
follows:
2. To amend the 1998 Equity Incentive Plan to increase the aggregate number of
common shares available under the Plan from 4,500,000 shares to 6,000,000
shares.
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
26,656,946 4,326,115 75,404
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
(a) EXHIBIT DESCRIPTION
3.1 Certificate of Incorporation of the Registrant, as amended, July 12,
1999 (incorporated by reference to exhibit of the same number contained
in the Company's 8-K dated September 21, 1999)
3.2 Restated By-Laws of the Registrant, dated July 13,1999 (incorporated by
reference to exhibit of the same number contained in the Company's 8-K
dated September 21, 1999)
4 Specimen of Common Share Certificate (incorporated by reference to
exhibit of the same number contained in the Company's Annual Report on
form 10KA for fiscal year ended October 31, 1999)
(b) REPORTS ON FORM 8-K
We filed on Form 8-K dated April 30, 2003 under Item 5 "Other Events," a
press release announcing the Company has initiated a cash management plan
consistent with market demand and has implemented cost saving measures including
a reduction in the workforce of 90 to 100 positions, representing approximately
20 percent of our employees.
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FUELCELL ENERGY, INC. - Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FUELCELL ENERGY, INC.
/s/ Joseph G. Mahler
-----------------------------
Joseph G. Mahler
Senior Vice President, CFO
Treasurer/Corporate Secretary
Dated: June 13, 2003
H-106
FUELCELL ENERGY, INC. - Form 10-Q
CERTIFICATION
I, Jerry D. Leitman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FuelCell
Energy Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 13, 2003
/s/ Jerry D. Leitman
-------------------------------------
Jerry D. Leitman
President and Chief Executive Officer
H-107
FUELCELL ENERGY, INC. - Form 10-Q
CERTIFICATION
I, Joseph G. Mahler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FuelCell
Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 13, 2003
/s/ Joseph G. Mahler
-----------------------
Joseph G. Mahler
Chief Financial Officer
H-108
FUELCELL ENERGY, INC. - PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No.)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
FUELCELL ENERGY, INC.
---------------------
(Name of Registrant as Specified In Its Charter)
______________________________________________________________________
Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction
applies:______________________
(2) Aggregate number of securities to which transaction
applies:______________________
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):__________________
(4) Proposed maximum aggregate value of transaction: _____________
(5) Total Fee paid:_______________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:______________________
(2) Form, Schedule or Registration Statement No. _________________
(3) Filing Party:________________________________
(4) Date Filed:__________________________________
H-109
FUELCELL ENERGY, INC. - PROXY STATEMENT
FUELCELL ENERGY, INC.
3 Great Pasture Road, Danbury, CT 06813
203-825-6000
February 14, 2003
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of FuelCell Energy, Inc. ("FuelCell"), which will be held on Tuesday, March 25,
2003 at 10:00 A.M., at the Sheraton Danbury Hotel located at 18 Old Ridgebury
Road, Danbury, Connecticut. The formal Notice of Annual Meeting and Proxy
Statement, fully describing the matters to be acted upon at the meeting, appear
on the following pages.
The only matters scheduled to be considered at the meeting are the
election of FuelCell's directors and amendment of FuelCell's 1998 Equity
Incentive Plan.
The Board of Directors recommends the approval of the proposals being
presented at the Annual Meeting of Shareholders as being in the best interest of
FuelCell. We urge you to read the Proxy Statement and give these proposals your
careful attention.
Your vote is important regardless of the number of shares you own.
Whether or not you plan to attend the meeting, please take the time to vote in
one of these ways:
- By mail -- fill in, sign and date the enclosed proxy card and return it
promptly in the postage-paid envelope.
- By telephone -- call the toll-free telephone number on your proxy card
to vote by phone.
- Via Internet -- visit the web site noted on your proxy card to vote via
the Internet.
You may attend the meeting and vote in person even if you have
previously voted by proxy in one of the three ways listed above.
IF YOU PLAN ON ATTENDING THE MEETING, PLEASE CALL FUELCELL AT (203)
825-6102. THE SHERATON DANBURY HOTEL IS LOCATED OFF EXIT 2 OF I-84 IF TRAVELING
EAST AND EXIT 2A IF TRAVELING WEST.
Sincerely yours,
Jerry Leitman
Chairman of the Board of Directors,
President and Chief Executive Officer
H-110
FUELCELL ENERGY, INC. - PROXY STATEMENT
[FUELCELL ENERGY LOGO]
FUELCELL ENERGY, INC.
3 Great Pasture Road, Danbury, CT 06813
203-825-6000
NOTICE OF ANNUAL SHAREHOLDERS' MEETING
TO BE HELD MARCH 25, 2003
TO THE SHAREHOLDERS OF FUELCELL ENERGY, INC.:
NOTICE IS HEREBY GIVEN that the Annual Shareholders' Meeting of
FuelCell Energy, Inc. (the "Company"), will be held at the Sheraton Danbury
Hotel located at 18 Old Ridgebury Road, Danbury, Connecticut on Tuesday, March
25, 2003 at 10:00 a.m. Eastern Standard Time for the following purposes:
1. To elect eleven (11) directors to serve for the ensuing year
and until their successors are duly elected and qualified.
2. To amend the Company's 1998 Equity Incentive Plan to increase
the aggregate number of common shares available under this
plan from 4,500,000 shares to 6,000,000 shares.
3. Such other business as may properly come before the Meeting or
any adjournment thereof.
Shareholders of record at the close of business on February 14, 2003
are entitled to notice of and to vote at the meeting.
IF YOU PLAN ON ATTENDING THE MEETING, PLEASE CALL FUELCELL AT (203) 825-6102.
YOUR ATTENTION IS DIRECTED TO THE ATTACHED PROXY STATEMENT. REGARDLESS
OF WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE FILL IN, SIGN, DATE AND
MAIL THE ENCLOSED PROXY, OR VOTE YOUR SHARES BY TOUCHTONE TELEPHONE OR VIA THE
INTERNET AS PROMPTLY AS POSSIBLE IN ORDER TO SAVE THE COMPANY FURTHER
SOLICITATION EXPENSE. THERE IS ENCLOSED WITH THE PROXY AN ADDRESSED ENVELOPE FOR
WHICH NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
BY ORDER OF THE BOARD OF DIRECTORS
JOSEPH G. MAHLER
CORPORATE SECRETARY
Danbury, Connecticut
February 14, 2003
H-111
FUELCELL ENERGY, INC. - PROXY STATEMENT
FUELCELL ENERGY, INC.
3 Great Pasture Road, Danbury, CT 06813
203-825-6000
H-112
FUELCELL ENERGY, INC. - PROXY STATEMENT
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 25, 2003
This Proxy Statement is furnished to the shareholders of FuelCell
Energy, Inc. (the "Company") in connection with the solicitation of proxies by
the Board of Directors of the Company to be voted at the 2003 Annual Meeting of
Shareholders (the "Annual Meeting") and at any adjournment thereof. The Annual
Meeting will be held at the Sheraton Danbury Hotel located at 18 Old Ridgebury
Road, Danbury, Connecticut on March 25, 2003 at 10:00 a.m. Eastern Standard
Time. The Company is a Delaware corporation.
The approximate date on which this Proxy Statement and the accompanying
proxy card are first being sent or given to shareholders is February 26, 2003.
VOTING
GENERAL
The securities that can be voted at the Annual Meeting consist of
Common Stock of the Company, $.0001 par value per share, with each share
entitling its owner to one vote on each matter submitted to the shareholders.
The record date for determining the holders of Common Stock who are entitled to
notice of and to vote at the Annual Meeting is February 14, 2003. On the record
date, 39,318,251 shares of Common Stock were outstanding and eligible to be
voted at the Annual Meeting.
QUORUM AND VOTE REQUIRED
The presence, in person or by proxy, of a majority of the outstanding
shares of Common Stock of the Company is necessary to constitute a quorum at the
Annual Meeting.
The affirmative vote of the holders of a plurality of the shares of
Common Stock represented in person or by proxy at the Annual Meeting is required
to elect the directors. Abstentions, including broker non-votes, will have no
effect on the outcome of this matter
The affirmative vote of the holders of a majority of the shares of
Common Stock voting on the matter is required for the approval of the amendment
to the Company's 1998 Equity Incentive Plan. Abstentions will have the same
effect as voting against the proposal to approve the amendment, while broker
non-votes will have no effect on the outcome of this proposal.
VOTING BY PROXY
In voting by proxy with regard to the election of directors,
shareholders may vote in favor of all nominees, withhold their votes as to all
nominees or withhold their votes as to specific nominees. Shareholders should
specify their choices on the accompanying proxy card, by telephone or Internet.
All properly executed proxies delivered by shareholders to the Company
and not revoked will be voted at the Annual Meeting in accordance with the
directions given. IF NO SPECIFIC INSTRUCTIONS ARE GIVEN WITH REGARD TO THE
MATTERS TO BE VOTED UPON, THE SHARES REPRESENTED BY A PROXY WILL BE VOTED "FOR"
THE ELECTION OF ALL DIRECTORS AND "FOR" THE PROPOSAL TO APPROVE THE AMENDMENT TO
THE COMPANY'S 1998 EQUITY INCENTIVE PLAN. If any other matters properly come
before the Annual Meeting, the persons named as proxies will vote upon such
matters according to their best judgment.
Any shareholder delivering a proxy has the power to revoke it at any
time before it is voted by giving written notice to the Secretary of the
Company, by executing and delivering to the Secretary a proxy card bearing a
later date or by voting in person at the Annual Meeting.
In addition to soliciting proxies through the mail, the Company may
solicit proxies through its directors and employees in person or by telephone.
Brokerage firms, nominees, custodians and fiduciaries also may be requested to
forward proxy materials to the beneficial owners of shares held of
H-113
FUELCELL ENERGY, INC. - PROXY STATEMENT
record by them. All expenses incurred in connection with the solicitation of
proxies will be borne by the Company.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Eleven directors are to be elected at the Annual Meeting, each to hold
office until the next annual meeting of shareholders and until a successor is
elected and qualified. It is the intention of the persons named in the enclosed
form of proxy to vote, if authorized, the proxies for the election as directors
of the eleven persons named below as nominees. All of the nominees are at
present directors of the Company. If any nominee declines or is unable to serve
as a director (which is not anticipated), the persons named as proxies reserve
full discretion to vote for any other person who may be nominated.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO
ELECT THE ELEVEN NOMINEES LISTED BELOW AS DIRECTORS OF THE COMPANY.
The following table sets forth certain information for each nominee for election
as a director.
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
Jerry D. Leitman 60 Mr. Leitman has been President and Chief Executive Officer 1997
since August 1997. Mr. Leitman became Chairman of the
Board in June 2002. Mr. Leitman was previously President
of Asea Brown Boveri's (ABB) global air pollution control
businesses from 1992 to 1995. Prior to joining ABB, Mr.
Leitman was Group Executive Vice President of FLAKT AB, a
Swedish multinational company, responsible for FLAKT's
worldwide industrial businesses from 1989 to 1992. Mr.
Leitman is also a Director and a member of the
Compensation Committee of Esterline Technologies Inc.
Warren D. Bagatelle 64 Mr. Bagatelle has been a Managing Director of Loeb 1988
Partners Corporation since 1988 and a general partner of
Loeb Investors Co. LXXV, an investment partnership and an
affiliate of Loeb Partners Corporation. Mr. Bagatelle is a
Director of Evercel, Inc. and VirtualsScopics, LLC.
Christopher R. 60 Mr. Bentley has been Executive Vice President since 1993
Bentley September 1990 and Chief Operating Officer since
August 2000. Mr. Bentley was President of Fuel Cell
Manufacturing Corporation, our former subsidiary, from
September 1990 to December 1997. From 1985 through 1989,
he was Director of Manufacturing (1985), Vice President
and General Manager (1985-1988) and President (1988-1989)
of the Turbine Airfoils Division of Chromalloy Gas Turbine
Corporation, a manufacturer of gas turbine hardware
H-114
FUELCELL ENERGY, INC. - PROXY STATEMENT
Michael Bode 58 Mr. Bode became Chief Executive Officer of MTU CFC 1993
Solutions GmbH, a company of Daimler Chrysler, AG, in
January 2003. Mr. Bode was Executive Vice President and
Director of the New Technology Group of MTU
Friedrichshafen GmbH from July 1993 to February 2003. From
1990 to 1993 Mr. Bode was Vice President and Director of
the New Technology group of the Space Transportation and
Propulsion Systems division of Deutsche Aerospace AG, a
subsidiary of Daimler-Benz Corp. Mr. Bode joined
Messerschmitt-Bolkow-Blohm GmbH in 1974, where he held a
variety of positions. Mr. Bode serves as a Director of BI
New Energy Solutions.
Thomas R. Casten 60 Mr. Casten currently serves as Chairman and CEO of Private 2000
Power LLC, a firm that builds and operates power plants
that recycle waste heat and waste fuel. From 1989 to 1999,
Mr. Casten was Chief Executive Officer of Trigen Energy
Corporation, a company involved in alternative energy
generation. From 1980 to 1986, Mr. Casten was Chief
Executive Officer of Trigen's predecessor company,
Cogeneration Development Corporation. From 1969 to 1980,
Cummings Engine Company employed Mr. Casten, where he
established a business unit to combine generation of heat
and power using diesel engines. Mr. Casten is the Chairman
of the World Alliance for Decentralized Energy working to
advance distributed power worldwide.
James D. Gerson 59 Mr. Gerson has been Vice President of Fahnestock & Co., 1992
Inc. since March 1993, where he has held a variety of
positions in the corporate finance, research, and
portfolio management areas. Mr. Gerson also serves as a
Director of Ag Services of America, Inc. and American
Power Conversion Corp. and is Chairman of the Board of
Evercel, Inc.
Thomas L. Kempner 75 Mr. Kempner was Chairman of the Board from March 1992 to 1988
August 1997. He has been Chairman and Chief Executive
Officer of Loeb Partners Corporation since 1979 and a
general partner of Loeb Investors Co. LXXV, an investment
partnership and an affiliate of Loeb Partners Corporation.
Mr. Kempner is also a Director of Alcide Corporation,
IGENE Biotechnology, Inc., Intermagnetics General
Corporation, CCC Information Services Group, Inc., Insight
Communications Company, Inc., and Dyax Corporation and
Director Emeritus of Northwest Airlines, Inc.
William A. Lawson 69 Mr. Lawson has been President of W.A. Lawson Associates, 1988
an industrial and financial consulting firm, since 1987.
Mr. Lawson is past Chairman of the Board of
H-115
FUELCELL ENERGY, INC. - PROXY STATEMENT
Directors of Newcor, Inc. Mr. Lawson is a Director of
Evercel, Inc.
Hansraj C. Maru 58 Dr. Maru has been Executive Vice President since December 1992
1992 and was appointed Chief Technology Officer in
August 2000. Dr. Maru was Chief Operating Officer from
December 1992 to December 1997. Prior to that he was
Senior Vice President-Research and Development. Prior to
joining us in 1977, Dr. Maru was involved in fuel cell
development at the Institute of Gas Technology
Charles J. Murphy 55 Mr. Murphy, C.F.A., is a private investor/consultant who 2002
currently teaches as an Adjunct Professor at NYU's Stern
School of Business. Over the last several years he has
worked as a senior investment banker/advisor at Allegheny
Energy, Merrill Lynch, Pierce, Fenner & Smith and J.P.
Morgan, specifically in the Energy, Power and Energy
Technology areas. From 1976 to 1996, Mr. Murphy was an
investment banker at Credit Suisse First Boston where he
was a member of the Executive Board, the head of the
Global Equity Department and co-head of the Investment
Banking Department. Prior to joining First Boston, Mr.
Murphy held positions in both Electrical Engineering and
Rate Design at American Electric Power and in Avionics
Engineering at Sikorsky Aircraft.
John A. Rolls 61 Mr. Rolls has been President, Chief Executive Officer and 2000
a principal investor in Thermion Systems International
since 1996. He is a Director and principal investor in
VivaScan Corporation and is a Director and Chairman of the
Finance Committee of both Bowater Inc. and MBIA Inc. Mr.
Rolls was President and Chief Executive Officer of
Deutsche Bank North America from 1992 through 1996. From
1986 through 1992, Mr. Rolls was Executive Vice President
and Chief Financial Officer for United Technologies Corp.
Previously, he was Senior Vice President and Chief
Financial Officer of RCA Corporation.
Jerry D. Leitman has been nominated as a director pursuant to his
employment agreement. See "Employment Agreements."
In June 2002, Dr. Bernard Baker resigned as Chairman of the Board of
Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of February 14,
2003 with respect to: (a) the only shareholders known to management to own
beneficially more than 5% of the outstanding common stock of FuelCell; (b) each
of FuelCell's directors; (c) each of the executive officers of FuelCell named
below in the Summary Compensation Table under the heading "Executive
Compensation"; and (d) all of
H-116
FUELCELL ENERGY, INC. PROXY STATEMENT
FuelCell's directors and executive officers as a group.
Unless indicated otherwise the address of each holder is in care of
FuelCell Energy, Inc., 3 Great Pasture Road, Danbury, Connecticut 06813-1305.
SHARES OF PERCENTAGE OF
COMMON OUTSTANDING
STOCK OWNED COMMON
NAME BENEFICIALLY STOCK (1)
--------------------------------------- ------------ -------------
Jerry D. Leitman 1,475,875 (2) 3.62
Warren D. Bagatelle
c/o Loeb Partners Corp.
61 Broadway
New York, NY 10006 1,559,200 (3), (4) 3.96
Christopher R. Bentley 402,542 (5) 1.02
Michael Bode
c/o MTU CFC Solutions GmbH
Postfach
D-81663 Munchen
Germany -- (6) *
Thomas R. Casten 30,000 (7) *
James D. Gerson
c/o Fahnestock and Co., Inc.
780 3rd Avenue
New York, NY 10017 1,338,796 (8) 3.40
Thomas L. Kempner
c/o Loeb Partners Corp.
61 Broadway
New York, NY 10006 919,400 (3), (9) 2.34
William A. Lawson 87,000 (10) *
Joseph G. Mahler 285,125 (11) *
Hansraj C. Maru 248,016 (12) *
Charles J. Murphy -- *
Herbert T. Nock 204,500 (13) *
John A. Rolls
H-117
FUELCELL ENERGY, INC. PROXY STATEMENT
c/o Thermion Systems International
611 Access Road
Stratford, CT 06615 38,000 (14) *
Daimler Benz affiliate
MTU Friedrichshafen GmbH
("MTU")
Maybachplatz 1
88045 Friedrichshafen, Germany 2,746,548 6.99
All Directors and Executive Officers
as a Group
(13 persons) 5,681,054 (15) 13.64
* Less than one percent.
(1) Unless otherwise noted, each person identified possesses sole voting
and investment power with respect to the shares listed.
(2) Mr. Leitman's shareholdings include currently exercisable options to
purchase 1,458,000 shares of Common Stock.
(3) Warren Bagatelle and Thomas L. Kempner, by virtue of being general
partners of Loeb Investors Co. LXXV, may each be deemed to beneficially
own 907,400 shares of stock owned by Loeb Investors Co. LXXV.
(4) Mr. Bagatelle's shareholdings include options to purchase 12,000 shares
of Common Stock, which are currently exercisable or are exercisable
within 60 days.
(5) Mr. Bentley's shareholdings include options to purchase 170,150 shares
of Common Stock, which are currently exercisable or are exercisable
within 60 days.
(6) Mr. Bode is an executive officer of MTU CFC Solutions GmbH, a company
of Daimler Chrysler, AG.
(7) Mr. Casten's shareholdings include options to purchase 30,000 shares of
Common Stock, which are currently exercisable or are exercisable within
60 days.
(8) Mr. Gerson's shareholdings include 113,200 shares held by his wife,
Barbara Gerson, as Custodian for one child, 94,800 shares held by a
private foundation, of which Mr. Gerson is President and a Director and
147,000 shares owned by an estate of which Mr. Gerson is sole executor.
Mr. Gerson disclaims beneficial ownership of the securities held by his
wife, by the private foundation and by the estate. Mr. Gerson's
shareholdings include options to purchase 12,000 shares of Common
Stock, which are currently exercisable or are exercisable within 60
days.
(9) Mr. Kempner's shareholdings include options to purchase 12,000 shares
of Common Stock, which are currently exercisable or are exercisable
within 60 days.
(10) Mr. Lawson's shareholdings include options to purchase 12,000 shares of
Common Stock, which are currently exercisable or are exercisable within
60 days.
(11) Mr. Mahler's shareholdings include options to purchase 248,200 shares
of Common Stock, which are currently exercisable or are exercisable
within 60 days.
(12) Dr. Maru's shareholdings include options to purchase 157,500 shares of
Common Stock, which are currently exercisable or are exercisable within
60 days.
(13) Mr. Nock's shareholdings include options to purchase 204,500 shares of
Common Stock, which are currently exercisable or are exercisable within
60 days.
(14) Mr. Roll's shareholdings include options to purchase 30,000 shares of
Common Stock, which are currently exercisable or are exercisable within
60 days.
(15) Includes options to purchase 2,346,350 shares of Common Stock, which
are currently exercisable or are exercisable within 60 days.
H-118
FUELCELL ENERGY, INC. - PROXY STATEMENT
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors held seven meetings during the fiscal year ended
October 31, 2002. Each director attended at least 75% of the meetings of the
Board of Directors and Board committees of which he was a member during the
period he served as director.
EXECUTIVE COMMITTEE
The Board of Directors has an Executive Committee comprised of Messrs.
Kempner (Chairman), Bagatelle, Gerson, Lawson, Leitman, and Rolls. The Executive
Committee, which held no meetings during fiscal 2002, is authorized to exercise
the powers of the Board managing the business and affairs of the Company between
meetings of the Board of Directors.
NOMINATING COMMITTEE
The Board of Directors has a Nominating Committee formed on March 26,
2002 comprised of Messrs. Lawson (Chairman), Rolls, Kempner and Leitman. The
Nominating Committee, which held one meeting during fiscal 2002, makes
recommendations to the Board regarding the size and composition of the Board.
The Nominating Committee also establishes procedures for the nomination process,
recommends candidates for election to the Board and nominates officers for
election by the Board. The Nominating Committee considers nominees proposed by
the stockholders. To recommend a prospective nominee for the Nominating
Committee's consideration, you may submit the candidates name and qualifications
to the Company's corporate secretary in writing at 3 Great Pasture Road,
Danbury, Connecticut 06813-1305.
AUDIT COMMITTEE
The Company has an Audit Committee consisting of Messrs. Gerson
(Chairman), Bagatelle and Murphy. Mr. Rolls was Chairman and Mr. Bode was a
member until June 20, 2002 and October 9, 2002 respectively. Each resigned
pursuant to the Company's policy of rotating Directors among committees. Mr.
Gerson became Chairman and Mr. Murphy joined the Audit Committee in June 2002.
The Audit Committee had five meetings in fiscal 2002 and is responsible for,
among other things, appointing and supervising the independent public
accountants of the Company, discussing the scope of the auditors' examination,
and reviewing annual financial statements.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors of the Company is
composed of three independent directors. The Board has made a determination that
the members of the Audit Committee satisfy the independence requirements of the
Marketplace Rules of the Nasdaq Stock Market. The responsibilities of the Audit
Committee are set forth in the Charter of the Audit Committee, which was adopted
by the Board of Directors of the Company on June 8, 2000. The Audit Committee,
among other matters, is responsible for the annual appointment and supervision
of the independent public accountants, and reviews the arrangements for and the
results of the auditors' examination of the Company's books and records and
auditors' compensation. The Audit Committee reviews the Company's accounting
policies, internal control procedures and systems and compliance activities. The
Audit Committee also reviews the Charter of the Audit Committee.
H-119
FUELCELL ENERGY, INC. - PROXY STATEMENT
The following is a report on the Audit Committee's activities relating to fiscal
year 2002.
Review of Audited Financial Statements with Management
The Audit Committee reviewed and discussed the audited financial
statements with the management of the Company.
Review of Financial Statements and Other Matters with Independent
Accountants
The Audit Committee has discussed with KPMG, the Company's independent
auditors, the matters required to be discussed by Statement on Auditing
Standards No. 61 (Communication with Audit Committees). The Audit Committee has
received from KPMG the written disclosures and the letter required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees), and has discussed with KPMG matters relating to the firm's
independence from the Company.
Recommendation that Financial Statements be Included in Annual Report
Based on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the last
fiscal year for filing with the Securities and Exchange Commission.
The members of the Audit Committee have submitted this report
February 14, 2003
AUDIT COMMITTEE
James D. Gerson (Chairman)
Warren D. Bagatelle
Charles Murphy
COMPENSATION COMMITTEE
The Company has a Compensation Committee consisting of Messrs. Lawson
(Chairman), Casten and Rolls. Mr. Gerson was a member until June 20, 2003 at
which time Mr. Rolls joined the Committee. The Compensation Committee had five
meetings in fiscal 2002. The functions of the Compensation Committee are to
review, approve and recommend to the Board of Directors the terms and conditions
of incentive bonus plans applicable to corporate officers and key management
personnel, to review and approve the annual salary of the Chief Executive
Officer, and to administer the Company's Section 423 Stock Purchase Plan and the
Company's 1998 Equity Incentive Plan.
DIRECTOR COMPENSATION
Each Board member not employed by the Company, except for Michael Bode,
receives $10,000 per annum. New Board members also receive 40,000 non-qualified
stock options upon acceptance to the Board. The stock options are granted
pursuant to the Company's 1998 Equity Incentive Plan. The options are
exercisable commencing one year after grant, vest at the rate of 25% per year
from date of grant and have restrictions as to transferability. An additional
$3,000 per annum is paid to the Chairman
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FUELCELL ENERGY, INC. - PROXY STATEMENT
and $2,000 per annum is paid to each non-employee member of the Executive,
Nomination, Compensation and Audit Committees. The Company reimburses directors
for reasonable expenses incurred in connection with the performance of their
duties as directors.
Upon joining the Board on June 20, 2002, Mr. Murphy was granted 40,000
nonqualified stock options. The stock options were granted pursuant to the
Company's 1998 Equity Incentive Plan. The options are exercisable at $9.55 per
share, commencing one year after grant, vest at the rate of 25% per year and
have restrictions as to transferability.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation for
services in all capacities to the Company for the fiscal years ended October 31,
2002, 2001 and 2000, of those persons who were at October 31, 2002 (i) the chief
executive officer and (ii) the four other most highly compensated executive
officers of the Company (collectively, the "Named Officers").
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES ALL
NAME AND ------------------------------------ UNDERLYING OTHER
PRINCIPAL FISCAL SALARY BONUS OPTIONS COMPENSATION
POSITION YEAR ($) ($) # (2) ($)
---------------------------------------------------------------------------------------------------------------------------
Jerry D. Leitman 2002 373,888 180,000 200,000 18,000
President, 2001 358,150 130,000 -0- 16,848
Chief Executive Officer 2000 349,210 100,000 -0- 17,424
Christopher R. Bentley 2002 261,908 76,000 45,000 18,000
Executive Vice President 2001 243,102 64,000 32,000 16,848
and Chief Operating Officer 2000 236,362 57,500 24,000 17,424
Joseph G. Mahler 2002 226,161 67,000 45,000 18,000
Senior Vice President 2001 209,444 56,000 32,000 15,818
Chief Financial Officer 2000 200,113 47,500 24,000 18,414
Corporate Secretary and Treasurer
Hansraj C. Maru 2002 209,405 53,000 30,000 18,000
Executive Vice President 2001 196,077 50,000 32,000 16,848
and Chief Technology Officer 2000 189,167 45,000 24,000 17,421
Herbert T. Nock (1) 2002 193,914 53,000 50,000 21,090
Senior Vice President, 2001 177,841 40,000 -0- 72,059
Marketing and Sales 2000 41,497 25,000 320,000 -0-
(1) Mr. Nock joined the Company as Senior Vice President, Marketing and
Sales in August 2000.
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FUELCELL ENERGY, INC. - PROXY STATEMENT
(2) Represents employer contributions to the Defined Contribution Pension
Plan, employer contributions to the Section 401(k) Plan. Mr. Nock's
compensation for fiscal 2001 includes $67,990 for relocation expenses.
The following two tables set forth certain information with respect to (i)
option grants to the named executive officers of the Company during the fiscal
year ended October 31, 2002, and (ii) the aggregated number and value of options
exercisable and unexercisable by the named executive officers as of October 31,
2002.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
PERCENT OF REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL
SECURITIES OPTIONS/SARs RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE OR PRICE APPRECIATION
OPTIONS/SARs EMPLOYEES IN BASE PRICE EXPIRATION FOR OPTION TERM (2)
NAME GRANTED (1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- ------------ ----------- ---------- --------- ---------
Jerry D. Leitman 200,000 15.59 $13.76 12/19/11 1,730,718 4,385,979
Christopher Bentley 45,000 3.51 $13.76 12/19/11 389,412 986,845
Joseph G. Mahler 45,000 3.51 $13.76 12/19/11 389,412 986,845
Hansraj C. Maru 30,000 2.34 $13.76 12/19/11 259,608 657,897
Herbert T. Nock 50,000 3.90 $13.76 12/19/11 432,680 1,096,495
(1) The options were granted under the Company's 1998 Equity Incentive
Plan. These options become exercisable in four equal annual
installments on each anniversary date of the date of grant. Options
that have been issued may not be exercised beyond the earlier of (a)
ten years from the date of grant, or (b) three months after the holder
ceases to be employed by the Company, except in the event of
termination by reason of death or permanent disability, in which event
the option may be exercised for up to one year following termination.
(2) The assumed rates are compounded annually for the full term of the
options.
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FUELCELL ENERGY, INC. - PROXY STATEMENT
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 10/31/02 AT 10/31/02
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE (#) UNEXERCISABLE (1) ($)
---- ------------ ------------ ------------------- ---------------------
Jerry D. Leitman 52,000 883,560 1,408,000 (2) 5,800,960 (2)
200,000 (3) -0- (3)
Christopher R. Bentley 12,000 231,480 114,900 (2) 392,494 (2)
111,000 (3) 124,200 (3)
Joseph G. Mahler 19,250 310,785 225,950 (2) 825,714 (2)
78,000 (3) -0- (3)
Hansraj C. Maru 6,900 79,419 106,000 (2) 378,720 (2)
96,000 (3) 124,200 (3)
Herbert T. Nock -0- -0- 192,000 (2) -0- (2)
178,000 (3) -0- (3)
(1) Based upon the closing price of $5.77 on October 31, 2002 of the
Company's Common Stock on the Nasdaq National Market minus the
respective option exercise price.
(2) Exercisable.
(3) Unexercisable.
EMPLOYMENT AGREEMENTS
In August 1997, the Company entered into an employment agreement with
Mr. Leitman upon hiring him as its President and Chief Executive Officer. The
employment agreement was subsequently modified in June 2002. Under the
agreement, which is terminable by either party upon 30 days notice, Mr. Leitman
is entitled to a minimum annual salary and a bonus based upon an incentive
compensation plan to be developed by Mr. Leitman with the Compensation
Committee. In addition, upon entering into the agreement, the Company granted
Mr. Leitman options to purchase 1,500,000 shares of Common Stock. The agreement
also provides Mr. Leitman with the opportunity to participate in insurance plans
and other employment benefits as may be generally available to other employees
of the Company. In certain circumstances, if Mr. Leitman's employment is
terminated, including a termination by Mr. Leitman upon a change of control, Mr.
Leitman will be entitled to a severance benefit equal to (i) two times his then
base salary, plus (ii) an amount equal to Mr. Leitman's bonus from the Company
for the immediately preceding year. The agreement also contains non-disclosure
provisions and prohibits Mr. Leitman from competing with the Company during the
term of his employment and for a period of two years thereafter. Under the
Agreement, the Company has agreed to use its best efforts to cause Mr. Leitman
to be elected to the Board of Directors and to appoint Mr. Leitman as a member
of the Executive Committee of the Board of Directors.
In October 1998, the Company entered into an employment agreement with
Mr. Mahler upon hiring him as its Chief Financial Officer, Treasurer and
Corporate Secretary. Under the agreement, which is terminable by either party
upon 30 days notice, Mr. Mahler is entitled to a minimum annual salary and a
bonus based upon the Company incentive compensation plan. In addition, upon
entering into the agreement, the Company granted Mr. Mahler options to purchase
300,000 shares of Common Stock. The agreement also provides Mr. Mahler with the
opportunity to participate in insurance plans and other employment benefits as
may be generally available to other employees of the Company. In certain
circumstances, if Mr. Mahler's employment is terminated, Mr. Mahler will be
entitled to a severance benefit equal to (i) his then base salary, plus (ii) an
amount equal to Mr. Mahler's bonus from the Company for the immediately
preceding year. The agreement also contains non-disclosure
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FUELCELL ENERGY, INC. - PROXY STATEMENT
provisions and prohibits Mr. Mahler from competing with the Company during the
term of his employment and for a period of two years thereafter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions regarding certain executive compensation are made by the
Compensation Committee, which is composed of Messrs. Lawson, Casten and Rolls.
The Compensation Committee makes recommendations to the outside director members
of the Board with respect to the salary, cash bonus, or other long term
incentives of the Chief Executive Officer. The Chief Executive Officer is
responsible for the salary recommendations of the remaining executive officers.
The Company has both a short and long term incentive compensation plan. The
Compensation Committee is responsible for approval of the incentive awards with
significant reliance on the recommendations of the Chief Executive Officer.
Either the Compensation Committee or the Board of Directors approves
stock option awards under the 1998 Equity Incentive Plan with reliance upon the
recommendations of the Compensation Committee. No member of the Compensation
Committee was an officer or employee of the Company during the fiscal year ended
October 31, 2002.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee reviews the Company's compensation plan on a
regular basis. The Compensation Committee periodically retains independent
consultants on an as needed basis to provide current market data with regard to
base salary structure, short-term cash incentives and with the development of
long-term incentive plans. The Compensation Committee regularly updates its
assessment of various long-term incentive tools including stock options,
restricted stock, performance-based equity, and other alternatives that might be
available.
The Company's primary objective in developing executive compensation
policies is to attract, motivate and retain highly qualified and effective
leaders. The compensation policy includes various components of compensation
that are intended to align management behaviors and priorities directly with the
Company's strategic objectives and to encourage management to act in the best
long-term interest of the Company and its shareholders. The Company's executive
officer compensation policy generally consists of three elements: base
compensation, annual cash bonus and long-term incentive compensation.
Cash Compensation
Annual cash compensation consists of two elements: base salary and
annual cash bonus. Each officer is offered a base salary that is commensurate
for the role that he or she is performing. In setting compensation, the
Compensation Committee and the Chief Executive Officer strive to maintain base
compensation for the Company's executive officers at levels which the
Compensation Committee and the Chief Executive Officer, based on their
experience, believe are competitive with the compensation of comparable
executive officers in similarly situated companies.
Increases in base salary are based on a periodic review and evaluation
of the performance of the operation or function for which the executive has
responsibility, and is measured against defined performance criteria. The
executive is also reviewed according to his or her competence as an effective
leader in the Company, which includes an evaluation of the skills and experience
required for the job, coupled with a comparison of these elements with similar
elements for other executives both within and outside of the Company.
H-124
FUELCELL ENERGY, INC. - PROXY STATEMENT
Executive officers are eligible to participate in a bonus plan. The
Compensation Committee determines awards under the bonus plan. The Compensation
Committee relies significantly upon the recommendation of the Chief Executive
Officer with respect to the bonus to be awarded to the other executive officers.
The executive officers, as well as other key employees, may receive bonuses
based upon meeting the performance objectives of the Company and their
contributions to the Company.
The compensation paid by the Company to its Chief Executive Officer for
fiscal 2002 was based upon an employment agreement negotiated with Mr. Leitman.
The Compensation Committee has recently conducted a survey of compensation
packages of Chief Executive Officers in comparable companies, and believes,
based upon the individual experience of its members, that the compensation
package for Mr. Leitman for fiscal 2002 was reasonable based upon Mr. Leitman's
experience, his level of responsibility and the contributions made and expected
to be made by him to the Company. See "Employment Agreement" for a description
of Mr. Leitman's employment agreement.
Long-term incentive compensation
Each of the executive officers and all employees are eligible to
receive awards under the 1998 Equity Incentive Plan. The 1998 Equity Incentive
Plan will be used to align a portion of the officers' compensation with the
shareholders' interest and the long-term success of the Company by encouraging
the executive officers and other employees to remain with the Company, and by
enabling optionees to develop and maintain a significant, long-term stock
ownership position in the Company's Common Stock. The value realizable from
exercisable options is dependent upon the extent to which the Company's
performance is reflected in the market price of the Company's Common Stock at
any particular point in time.
In determining the number of options to be granted to each executive
officer, the Compensation Committee reviews the recommendations provided by the
Chief Executive Officer with respect to the executive officers, other than the
Chief Executive Officer, and makes a determination regarding those
recommendations. These determinations are based upon compensation surveys
conducted during fiscal 2001 of executive officers and certain key employees in
comparable companies.
The members of the Compensation Committee have submitted this report.
February 14, 2003
COMPENSATION COMMITTEE
William Lawson (Chairman)
Thomas Casten
John Rolls
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FUELCELL ENERGY, INC. - PROXY STATEMENT
PERFORMANCE GRAPH
The following graph compares the annual change in the Company's
cumulative total shareholder return on its Common Stock for the five fiscal
years ended October 31, 2002 with the cumulative total return on the Russell
2000 and a peer group consisting of SIC Group Code 369 companies listed on The
American Stock Exchange, Nasdaq National Market and New York Stock Exchange for
that period.
FISCAL YEAR ENDED
COMPANY/INDEX/MARKET 10/31/97 10/30/98 10/30/99 10/31/2000 10/31/2001 10/31/2002
-------------------- -------- -------- -------- ---------- ---------- ----------
FuelCell Energy, Inc. 100.00 82.81 240.11 2151.13 878.29 324.23
Misc Electric Equip, Supplies 100.00 71.11 96.94 110.89 56.46 54.67
Russell 2000 Index 100.00 88.16 99.88 115.73 99.56 86.85
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Securities Exchange Act of 1934, as amended, requires the Company's
executive officers and directors, and any persons owning more than 10% of a
class of the Company's stock, to file certain reports of ownership and changes
in ownership with the Securities and Exchange Commission (the "SEC"). All
filings for 2002 were made on a timely basis.
The above information is to the Company's knowledge, based solely on a
review of copies of reports furnished to the Company and representations of
certain officers, directors and shareholders owning more than 10% of the
Company's Common Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal year 2002, the Company sold to Daimler Chrysler affiliate
MTU-Friedrichshafen GmbH ("MTU") fuel cell components for approximately
$4,183,000.
In December of 1999, the Company entered into an agreement with MTU
granting an exclusive license to use the Company's Direct Fuel Cell(R) (DFC(R))
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 the Company and
others. MTU has agreed to make any improvements to the Company's DFC available
to the Company. MTU plans to conduct further research, development,
manufacturing and marketing programs in the area of carbonate fuel cell
technology and has agreed to negotiate a license grant of the results to the
Company. In addition, MTU has agreed to pay a royalty based on kilowatts of
electrical generating capacity using the Company's DFC made or sold by MTU or
its permitted licensees, including a minimum annual royalty commencing in 2000.
Pursuant to this agreement, MTU paid the Company $300,000 in fiscal year 2002.
In July 1998, the Company entered into a Cross-Licensing and
Cross-Selling Agreement with MTU pursuant to which MTU and the Company have
granted to each other the right to manufacture and sell each other's stationary
power fuel cell products in their respective regions. Each company will pay the
other royalties based upon sales.
Mr. Bode, a director of the Company, is an executive officer of an
affiliate of MTU, and MTU is a shareholder of the Company. The Company believes
that the terms of its transactions with MTU are no less favorable to the Company
than it could have obtained from an unaffiliated third party.
The Company entered into a consulting agreement with Dr. Bernard Baker
for $5,000 per month for two years commencing on February 11, 2002. Dr. Baker is
entitled to additional compensation if he consults for more than 48 days per
year.
H-126
FUELCELL ENERGY, INC. - PROXY STATEMENT
PROPOSAL NO. 2
AMENDMENT OF 1998 EQUITY INCENTIVE PLAN
Under the Company's 1998 Equity Incentive Plan (the "Plan"), the
Company's Board of Directors may grant Incentive Stock Options, Non-Qualified
Stock Options, Stock Appreciation Rights and Awards of Restricted Stock to
officers, key employees and others. Under the Plan, an aggregate of 4,500,000
shares of Common Stock have been reserved for issuance. We are presently seeking
to increase the aggregate number of shares available for grants under the Plan
from 4,500,000 to 6,000,000.
We believe that these shares of Common Stock are needed for issuance
under the Plan so sufficient awards can continue to be made to attract, retain
and motivate key employees, consultants, directors and others. Following is a
summary of the 1998 Equity Incentive Plan.
SUMMARY OF THE 1998 EQUITY INCENTIVE PLAN
Purpose
The purpose of the Plan is to attract and retain key employees,
directors, advisors and consultants, to provide an incentive for them to assist
FuelCell Energy, Inc. (the "Company") to achieve long-range performance goals,
and to enable them to participate in the long-term growth of the Company. All
employees participate in the Plan.
Stock Available for Awards
Awards may be made under the Plan covering of up to a maximum of
4,500,000 shares of Common Stock. Proposal No. 2 recommends the amendment to the
Plan to increase the number of shares authorized for issuance from 4,500,000 to
6,000,000 shares.
Eligibility
All employees and, in the case of awards other than Incentive Stock
Options, directors, advisors and consultants of the Company or any affiliate
capable of contributing significantly to the successful performance of the
Company, other than a person who has irrevocably elected not to be eligible, are
eligible to be participants in the Plan.
Administration
The Compensation Committee shall administer the Plan. The Board,
including any duly authorized committee of the Board, shall have authority to
adopt, alter and repeal such administrative rules, guidelines and practices
governing the operation of the Plan as it shall from time to time consider
advisable, and to interpret the provisions of the Plan. The Board's decisions
shall be final and binding. To the extent permitted by applicable law, the Board
may delegate to the committee the power to make awards to participants and all
determinations under the Plan with respect thereto.
Stock Option Awards
Subject to the provisions of the Plan, the Board may award Incentive
Stock Options and Nonqualified Stock Options and determine the number of shares
to be covered by each option, the option price therefore and the conditions and
limitations applicable to the exercise of the option. The
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FUELCELL ENERGY, INC. - PROXY STATEMENT
terms and conditions of Incentive Stock Options shall be subject to and comply
with Section 422 of the Internal Revenue Code, or any successor provision, and
any regulations thereunder
Option Price
The Compensation Committee has established guidelines in determining
grant dates. The grant price shall not be less than 100% of the fair market
value of the Common Stock on the date of award with respect to Incentive Stock
Options.
Exercise of Options
Each option shall be exercisable at such times and subject to such
terms and conditions as the Board may specify in the applicable award or
thereafter. The Board may impose such conditions with respect to the exercise of
options, including conditions relating to applicable federal or state securities
laws, as it considers necessary or advisable.
Stock Appreciation Rights
The Board may award Stock Appreciation Rights either in tandem with a
stock option or unrelated to a stock option. When rights are granted in tandem
with an option, the rights or options terminate when the other is exercised.
Restricted Stock
Subject to the provisions of the Plan, the Board may award shares of
Restricted Stock and determine the duration of the restricted period during
which, and the conditions under which, the shares may be forfeited to the
Company and the other terms and conditions of such awards. Shares of Restricted
Stock may be issued for no cash consideration or such minimum consideration as
may be required by applicable law. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as permitted by
the Board, during the restricted period. Shares of Restricted Stock shall be
evidenced in such manner as the Board may determine. Any certificates issued in
respect of shares of Restricted Stock shall be registered in the name of the
participant and unless otherwise determined by the Board, deposited by the
participant, together with a stock power endorsed in blank, with the Company. At
the expiration of the restricted period, the Company shall deliver such
certificates to the participant or if the participant has died, to the
participant's designated beneficiary.
Termination of Employment
The Board shall determine the effect on an award of the disability,
death, retirement or other termination of employment of a participant and the
extent to which, and the period during which, the participant's legal
representative, guardian or designated beneficiary may receive payment of an
award or exercise rights thereunder.
Plan Expiration
Options, Stock Appreciation Rights and awards of Restricted Stock shall
not be granted after March 10, 2008.
Amendment of Plan
H-128
FUELCELL ENERGY, INC. - PROXY STATEMENT
The Board may amend, suspend or terminate the Plan or any portion
thereof at any time, provided that no amendment shall be made without
shareholder approval if such approval is necessary to comply with any applicable
requirement of the laws of the State of Delaware, any applicable tax
requirement, any applicable rules or regulation of the Securities and Exchange
Commission, including Rule 16(b)-3 (or any successor rule thereunder), or the
rules and regulations of any stock market on which the Company's securities are
traded.
EQUITY COMPENSATION PLAN AND WARRANT INFORMATION
NUMBER OF NUMBER OF
SECURITIES TO WEIGHTED- SECURITIES
BE ISSUED AVERAGE REMAINING
UPON EXERCISE AVAILABLE FOR
EXERCISE OF PRICE OF FUTURE
OUTSTANDING OUTSTANDING ISSUANCE
OPTIONS, OPTIONS, UNDER EQUITY
WARRANTS WARRANTS COMPENSATION
PLAN CATEGORY AND RIGHTS AND RIGHTS PLANS
---------------------------------------- ---------------- ----------- -------------
Plans approved by security holders:
Stock option plans 5,133,586 $ 10.57 546,122
Employee stock purchase plan (1) 13,855 4.91 499,464
Warrants issued to business partners
not approved by security holders (2) 2,640,000 30.06 --
--------- -------- ---------
Total 7,787,441 $ 17.17 1,045,586
(1) The Company offers a stock purchase plan that allows employees to
purchase shares of our Common Stock at a discounted cost. As of October
31, 2002, based on the amount of employee contributions to the plan,
there were rights to purchase 13,855 shares at $4.91 per share.
(2) The Company has issued warrants to certain of its business partners as
sales incentives.
INDEPENDENT PUBLIC ACCOUNTANTS
AUDIT FEES
The aggregate fees paid to KPMG LLP, our independent public
accountants, for professional services rendered for the audit of our annual
consolidated financial statements for 2002 and for the reviews of our quarterly
financial statements included in our Forms 10-Q for 2002 were approximately
$150,000.
OTHER FEES
Fees paid to KPMG LLP for tax services for 2002 were approximately
$359,000 including $146,000 for tax return and compliance work, and $213, 000
for special projects. No other fees were paid to KPMG LLP.
Our Audit Committee has considered whether the provision of KPMG LLP's
services other than for the annual audit and quarterly reviews is compatible
with their independence and has concluded that
H-129
FUELCELL ENERGY, INC. - PROXY STATEMENT
it is.
A representative of KPMG LLP will be present at the Annual Meeting to
make a statement if such representative desires to do so and to respond to
appropriate questions.
SHAREHOLDER PROPOSALS FOR THE 2004 ANNUAL MEETING
Shareholders who wish to present proposals for inclusion in the
Company's proxy materials and for consideration at the 2004 Annual Meeting of
Shareholders should submit the proposals in writing to the Secretary of the
Company in accordance with all applicable rules and regulations of the SEC no
later than October 29, 2003.
ANNUAL REPORT AND FORM 10-K
ADDITIONAL COPIES OF THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL
YEAR ENDED OCTOBER 31, 2002 AND COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002 AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ARE AVAILABLE TO SHAREHOLDERS WITHOUT CHARGE UPON WRITTEN
REQUEST ADDRESSED TO: FUELCELL ENERGY, INC., 3 GREAT PASTURE ROAD, DANBURY,
CONNECTICUT 06813 ATTN: SHAREHOLDER RELATIONS OR IS ALSO AVAILABLE THROUGH THE
COMPANY'S WEBSITE AT WWW.FUELCELLENERGY.COM.
OTHER MATTERS
As of the date of this proxy statement, the Board of Directors knows of no
matters which will be presented for consideration at the Annual Meeting other
than the proposals set forth in this Proxy Statement. If any other matters
properly come before the meeting, it is intended that the persons named in the
proxy will act in respect thereof in accordance with their best judgment.
By Order of the Board of Directors
Joseph G. Mahler
Corporate Secretary
Danbury, CT
February 14, 2003
H-130
FUELCELL ENERGY, INC. - PROXY STATEMENT
PROXY BY MAIL Please mark your
votes like this
[X]
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD MARCH 25, 2003.
FOR all nominees WITHHOLD 2. To amend the 1998 FOR AGAINST ABSTAIN
listed below (except AUTHORITY to vote Equity Incentive Plan [ ] [ ] [ ]
as marked to the for all nominees listed to increase the
1. Election of contrary below) below aggregate number of
Directors [ ] [ ] common shares available
under the Plan from
4,500,000 to 6,000,000
shares.
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY 3. As such proxies may in their discretion determine in respect of
INDIVIDUAL NOMINEE STRIKE A LINE THROUGH THE NOMINEE'S any other business properly to come before said meeting (the
NAME IN THE LIST BELOW.) Board of Directors knowing of no such other business).
01 Warren D. Bagatelle, 02 Christopher R. Bentley, 03 The directors recommend a vote FOR items 1 and 2.
Michael Bode, 04 Thomas R. Casten, 05 James D. Gerson, 06
Thomas L. Kempner, 07 William A. Lawson, 08 Jerry D.
Leitman, 09 Hansraj C. Maru, 10 Charles J. Murphy, 11
John A. Rolls. UNLESS THE STOCKHOLDER DIRECTS OTHERWISE, THIS PROXY WILL BE
VOTED FOR ITEMS 1 AND 2 AS PROPOSED.
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telephone.
- This eliminates the need to return the proxy card.
- Your electronic vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed, dated and returned the
proxy card.
H-131
FUELCELL ENERGY, INC. - PROXY STATEMENT
TO VOTE YOUR PROXY BY INTERNET
WWW.CONTINENTALSTOCK.COM
Have your proxy card in hand when you access the above website. You will be
prompted to enter the company number, proxy number and account number to create
an electronic ballot. Follow the prompts to vote your shares.
TO VOTE YOUR PROXY BY MAIL
Mark, sign and date your proxy card above, detach it and return it in the
postage-paid envelope provided.
TO VOTE YOUR PROXY BY PHONE
1-800-293-8533
Use any touch-tone telephone to vote your proxy. Have your proxy card in hand
when you call. You will be prompted to enter the company number, proxy number
and account number. Follow the voting instructions to vote your shares.
PLEASE DO NOT RETURN THE ABOVE CARD IF VOTED ELECTRONICALLY
H-132
FUELCELL ENERGY, INC. - PROXY STATEMENT
PROXY FUELCELL ENERGY, INC. PROXY
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS MARCH 25, 2003
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jerry D. Leitman and Joseph G. Mahler,
and each of them, attorneys with full power of substitution, to vote as directed
on the reverse side all shares of Common Stock of FuelCell Energy, Inc.
registered in the name of the undersigned, or which the undersigned may be
entitled to vote, at the Annual Meeting of Stockholders to be held at the
Sheraton Danbury Hotel located at 18 Old Ridgebury Road, Danbury, CT. at 10:00
a.m. and at any adjournment or postponement thereof.
(CONTINUED ON REVERSE SIDE)
- FOLD AND DETACH HERE -
H-133
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2003
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 1-14204
FUELCELL ENERGY, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 06-0853042
(State of Incorporation) (I.R.S. Employer Identification Number)
3 GREAT PASTURE ROAD
DANBURY, CONNECTICUT 06813
(Address of Principal Executive Offices)
Telephone (203) 825-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the 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. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.0001 per share, outstanding at September 8, 2003;
39,374,633
H-134
FUELCELL ENERGY, INC
FORM 10-Q
For the Three and Nine Month Periods Ended July 31, 2003
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets as of July 31, 2003 and October 31, 2002 3
Condensed Statements of Operations for the three month periods ended July 31, 2003 and 2002 4
Condensed Statements of Operations for the nine month periods ended July 31, 2003 and 2002 5
Condensed Statements of Cash Flows for the nine month periods ended on July 31, 2003 and 2002
Notes to Unaudited Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 21
H-135
FUELCELL ENERGY, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JULY 31,
2003 OCTOBER 31,
(UNAUDITED) 2002
ASSETS
Current assets:
Cash and cash equivalents $ 65,670 $ 102,495
Investments: U.S. treasury securities 86,671 103,501
Accounts receivable, net 7,264 10,438
Inventories, net 15,699 13,981
Other current assets 3,111 4,334
--------- ---------
Total current assets 178,415 234,749
Property, plant and equipment, net 39,712 38,710
Investments: U.S. treasury securities 16,236 14,542
Other assets, net 1,764 1,802
--------- ---------
Total assets $ 236,127 $ 289,803
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 317 $ 285
Accounts payable 3,951 4,712
Accrued liabilities 5,677 7,815
Deferred license fee income 113 38
Customer advances 4,536 3,466
--------- ---------
Total current liabilities 14,594 16,316
Long-term debt 1,562 1,785
--------- ---------
Total liabilities 16,156 18,101
Stockholders' equity:
Common stock ($.0001 par value); 150,000,000 shares authorized at July
31, 2003 and October 31, 2002: 39,356,633 and 39,228,828 shares
issued and outstanding at July 31, 2003 and October 31, 2002,
respectively 4 4
Additional paid-in capital 340,065 339,762
Accumulated deficit (120,098) (68,064)
--------- ---------
Total stockholders' equity 219,971 271,702
--------- ---------
Total liabilities and stockholders' equity $ 236,127 $ 289,803
========= =========
See notes to condensed financial statements
H-136
FUELCELL ENERGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
JULY 31,
2003 2002
------------ ------------
REVENUES:
Research and development contracts $ 4,715 $ 10,291
Product sales and revenues 2,561 1,671
------------ ------------
Total revenues 7,276 11,962
COSTS AND EXPENSES:
Cost of research and development contracts 9,623 14,348
Cost of product sales and revenues 8,283 7,399
Administrative and selling expenses 3,248 2,709
Research and development expenses 2,015 1,897
------------ ------------
Total costs and expenses 23,169 26,353
------------ ------------
Loss from operations (15,893) (14,391)
License fee income, net 68 68
Interest expense (29) (40)
Interest and other income, net 834 1,173
------------ ------------
Loss before provision for income taxes (15,020) (13,190)
Provision for income taxes -- --
------------ ------------
Net loss $ (15,020) $ (13,190)
============ ============
NET LOSS PER SHARE:
Basic and diluted net loss per share $ (0.38) $ (0.34)
============ ============
Basic and diluted weighted average shares outstanding 39,339,724 39,175,140
============ ============
See notes to condensed financial statements
H-137
FUELCELL ENERGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS ENDED
JULY 31,
2003 2002
------------ ------------
REVENUES:
Research and development contracts $ 14,312 $ 23,407
Product sales and revenues 12,157 4,121
------------ ------------
Total revenues 26,469 27,528
COSTS AND EXPENSES:
Cost of research and development contracts 28,365 29,452
Cost of product sales and revenues 38,232 17,333
Administrative and selling expenses 9,590 8,175
Research and development expenses 6,050 4,634
------------ ------------
Total costs and expenses 82,237 59,594
------------ ------------
Loss from operations (55,768) (32,066)
License fee income, net 203 203
Interest expense (102) (121)
Interest and other income, net 3,633 3,890
------------ ------------
Loss before provision for income taxes (52,034) (28,094)
Provision for income taxes -- --
------------ ------------
Net loss $ (52,034) $ (28,094)
============ ============
NET LOSS PER SHARE:
Basic and diluted net loss per share $ (1.32) $ (0.72)
============ ============
Basic and diluted weighted average shares outstanding 39,328,881 39,104,394
============ ============
See notes to condensed financial statements
H-138
FUELCELL ENERGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
JULY 31,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (52,034) $ (28,094)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,241 2,291
Amortization of treasury note premium/discount 384 387
Loss on disposal of property 3 37
Changes in operating assets and liabilities:
Accounts receivable 3,174 342
Inventories (1,718) (10,082)
Other assets 1,117 (6,303)
Accounts payable (761) (1,755)
Accrued liabilities (2,104) 904
Customer advances 1,070 1,720
Deferred license fee income and other 75 75
--------- ---------
Net cash used in operating activities (46,553) (40,478)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,029) (10,302)
Treasury notes matured 106,259 39,000
Treasury notes purchased (91,580) (114,906)
--------- ---------
Net cash provided by (used in) investing activities 9,650 (86,208)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings -- 787
Repayment of debt (225) (163)
Common stock issued for stock plans 303 526
--------- ---------
Net cash provided by financing activities 78 1,150
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (36,825) (125,536)
--------- ---------
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 102,495 256,870
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 65,670 $ 131,334
========= =========
See notes to condensed financial statements
H-139
FUELCELL ENERGY, INC.
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS)
NOTE 1: SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
FuelCell Energy, Inc. is engaged in the development and manufacture of carbonate
fuel cell power plants for distributed power generation. We are currently in the
process of developing standard products that incorporate our Direct FuelCell(R)
(DFC(R)) technology. We expect to incur losses as we expand our product
development, increase our production volume, , develop our distribution network
and bring our products to market.
BASIS OF PRESENTATION - INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The financial statements as of October 31, 2002 have been derived from
our audited financial statements. Certain information and footnote disclosures
normally included in our annual consolidated financial statements have been
condensed or omitted. The interim condensed financial statements, in the opinion
of management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly our financial position as of July 31,
2003, the results of operations for the three and nine months ended July 31,
2003 and 2002, and cash flows for the nine months ended July 31, 2003 and 2002.
The results of operations for the three and nine months ended July 31, 2003 and
2002 are not necessarily indicative of the results to be expected for the full
year. The reader should supplement the information in this document with prior
disclosures in our 2002 Annual Report on Form 10-K.
RECLASSIFICATIONS
Certain reclassifications have been made in the 2002 balance sheet to conform
with the 2003 presentation.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee's stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. We apply the
intrinsic value method of recognition under APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123. The pro forma amounts provided
may not be representative of future disclosures since the estimated fair value
of stock options is amortized to expense over the vesting period, and additional
options may be granted in future years. The pro forma amounts assume that the
Company had been following the fair-value-based method since the beginning.
H-140
FUELCELL ENERGY, INC.
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS)
The following table illustrates the effect on net loss and net loss per basic
and diluted share as if we had applied the fair value method to our stock-based
compensation, as required under the disclosure provisions of SFAS No. 123:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2003 2002 2003 2002
-------- -------- -------- --------
Net loss $(15,020) $(13,190) $(52,034) $(28,094)
Deduct: Stock based compensation determined under fair-value
based method for all awards (2,372) (2,052) (6,802) (6,159)
-------- -------- -------- --------
Proforma net loss $(17,392) $(15,243) $(58,836) $(34,253)
Basic and diluted loss per share:
As reported $ (0.38) $ (0.34) $ (1.32) $ (0.72)
Pro forma $ (0.44) $ (0.39) $ (1.50) $ (0.88)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
JULY 31,
2003 2002
---- ----
Risk-free interest rate 3.45% 4.30%
Expected life in years 7.5 7.5
Expected volatility 65.0% 87.6%
Expected dividend yield -- --
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
No. 143, "Accounting for Asset Retirement Obligations". Statement No. 143
requires recording the fair market value of an asset retirement obligation as a
liability in the period in which a legal obligation associated with the
retirement of tangible long-lived assets is incurred. The Statement also
requires recording the contra asset to the initial obligation as an increase to
the carrying amount of the related long-lived asset and depreciation of that
cost over the life of the asset. The liability is then increased at the end of
each period to reflect the passage of time and changes in the initial fair value
measurement. We adopted the provisions of Statement No. 143 effective January 1,
2003 and the adoption did not have a significant effect on our financial
statements or disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" (SFAS 148). SFAS 148 amends SFAS No. 123
"Accounting for Stock-Based Compensation," (SFAS 123) to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The additional disclosure requirements of SFAS 148 are effective for
fiscal years ending after December 15, 2002. We have elected to continue to
follow the intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). We have complied with the disclosure requirements of SFAS 148 in the "Stock
Based Compensation" paragraph above.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. We do not believe that this standard will have a
material impact on our financial statements.
H-141
FUELCELL ENERGY, INC.
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS)
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." The
Statement requires issuers to classify as liabilities (or assets in some
circumstances) three classes of freestanding financial instruments that embody
obligations for the issuer. Generally, the Statement is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective for us beginning on August 1, 2003. We have not entered into any
financial instruments within the scope of the Statement to date through July 31,
2003. However, we are evaluating the effect of this Statement on our financial
statements and disclosures.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." The Interpretation may have an effect on existing
practice because it requires existing variable interest entities to be
consolidated if those entities do not effectively disperse risks among the
parties involved. The Interpretation is effective immediately for all variable
interest entities created after January 31, 2003. We are required to apply the
provisions of this Interpretation no later August 1, 2003 to all variable
interest entities created before February 1, 2003. We have determined that
adoption of this Interpretation did not and based on our current structure will
not have a material effect on our financial statements and disclosure.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45") "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken by it in issuing the guarantee. It also requires certain
disclosures in the financial statements of the guarantor with respect to its
obligations. We adopted this standard during the quarter ended July 31, 2003 and
its implementation has had no material impact on our financial statements.
NOTE 2: LOSS PER SHARE
Basic and diluted loss per share is calculated based upon the provisions of SFAS
No. 128.
We computed EPS without consideration to potentially dilutive instruments due to
the fact that losses incurred would make them antidilutive. For the three and
nine months ended July 31, 2003 and 2002, the weighted average shares of
potentially dilutive (in-the-money) stock options were 2,904,148 and 2,439,718
respectively. For the three and nine months ended July 31, 2003 and 2002, there
were 2,640,000 and 5,133,333 warrants to purchase our common stock,
respectively, all of which were out-of-the money. These warrants vest and expire
over time. These warrants, if dilutive, would be excluded from the calculation
of EPS since their vesting is contingent upon certain future performance
requirements that are not yet probable. Refer also to Note 8 - Subsequent Events
for additional discussion regarding our warrants.
NOTE 3: DEPRECIATION
Depreciation is calculated using the straight-line method. Buildings and
improvements are depreciated over periods from 10 to 30 years, machinery and
equipment from 3 to 8 years and furniture and fixtures from 6 to 10 years.
Depreciation expense for the three months ended July 31, 2003 and 2002 was $1.5
million and $0.8 million respectively. Depreciation expense for the nine months
ended July 31, 2003 and 2002 was $4.2 million and $2.1 million respectively.
NOTE 4: INVESTMENTS: U.S. TREASURY SECURITIES
Investments, which are accounted for as held to maturity, consist of U. S.
Treasury Securities.
H-142
FUELCELL ENERGY, INC.
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS)
SHORT-TERM INVESTMENTS:
These treasuries have maturity dates ranging from August 15, 2003 to July 31,
2004 and estimated yields ranging from 2.25% to 5.25%. As of July 31, 2003, and
October 31, 2002, the aggregate fair value, gross unrealized holding gains and
gross unrealized holding losses were as follows:
JULY 31, OCTOBER 31,
2003 2002
-------- --------
Aggregate fair value $ 86,712 $103,811
Gross unrealized holding gains 81 310
Gross unrealized holding losses 42 --
LONG-TERM INVESTMENTS:
These notes have maturity dates ranging from October 31, 2004 to January 31,
2005, and estimated yields ranging from 1.625% to 5.875%. As of July 31, 2003,
and October 31, 2002, the aggregate fair value, gross unrealized holding gains
and gross unrealized holding losses were as follows:
JULY 31, OCTOBER 31,
2003 2002
------- -------
Aggregate fair value $16,273 $14,670
Gross unrealized holding gains 49 86
Gross unrealized holding losses 13 3
NOTE 5: INVENTORIES, NET
The components of inventory at July 31, 2003 and October 31, 2002 consisted of
the following:
JULY 31, OCTOBER 31,
2003 2002
------- -------
Raw materials $ 7,655 $10,214
Work-in-process, net 8,044 3,767
------- -------
Total $15,699 $13,981
======= =======
NOTE 6: OTHER CURRENT ASSETS, NET
The components of other current assets at July 31, 2003 and October 31, 2002
consisted of the following:
JULY 31, OCTOBER 31,
2003 2002
------ ------
Advance payments to vendors $1,057 $2,902
Prepaid expenses and other 2,054 1,432
------ ------
Total $3,111 $4,334
====== ======
H-143
FUELCELL ENERGY, INC.
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS)
NOTE 7: ACCRUED LIABILITIES
The components of accrued liabilities at July 31, 2003 and October 31, 2002
consisted of the following:
JULY 31, OCTOBER 31,
2003 2002
------ ------
Accrued payroll and employee benefits $2,497 $3,250
Accrued contract and operating costs 2,229 4,174
Accrued taxes and other 951 391
------ ------
Total $5,677 $7,815
====== ======
NOTE 8: SUBSEQUENT EVENTS
INVESTMENT IN VERSA POWER SYSTEMS
On August 4, 2003 we made an investment totaling $1.5 million in Versa Power
Systems (Versa) of Des Plaines, Illinois which brought our total investment in
this company to $2 million representing 15.8% of Versa's shares. Our equity
position in Versa is expected to build and leverage intellectual property
development for market entry in the later phases of the Department of Energy's
Solid State Energy Conversion Alliance (SECA) program announced in April 2003.
Versa is a joint venture of the Gas Technology Institute, Electric Power
Research Institute, Materials and Systems Research Inc., the University of Utah
and FuelCell Energy, Inc. This investment will be accounted for on the cost
basis.
GLOBAL THERMOELECTRIC ACQUISITION
We announced on August 4, 2003 that we entered into a definitive agreement to
acquire Global Thermoelectric Inc., a leading developer of solid oxide fuel cell
(SOFC) technology, in an all-stock transaction. Following the close of the
transaction, we expect that Global shareholders will own approximately 17% to
20% of the fully diluted shares of FuelCell Energy, Inc. The total stock
consideration for this transaction is expected to be approximately $81.4 million
and we expect to incur cash transaction fees totaling approximately $1.7
million. The transaction is subject to the approval by the shareholders of both
companies, court approval, regulatory approvals and other customary closing
conditions. We filed a preliminary Joint Management Information Circular and
Proxy Statement regarding the proposed transaction with the U.S. Securities and
Exchange Commission. We currently expect to close on this transaction during the
fourth calendar quarter of this year.
STRATEGIC ALLIANCE WITH MARUBENI, INC.
On June 15, 2001, we signed a strategic alliance agreement with Marubeni, Inc.
On August 1, 2003, both companies have agreed to extend the terms of that
agreement by 18 months. As part of the original agreement, we issued 1,900,000
warrants to Marubeni. Under the extension, 760,000 of these warrants vest once
Marubeni has ordered a total of 10 MW of FuelCell's products and expire if
Marubeni has not done so by December 15, 2003. The remaining 1,140,000 warrants
vest once Marubeni has ordered a total of 45 MW of FuelCell's products and
expire if Marubeni has not done so by March 15, 2005. The warrants bear an
average exercise price of $42.90.
H-144
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Conditions and Results
of Operations (MD&A) is provided as a supplement to the accompanying
consolidated financial statements and footnotes to help provide an understanding
of our financial condition, changes in our financial condition and results of
operations. The MD&A is organized as follows:
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS. This section discusses how
certain forward-looking statements made by us throughout the MD&A are
based on management's present expectations about future events and are
inherently susceptible to uncertainty and changes in circumstances.
OVERVIEW. This section provides a general description of our business and
where investors can find additional information.
CRITICAL ACCOUNTING POLICIES. This section discusses those accounting
policies that are both considered important to our financial condition and
operating results and require significant judgment and estimates on the
part of management in their application.
RECENT DEVELOPMENTS. This section provides a brief overview of any
significant events occurring subsequent to the close of the reporting
period.
RESULTS OF OPERATIONS. This section provides an analysis of our results of
operations for the three and nine months ended July 31, 2003 and 2002,
respectively. In addition, a brief description is provided of transactions
and events that impact the comparability of the results being analyzed.
LIQUIDITY AND CAPITAL RESOURCES. This section provides an analysis of our
cash position and cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS. This section summarizes recent
accounting pronouncements.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the accompanying
Unaudited Condensed Financial Statements and Notes thereto included within this
report, and our audited financial statements and notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended October 31, 2002. All
dollar amounts are in thousands. In addition to historical information, this
Form 10-Q and the following discussion contain forward-looking statements,
including statements regarding our plans and expectations regarding the
development and commercialization of our fuel cell technology. Our actual
results could differ materially from those projected. Factors that could cause
such a difference include, but are not limited to, those set forth under the
caption "Risk Factors" in our Annual Report on Form 10-K filed for the fiscal
year ended October 31, 2002.
OVERVIEW
We are a world leader in the development and manufacture of carbonate fuel cell
power plants for distributed power generation. Our company has designed and is
developing standard fuel cell power plants that offer significant advantages
compared to existing power generation technology. These advantages include
higher fuel efficiency than existing distributed generation equipment,
significantly lower emissions, quieter operation, flexible siting and permitting
requirements, scalability and potentially lower operating, maintenance and
generation costs.
Our carbonate fuel cell, known as the Direct FuelCell(R) or DFC(R), 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 to produce
hydrogen. FuelCell believes that this "one-step" 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 proton
exchange membrane and phosphoric acid, generally use complex, external fuel
processing equipment to convert the fuel into hydrogen. This external equipment
increases capital cost and reduces electrical efficiency.
H-145
We expect that commercial DFC power plant products will achieve an electrical
efficiency of between 45% and 57%. Depending on location, application and load
size, we expect that a co-generation configuration will reach an overall energy
efficiency of between 70% and 80%.
Our DFC products are designed to meet the power requirements of a wide range of
customers, such as utilities, industrial facilities, data centers, wastewater
treatment plants, office buildings, hospitals, universities and hotels. We are
bringing our stationary DFC power plants to such target applications now,
delivering 22 units (DFC power plants and fuel cell stacks) from Nov. 1, 2002
through September 9, 2003, and have generated over 14 million kilowatt hours of
electricity at customer sites in Europe, Japan and the U.S. since November 1999.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports will be made available free of
charge through the Investor Relations section of the Company's Internet website
(http://www.fuelcellenergy.com) as soon as practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission. Material contained on our website is not incorporated by reference
in this report. Our executive offices are located at 3 Great Pasture Road,
Danbury, CT 06813.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
Our revenues and fees on long-term contracts are recognized on a method similar
to the percentage-of-completion method. Revenues are recognized proportionally
as research and development costs are incurred and compared to the estimated
total research and development costs for each contract or field trial. In many
cases, we are reimbursed only a portion of the costs incurred or to be incurred
on the contract. At the point that our fuel cells are commercial, estimated
costs to complete an individual contract in excess of revenue will be accrued
immediately.
Revenues from Government funded research, development and demonstration programs
are generally multi-year, cost reimbursement and/or cost shared type contracts
or cooperative agreements. We are reimbursed for reasonable and allocable costs
up to the reimbursement limits set by the contract or cooperative agreement.
Warrant Value Recognition
Warrants have been issued as sales incentives to certain of our business
partners. As we recognize the associated revenue for orders placed in accordance
with these sales agreements, a proportional amount of the fair value of the
warrants will be recorded against the revenue as a sales discount. No discounts
have been recorded to date.
Inventories
As discussed above, we recognize research and development costs for contracts as
incurred. When we incur costs for material, labor and overhead to build fuel
cell stacks which have not yet been dedicated to a particular contract, we
include them in work-in-process (WIP) inventory to the extent we estimate them
to be recoverable based on anticipated use of the fuel cell stacks and projected
cost reimbursement on these contracts. During the normal course of business, we
will dedicate the fuel cell stacks in WIP inventory to a contract, at which
point in time the inventory costs are charged to cost of research and
development contracts or cost of product sales and revenues, and when
appropriate, revenue will be recognized on these costs.
As we increase our commercial activities, we anticipate that our assessment of
recoverability of inventory costs will become increasingly dependent upon the
amount we believe we can sell the fuel cell stacks in the commercial market, and
less on the extent to which costs are reimbursed pursuant to government
contracts.
H-146
Research and Development
Our cost of research and development contracts reflect costs incurred under
specific customer sponsored research and development contracts. These costs
consist of both manufacturing and engineering labor, including applicable
overhead expenses, materials to build prototype units, materials for testing,
and other costs associated with our customer sponsored research and development
contracts.
Our research and development expenses reflect costs for research and development
projects conducted without specific customer sponsored contracts. These costs
consist primarily of engineering labor, overhead, materials to build prototype
units, materials for testing, consulting fees and other costs associated with
our internal research and development expenses.
RECENT DEVELOPMENTS
INVESTMENT IN VERSA POWER SYSTEMS
On August 4, 2003 we made an investment totaling $1.5 million in Versa Power
Systems (Versa) of Des Plaines, Illinois which brought our total investment in
this company to $2 million representing 15.8% of Versa's shares. Our equity
position in Versa is expected to build and leverage intellectual property
development for market entry in the later phases of the Department of Energy's
Solid State Energy Conversion Alliance (SECA) program announced in April 2003.
Versa is a joint venture of the Gas Technology Institute, Electric Power
Research Institute, Materials and Systems Research Inc., the University of Utah
and FuelCell Energy, Inc. This investment will be accounted for on the cost
basis.
GLOBAL THERMOELECTRIC ACQUISITION
We announced on August 4, 2003 that we entered into a definitive agreement to
acquire Global Thermoelectric Inc., a leading developer of solid oxide fuel cell
(SOFC) technology, in an all-stock transaction. Following the close of the
transaction, we expect that Global shareholders will own approximately 17% to
20% of the fully diluted shares of FuelCell Energy, Inc. The total stock
consideration for this transaction is expected to be approximately $81.4 million
and we expect to incur cash transaction fees totaling approximately $1.7
million. The transaction is subject to the approval by the shareholders of both
companies, court approval, regulatory approvals and other customary closing
conditions. We filed a preliminary Joint Management Information Circular and
Proxy Statement regarding the proposed transaction with the U.S. Securities and
Exchange Commission. We currently expect to close on this transaction during the
fourth calendar quarter of this year.
STRATEGIC ALLIANCE WITH MARUBENI, INC.
On June 15, 2001, we signed a strategic alliance agreement with Marubeni, Inc.
On August 1, 2003, both companies have agreed to extend the terms of that
agreement by 18 months. As part of the original agreement, we issued 1,900,000
warrants to Marubeni. Under the extension, 760,000 of these warrants vest once
Marubeni has ordered a total of 10 MW of FuelCell's products and expire if
Marubeni has not done so by December 15, 2003. The remaining 1,140,000 warrants
vest once Marubeni has ordered a total of 45 MW of FuelCell's products and
expire if Marubeni has not done so by March 15, 2005. The warrants bear an
average exercise price of $42.90.
H-147
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JULY 31, 2003 AND JULY 31, 2002
REVENUES
The following tables summarizes our revenue mix for the three months ended
July 31, 2003 and 2002 (dollar amounts in thousands), respectively:
THREE MONTHS ENDED THREE MONTHS ENDED
JULY 31, 2003 JULY 31, 2002 PERCENTAGE
---------------------- ---------------------- INCREASE /
PERCENT OF PERCENT OF (DECREASE) IN
PRODUCT PRODUCT PRODUCT PRODUCT
REVENUES REVENUES REVENUES REVENUES REVENUES
-------- -------- -------- -------- --------
Research and development contracts $ 4,715 65% $10,291 86% (54)%
Product sales and revenues 2,561 35% 1,671 14% 53%
------- ------- ------- ------- -------
Total $ 7,276 100% $11,962 100% (39)%
======= ======= ======= ======= =======
Revenues for the three months ended July 31, 2003 decreased by $4.7 million or
39%, to $7.3 million from the $12.0 million during the same period of the prior
year. This decrease in total revenues was comprised of a 54% decrease in
government research and development contracts partially offset by an increase in
product sales revenue. This decrease in government contract revenue is due to
timing of available funding on contracts in which we are currently
participating. The additional product sales revenue was related to the
manufacture of DFC300A power plants for our distribution partners. As a percent
of total revenues, product revenues comprised 35% of total revenues compared to
14% in the prior year. The decrease in revenues associated with our research and
development contracts reflect reduced funding on certain government contracts.
COSTS AND EXPENSES
Cost of product sales and revenues increased to $8.3 million or 12% during the
three months ended July 31, 2003 compared to $7.4 million during the same period
in the prior year. This increase was due to additional product sales recorded
during the period.
Cost of research and development contracts decreased to $9.6 million or 33%
during the three months ended July 31, 2003, compared to $14.3 during the 2002
period primarily due to decreased activities on government contracts.
Administrative and selling expenses increased by 20%, to $3.2 million during the
three months ended July 31, 2003 compared to the $2.7 million recorded in the
2002 period. This increase was primarily comprised of higher business insurance
costs and franchise taxes partially offset by decreases in salaries and
benefits.
Research and development expenses increased 6%, to $2.0 million during the three
months ended July 31, 2003 compared to the $1.9 million recorded in the 2002
period. This increase is primarily due to increased investment in development
costs associated primarily with the design and engineering of our megawatt
products, the DFC1500 and DFC3000.
The net result of our revenues and costs was a loss from operations during the
three months ended July 31, 2003 totaling $15.9 million. This operating loss is
approximately 10% higher then the $14.4 million loss recorded during the 2002
period. We continue to invest in the standardization of our DFC power plants.
Other factors impacting the operating loss included, reduced funding on certain
government contracts, development of our distribution network, and increases in
operating costs including depreciation on new production equipment, business
insurance premiums, information systems and infrastructure.
H-148
OTHER INCOME (EXPENSE)
Interest and other income, net decreased by 29%, to $0.8 million during the
three months ended July 31, 2003 compared to the $1.2 million recorded in the
2002 period. This was due to declining interest income as a result of lower
interest rates and cash and investment balances compared to the prior year.
COMPARISON OF NINE MONTHS ENDED JULY 31, 2003 AND JULY 31, 2002
REVENUES
The following tables summarizes our revenue mix for the nine months ended
July 31, 2003 and 2002 (dollar amounts in thousands), respectively:
NINE MONTHS ENDED NINE MONTHS ENDED
JULY 31, 2003 JULY 31, 2002 PERCENTAGE
---------------------- ---------------------- INCREASE /
PERCENT OF PERCENT OF (DECREASE) IN
PRODUCT PRODUCT PRODUCT PRODUCT
REVENUES REVENUES REVENUES REVENUES REVENUES
-------- -------- -------- -------- --------
Research and development contracts $14,312 54% $23,407 85% (39)%
Product sales and revenues 12,157 46% 4,121 15% 195%
------- ------- ------- ------- -------
Total $26,469 100% $27,528 100% (4)%
======= ======= ======= ======= =======
Revenues for the nine months ended July 31, 2003 decreased by $1.0 million or
4%, to $26.5 million from the $27.5 million during the same period of the prior
year. This decrease in total revenues was comprised of a 39% decrease in
research and development contracts partially offset by an increase in product
sales revenue. The additional product sales revenue was related to the
manufacture of DFC300A power plants for our distribution partners and sales of
fuel cell components to MTU for their field trial program. As a percent of total
revenues, product revenues comprised 46% of total revenues compared to 15% in
the prior year. The decrease in revenues associated with our research and
development contracts reflect reduced funding on certain government contracts.
COSTS AND EXPENSES
Cost of product sales and revenues increased to $38.2 million or 121% during the
nine months ended July 31, 2003 compared to $17.3 million recorded during the
same period in the prior year. This increase was due to additional product sales
recorded during the period. Our ratio of costs associated with product sales is
approximately 3.1 to 1 as we continue to install and demonstrate our products to
gain market acceptance.
Cost of research and development contracts decreased to $28.4 million or 4%
during the nine months ended July 31, 2003, compared to $29.5 recorded during
the 2002 period primarily due to activities on government contracts.
Administrative and selling expenses increased by 17%, to $9.6 million during the
nine months ended July 31, 2003 compared to the $8.2 million recorded in the
2002 period. This increase was primarily comprised of higher business insurance
premiums, franchise taxes and selling expenses.
Research and development expenses increased 31%, to $6.1 million during the nine
months ended July 31, 2003 compared to the $4.6 million recorded in the 2002
period. This increase is primarily due to increased investment in development
costs associated primarily with the design and engineering of our products, the
DFC300A, DFC1500 and DFC3000.
The net result of our revenues and costs was a loss from operations during the
nine months ended July 31, 2003 totaling $55.8 million compared to the $32.1
million loss recorded during the 2002 period. We continue to invest in the
standardization of our DFC power plants and bringing our products to market.
Other factors impacting the operating loss included, reduced funding on certain
government contracts, development of our distribution network, and increases in
operating costs including depreciation on new production equipment, business
insurance premiums, information systems and infrastructure.
H-149
OTHER INCOME (EXPENSE)
Interest and other income net decreased by 7%, to $3.6 million during the nine
months ended July 31, 2003 compared to the $3.9 million recorded in the 2002
period. This was due to declining interest income as a result of lower interest
rates and cash and investment balances compared to the prior year. Included in
other income in fiscal 2003 was also a state research and development incentive
for $1.4 million in fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2003, we had total cash, cash equivalents and investments in
treasury securities of approximately $169 million. We continue to invest in new
product development and brining our products to market, as such, we are not
currently generating positive cash flow from our operations. Our operations are
funded primarily through sales of equity, cash generated from operations and
borrowings. Cash from operations includes revenue from government contracts and
cooperative agreements, field trial projects, sale of fuel cell components
primarily to MTU, license fees and interest income.
Our cash requirements depend on numerous factors, including the implementation
of our field follow program for our DFC300A products, which will be used to
monitor fleet performance to build operational history of our DFC300A power
plants. We expect this will enable us to further enhance our product design to
allow for cost reduction, performance improvement, increased reliability and
serviceability. Other factors include the initiation of our megawatt class field
trial program, and development of our DFC/Turbine and diesel DFC products. We
expect to devote substantial capital resources to achieve our overall product
goals of cost reduction, performance improvement, reliability and
serviceability. We believe that we can achieve these goals through our near term
product strategy of developing standard products, increasing volume production,
further development of our distribution network and operating units in the
field. We expect such activities will be funded from existing cash, cash
equivalents, investments and cash from operations.
Our research and development contracts are generally multi-year, cost
reimbursement type contracts. The majority of these are U. S. Government
contracts that are dependent upon the government's continued allocation of funds
and may be terminated in whole or in part at the convenience of the government.
In April, we were notified that Congressional appropriations for our cooperative
agreement with the DOE for the current fiscal period was reduced by
approximately $5 million as compared to historical annual funding levels.
Funding for the U.S. Navy marine diesel program (approximately $2.5 million) was
also delayed. We expect that the remainder of the funding will be made available
to us in the next fiscal year. In May, we were selected by the DOE as a prime
"awardee" for the SECA program. This is a ten-year, $139 million cost-share
co-operative agreement with three phases. The first phase is a three-year $24
million program cost-shared award. We will continue to seek research and
development contracts for all of our product lines. To obtain contracts, we must
continue to prove the benefits of our technologies and be successful in our
competitive bidding.
We anticipate that our existing capital resources, together with anticipated
revenues, will be adequate to satisfy our planned financial requirements and
agreements through at least the next twelve months.
CASH INFLOWS AND OUTFLOWS
During the nine months ended July 31, 2003, cash and cash equivalents and
investments decreased by $52.0 million compared with a decrease of $50.0 million
during the nine months ended July 31, 2002. We used a total of $36.8 million of
cash and cash equivalents during the nine months ended July 31, 2003 as well as
$15.1 million of matured short and long-term investments.
The key components our cash use are as follows:
Operating Activities: During the nine months ended July 31, 2003, we used
$46.6 million in cash, which consists of a net loss for the period of
approximately $52.0 million, offset by non-cash adjustments (primarily
depreciation) of $4.6 million and an increase in working capital of
approximately $0.8 million. This compares to an operating cash usage of
$40.5 million during the nine months ended July 31, 2002. The increase in
operating cash usage is due to higher net losses partially offset by
higher depreciation and less working capital use compared to the prior
period.
H-150
Investing Activities: Capital expenditures for the nine months ended July
31, 2003 were approximately $5.3 million lower than the comparable nine
months of the prior year as we completed the majority of the Torrington
facility production equipment purchases in 2002.
Financing Activities: During the nine months ended July 31, 2003, we
generated $0.1 million in financing activities, from the exercise of stock
options and purchases of shares in our employee stock purchase plan offset
by repayments of debt. This compares with $1.1 million generated in 2002
which included borrowings of approximately $0.8 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
No. 143, "Accounting for Asset Retirement Obligations". Statement No. 143
requires recording the fair market value of an asset retirement obligation as a
liability in the period in which a legal obligation associated with the
retirement of tangible long-lived assets is incurred. The Statement also
requires recording the contra asset to the initial obligation as an increase to
the carrying amount of the related long-lived asset and depreciation of that
cost over the life of the asset. The liability is then increased at the end of
each period to reflect the passage of time and changes in the initial fair value
measurement. We adopted the provisions of Statement No. 143 effective January 1,
2003 and the adoption did not have a significant effect on our financial
statements or disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" (SFAS 148). SFAS 148 amends SFAS No. 123
"Accounting for Stock-Based Compensation," (SFAS 123) to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The additional disclosure requirements of SFAS 148 are effective for
fiscal years ending after December 15, 2002. We have elected to continue to
follow the intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). We have complied with the disclosure requirements of SFAS 148 in the "Stock
Based Compensation" paragraph above.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. We do not believe that this standard will have a
material impact on our financial statements.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." The
Statement requires issuers to classify as liabilities (or assets in some
circumstances) three classes of freestanding financial instruments that embody
obligations for the issuer. Generally, the Statement is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective for us beginning on August 1, 2003. We have not entered into any
financial instruments within the scope of the Statement to date through July 31,
2003. However, we are evaluating the effect of this Statement on our financial
statements and disclosures.
H-151
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." The Interpretation may have an effect on existing
practice because it requires existing variable interest entities to be
consolidated if those entities do not effectively disperse risks among the
parties involved. The Interpretation is effective immediately for all variable
interest entities created after January 31, 2003. We are required to apply the
provisions of this Interpretation no later August 1, 2003 to all variable
interest entities created before February 1, 2003. We have determined that
adoption of this Interpretation did not and based on our current structure will
not have a material effect on our financial statements and disclosure.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45") "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken by it in issuing the guarantee. It also requires certain
disclosures in the financial statements of the guarantor with respect to its
obligations. We adopted this standard during the quarter ended July 31, 2003 and
its implementation has had no material impact on our financial statements.
H-152
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
Our exposures to market risk for changes in interest rates, relate primarily to
our investment portfolio and long term debt obligations. Our investment
portfolio includes both short-term United States Treasury instruments with
maturities averaging three months or less, as well as U.S. Treasury notes with
fixed interest rates with maturities of up to twenty months. Cash is invested
overnight with high credit quality financial institutions. Based on our overall
interest exposure at July 31, 2003, including all interest rate sensitive
instruments, a near-term change in interest rate movements of 1% would affect
our results of operations by approximately $0.7 million annually.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic SEC reports. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
H-153
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT DESCRIPTION
Exhibit 31.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(B) REPORTS ON FORM 8-K
We filed on Form 8-K dated June 3, 2003 under Item 5 "Other Events," a press
release announcing the Company's second quarter results.
We filed on Form 8-K dated August 4, 2003 under Item 5 "Other Events," a
Combination Agreement with Global Thermoelectric Inc. (Global) providing for the
Company to acquire Global in an all-stock transaction.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FUELCELL ENERGY, INC.
(REGISTRANT)
September 12, 3003 /s/ Joseph G. Mahler
------------------ --------------------
DATE JOSEPH G. MAHLER
Senior Vice President, Chief Financial
Officer, Treasurer and Corporate Secretary
(Principal Financial Officer and Principal Accounting Officer)
H-154
INDEX OF EXHIBITS
Exhibit 31.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
H-155
ANNEX I - ADDITIONAL INFORMATION ABOUT GLOBAL
Attached hereto are:
- Renewal annual information form of Global dated May 6, 2003;
- Interim Report 1 for the Quarter Ended March 31, 2003;
- Interim Report 2 for the Quarter Ended June 30, 2003.
ANNEX I - ADDITIONAL INFORMATION ABOUT GLOBAL
[GLOBAL THERMOELECTRIC LOGO]
GLOBAL THERMOELECTRIC INC.
ANNUAL INFORMATION FORM
FOR THE YEAR ENDED DECEMBER 31, 2002
MAY 6, 2003
I-2
TABLE OF CONTENTS
THE CORPORATION I-4
BUSINESS OF THE CORPORATION I-4
GENERAL DEVELOPMENT OF THE BUSINESS I-4
NARRATIVE DESCRIPTION OF THE BUSINESS I-7
FACILITIES AND EQUIPMENT I-16
RESEARCH AND DEVELOPMENT I-16
HUMAN RESOURCES I-17
SELECTED CONSOLIDATED FINANCIAL INFORMATION I-18
SELECTED QUARTERLY CONSOLIDATED INFORMATION I-18
CONSOLIDATED FINANCIAL STATEMENTS I-19
MANAGEMENT'S DISCUSSION AND ANALYSIS I-43
MARKET FOR SECURITIES I-51
DIRECTORS AND OFFICERS I-52
DIVIDEND RECORD AND POLICY I-54
RISK FACTORS I-55
ADDITIONAL INFORMATION I-61
I-3
THE CORPORATION
Global Thermoelectric Inc. (the "Corporation") was originally
incorporated as Global Thermoelectric Power Systems Ltd. on March 10, 1975 and
was continued under the Business Corporations Act (Alberta) on December 30,
1983. On April 1, 1985, the Corporation amalgamated with its wholly-owned
subsidiary, Rigtronics Systems Ltd. Pursuant to Articles of Amendment dated
April 8, 1991, the Corporation changed its name to Global Thermoelectric Inc.
On September 17, 2001, the Corporation incorporated Global
Thermoelectric Corporation, a wholly-owned subsidiary, in the state of Delaware,
United States. Global Thermoelectric Corporation markets and sells
thermoelectric generators in the U.S. and has a sales office located in Houston,
Texas.
The head office and registered office of the Corporation is located at
4908 - 52nd Street S.E. Calgary, Alberta T2B 3R2.
BUSINESS OF THE CORPORATION
The Corporation is focused on the development and commercialization of
solid oxide fuel cell ("SOFC") products. It is also engaged in the development,
manufacture and sale of thermoelectric power generators for remote power
applications.
Fuel cells combine hydrogen and oxygen electrochemically to produce
electricity, heat and water. Hydrogen is obtained from hydrocarbon fuels such as
natural gas, propane and gasoline. In the case of the Corporation's fuel cells,
these hydrocarbon fuels can be used with minimal external "reforming" (see
"Narrative Description of the Business -- How Fuel Cells Work"). Utilizing
electrochemical reactions to produce electricity results in a more efficient use
of fuel while producing less environmentally harmful emissions such as nitrous
oxides. In addition, the scalability of fuel cell designs for distributed or
decentralized power production provides an economic alternative to large,
capital intensive power generation facilities. The ability to capture and
utilize the heat produced by the fuel cell also contributes to higher fuel
efficiencies. These advantages are important with the advent of deregulation
within the power industries of North America. Greater fuel efficiencies and fuel
cells' compatibility with a hydrogen fuel infrastructure also address concerns
related to energy security in the United States. Fuel cells can also be utilized
in transportation applications as replacements or supplements to the internal
combustion engine.
Thermoelectric generators produce electricity directly from heat and
are utilized for remote power applications in the pipeline, oil and gas and
telecommunication industries.
GENERAL DEVELOPMENT OF THE BUSINESS
GENERAL
After being incorporated, the Corporation's business was concentrated
mainly on funded and contract research activities, and by 1993, the Corporation
had refined its focus to the manufacture and sale of thermoelectric generators
and air heaters for military vehicles.
In early 1997, as part of its ongoing effort to enhance its power
generator product line, the Corporation researched available fuel cell
technologies. In July 1997, the Corporation signed a Memorandum of Agreement
with Forschungszentrum Julich ("Julich") for a worldwide non-exclusive licence
to review Julich's technology for use in development of a commercially viable
fuel cell product line. Julich is a government funded research organization that
has more than 4,500 employees, a budget of approximately $380 million per year
and concentrates on energy related matters including fusion and fuel cell
research.
I-4
In April 1999, the Corporation reported a series of successes in its
efforts to improve upon its fuel cell technology. Increased power output was
achieved while operating temperatures were lowered, allowing for the use of
lower cost materials in the fuel cell stack assembly. On October 25, 2001, the
Corporation announced that it had been released from all existing licensing
obligations, including royalty payments to Julich, for a payment of
approximately $68,000 to Julich.
In April and August of 1999, the Corporation received two purchase
orders for fuel cell stacks from Delphi Automotive Systems ("Delphi"), the
world's largest supplier of automotive components, systems and modules. Delphi
utilized the Corporation's fuel cells in their development project for
transportation applications. The Corporation has since completed its work
related to these purchase orders.
On July 12, 1999, the Corporation secured a contract worth $19 million,
the largest in the Corporation's history, to supply the Gas Authority of India
with thermoelectric generators and installation services in India.
On October 21, 1999 and November 22, 1999, the Corporation closed
Special Warrant financings for gross proceeds of $12.7 million and $15.3
million, respectively. In total, 3.3 million Special Warrants were issued that
were subsequently exercised for an equal number of common shares of the
Corporation for no additional consideration. Proceeds from these equity
offerings were earmarked for additional fuel cell development, the establishment
of a pilot scale manufacturing plant for fuel cells and fuel cell systems and
general corporate purposes.
On February 3, 2000, the Corporation announced that it had successfully
tested a fuel cell system prototype for residential power applications. The
system incorporated improvements in the Corporation's fuel cell power output and
system design.
On July 31, 2000, the Corporation entered into a strategic alliance
with Enbridge Inc. ("Enbridge") for the supply of natural gas-fuelled fuel cell
products suitable for the on-site supply of electric power and heating to homes.
Under the terms of the alliance, the Corporation issued Cumulative Redeemable
Convertible Preferred Shares, Series 2 (the "Series 2 Preferred Shares") for
gross proceeds of $25.0 million which was used to fund technology, design and
product development work. Enbridge has exclusive distribution rights in Canada
to the resulting residential fuel cell products. Under the terms of a joint
development agreement, Enbridge will provide input into product designs and
assist with regulatory and certification issues related to the launch of
commercial products.
On August 22, 2000, the Corporation closed an equity offering of
2,900,000 Special Warrants at $34.50 each for net proceeds of $94.6 million. The
Special Warrants were exercised for an equal number of common shares for no
additional consideration. Proceeds of this financing are being used to
accelerate the Corporation's SOFC research and development program, including
the manufacturing and testing of prototype systems.
On December 14, 2000, the Corporation announced the official opening of
its SOFC pilot production plant in Calgary, Alberta. The 32,000 ft(2) facility
will enable the Corporation to develop volume-orientated production processes,
including the utilization of existing manufacturing technologies adapted from
the computer chip industry.
In February 2001, the Corporation relocated its head office and took
occupancy of additional fuel cell research and development facilities
(comprising 47,000 ft(2) of combined space) adjacent to its pilot production
plant. In January 2002, an additional 24,000 ft(2) of leased space was added to
the research and development area.
Consistent with its strategy of focusing on power generating
technologies, including both fuel cells and thermoelectric generators, the
Corporation divested of its military heater division on August 24, 2001. In
2001, the Corporation recorded a gain on sale of the heater division of $0.7
million on sales proceeds of $2.1 million, reflecting the sale of the division's
fixed assets, goodwill and inventory. As part of the sale agreement, the
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Corporation is entitled to receive additional payments from the purchaser based
on heater sales over a subsequent five-year period should the purchaser be
successful in obtaining a follow-on contract with the U.S. military at specified
pricing levels. In conjunction with this sale agreement, the Corporation entered
into a supply agreement with the purchaser for the manufacture of certain
components of the heater product. During 2002, the Corporation reported $2.1
million in sales revenue related to these two contracts.
RECENT DEVELOPMENTS
On April 8, 2003, the Corporation and Quantum Fuel Systems Technologies
Worldwide, Inc., a Delaware Corporation ("Quantum"), entered into a combination
agreement (the "Combination Agreement") to combine the Corporation with Quantum
(the "Combination") in a share exchange pursuant to a plan of arrangement (the
"Plan of Arrangement"). On completion of the Combination: (i) common
shareholders of the Corporation will become stockholders of Quantum; (ii) the
Corporation's outstanding stock options will be exercisable into shares of
Quantum common stock; (iii) the Series 2 Preferred Shares will remain preferred
shares of the Corporation and Quantum will assume the obligation to issue common
stock upon their conversion; and (iv) the Corporation will become a consolidated
subsidiary of Quantum.
Upon closing of the Combination, Quantum is expected to integrate the
businesses and to significantly reduce the Corporation's level of cash
expenditures. Quantum is expected to maintain the Corporation's operations in
Alberta, with head office functions consolidated into Quantum's California
headquarters. Alan Niedzwiecki, Quantum's President and Chief Executive Officer,
and Brian Olson, Quantum's Chief Financial Officer, will lead the combined
company in those respective roles. Two members of the Corporation's Board of
Directors will join the Quantum board, which board will be expanded to seven
members.
Under the terms of the Plan of Arrangement, if approved, the
Corporation's common shareholders will receive Quantum common stock for their
common shares. The Corporation's common shares will be exchanged for shares of
Quantum common stock on the basis of an exchange ratio which is determined by
dividing U.S.$2.628378 by the 20-day volume-weighted average Quantum share price
ending three days prior to the Corporation's special meeting of its common
shareholders to approve the Plan of Arrangement. The specific exchange ratio
will be 0.835 Quantum shares for each common share of the Corporation if
Quantum's 20-day volume-weighted average common share price is above U.S.$3.15
and 1.020 Quantum common shares for each common share of the Corporation if
Quantum's 20-day volume-weighted average common share price is below U.S.$2.57.
If Quantum's 20-day volume-weighted common share price is between U.S.$2.57 and
U.S.$3.15, then the Corporation's common shareholders will receive U.S.$2.6284
of Quantum common stock for each common share of the Corporation. The
Corporation's common shareholders will receive cash in lieu of fractional
shares.
The Combination is expected to close in the third quarter of 2003.
Closing is subject to the satisfaction or waiver of a number of conditions
including the approval of the Plan of Arrangement by not less than 66 2/3% of
the votes cast by the Corporation's common shareholders at the special meeting
described above, the approval of the Combination and other matters by Quantum's
stockholders, the approval of the Court of Queen's Bench of Alberta, the
approval of Nasdaq and other customary closing conditions.
The Corporation must pay Quantum a termination fee of U.S.$2,000,000 in
cash if: (i) an acquisition proposal in respect of the Corporation is publicly
announced or is proposed, offered or made, the securityholders of the
Corporation do not approve the Plan of Arrangement and, within twelve months of
the termination of the Combination Agreement, the Corporation enters into,
directly or indirectly, an agreement, commitment or understanding with respect
to such acquisition proposal, an amended version thereof, a competing
acquisition proposal or an acquisition proposal solicited in response to the
foregoing, or any such acquisition proposal is consummated; (ii) prior to
approval of the Corporation's securityholders, Quantum terminates the
Combination Agreement because the Corporation has accepted, recommended,
approved or implemented a superior proposal; or (iii) Quantum terminates the
Combination Agreement because the Corporation's board of directors or any
committee thereof: (A) withdraws or modifies adversely to Quantum its advice to
the Corporation's common
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shareholders or makes a recommendation in favor of any acquisition proposal; or
(B) fails to reaffirm its advice within ten days upon request by Quantum or
after a competing acquisition proposal is announced, proposed, offered or made,
whichever occurs first. Quantum must pay the Corporation a termination fee of
U.S.$2 million upon the occurrence of similar events. In other circumstances
where the Combination Agreement is terminated, including the failure of a
party's securityholders to approve the Combination, a party may be required to
pay the other a fee of U.S.$900,000 as a reimbursement of expenses.
Each party to the Combination Agreement has the right to terminate the
agreement upon the occurrence of certain specified events, including, among
other things, the failure of shareholders to approve the Combination, the
modification by either board of its advice to shareholders, the recommendation
of a superior proposal or the failure to complete the Combination by September
30, 2003.
The Corporation may terminate the Combination Agreement without payment
of a termination fee or expense reimbursement if the daily volume-weighted
average of Quantum's stock price, calculated in accordance with the Combination
Agreement, is less than U.S.$2.15, calculated on a rolling basis for each
trading day during any 15 consecutive trading days after the date of the
Combination Agreement until the effective date of the Combination.
On May 6, 2003, Global reduced its workforce in its fuel cell division
by approximately one third, or 47 employees, which is expected to result in a
reduction of research and development expenses of approximately $5 million over
the next twelve months. During the course of Global's review of alternatives to
maximize shareholder value and in conjunction with its efforts to create a
sustainable solid oxide fuel cell program, Global determined that it needed to
significantly reduce expenditures and to focus on its core competency -- the
development of solid oxide fuel cell membranes and stack technology. Global
believes that this reduction maintains Global's staffing at a level which allows
it to continue to focus its efforts on its core technology development while
maintaining its prototype system capability.
NARRATIVE DESCRIPTION OF THE BUSINESS
FUEL CELLS
A fuel cell is an electrochemical device that produces electricity with
negligible combustion and without the harmful air contaminants that combustion
produces. Hydrogen fuel, which can be derived from natural gas, propane,
methanol or gasoline, and oxygen from the air are combined in a fuel cell to
produce electricity, with heat and water as the only significant by-products. A
fuel cell is more efficient in producing electricity from a fuel than are
combustion-based technologies. A fuel cell converts fuel directly into
electrical energy through an electrochemical reaction and, in the case of the
Corporation's fuel cells, operating efficiencies of about 35 to 45 percent may
be possible. When heat from the fuel cell is utilized, operating efficiencies of
up to 85 percent may be possible. As fuel cells operate with virtually no
combustion, they do not produce the airborne pollutants which are a major
by-product of combustion-based sources of electricity.
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HOW FUEL CELLS WORK
The following diagram illustrates the operation of the Corporation's
fuel cell membrane.
[FUEL CELL MEMBRANE DIAGRAM]
A SOFC membrane consists of three main solid parts: anode, cathode, and
an electrolyte. The anode and cathode are porous and allow only certain gases to
pass through them. Between the two is an electrolyte (which conducts
electricity) that will only allow oxygen ions to pass through from the cathode
to the anode. The oxygen ion combines with hydrogen to form water, heat, and
electricity, or with carbon monoxide to form carbon dioxide as well as
electricity and heat. As the oxygen ion passes through the electrolyte, the
resulting excess of electrons on the anode side completes an electrical circuit
through an external load to the electron deficient cathode side for the
production of a flow of electrons or electricity. Fuel cell membranes are
layered on top of each other separated by interconnects to form a fuel cell
stack. The Corporation is currently developing fuel cell stacks that comprise
five to 20 fuel cell membranes.
FUEL CELL SYSTEMS
A fuel cell system encompasses various processes and components. Raw
fuel is passed through a reformer, which releases the hydrogen from the fuel
before it enters the fuel cell stack. In some types of fuel cell technologies
(see " -- Fuel Cell Technology") this reforming process is a separate and
equipment intensive process. In the Corporation's fuel cells, this reforming is
relatively inexpensive as the fuel cell itself contributes to the reforming
process by virtue of its operating temperature. A less complicated and less
costly external reforming process is therefore required in the Corporation's
fuel cell system. The fuel cell stack, comprised of multiple fuel cell
membranes, produces DC electricity which, depending on the application, is then
used directly or converted to AC power by means of an inverter. To increase the
efficiency of the fuel cell, heat can be captured from the stack through the
utilization of a heat exchanger. As a result of operating in temperatures
ranging from 600-750(degree)C degrees, heat produced from the Corporation's fuel
cell system is easily utilized compared to heat produced from certain other fuel
cell technologies that operate at much lower temperatures.
FUEL CELL TECHNOLOGY
Fuel cells are typically classified by the electrolyte material they
utilize. The following are the most known types:
Alkaline fuel cells were utilized as early as the 1960s by NASA in the
Apollo program to power spacecraft electrical systems. As these fuel cells
require pure hydrogen and pure oxygen (or air from which carbon dioxide has been
removed) to operate, their applications are generally considered limited.
Phosphoric acid fuel cells are the most commercially developed fuel
cells for stationary power applications. They are currently being deployed in a
number of installations throughout Japan, Europe and the United States in
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mid to large stationary power applications and operate at temperatures of about
200(degree)C. The corrosive nature of their electrolyte material and system
complexity has negatively impacted their operating cost and life.
Molten carbonate fuel cells utilize a molten electrolyte and operate at
about 650(degree)C. They can be operated on internally reformed fuels, making
them suitable for stationary power applications. These type of fuel cells are
currently operating in various locations around the world, in large capacity
installations.
Proton exchange membrane ("PEM") fuel cells, which are also referred to
as polymer electrolyte membrane fuel cells, utilize a solid polymer (or plastic)
electrolyte. These fuel cells have received a significant commercialization
effort in the last five years by some of the largest companies in the fuel cell
industry. They operate at relatively low temperatures, of around 80(degree)C.
Currently, this type of fuel cell is being utilized in urban buses on a trial
basis and prototypes have been developed for residential co-generation, vehicle
propulsion and light industrial applications. However, sophisticated fuel
reforming is required if hydrocarbon based fuels are to be utilized as PEM fuel
cells require virtually pure hydrogen on which to operate.
Solid oxide fuel cells utilize a ceramic material as an electrolyte and
operate at temperatures between 600 and 1000(degree)C. SOFCs, because of their
operating temperatures, can operate on fuels such as natural gas and propane
without the need for costly external reforming of their fuel. In addition, they
can tolerate greater amounts of impurities, such as sulphur, which is often
found in such fuels as natural gas. These impurities need to be virtually
eliminated in PEM fuel cell systems to avoid serious degradation of fuel cell
materials. In addition, SOFCs can utilize carbon monoxide in the fuel mixture
without destroying the efficacy of the fuel cell membrane. Utilizing high
quality heat produced by the fuel cell system for heating water and space
heating significantly enhances the overall fuel efficiency of SOFCs. Conversely,
higher operating temperatures in SOFCs, compared to PEM fuel cells, generally
require longer warm up periods before electricity can be produced. The
Corporation is currently developing and commercializing SOFC products.
FUEL CELL MARKETS
In general, fuel cells have applications in three distinct markets,
stationary and portable power generation, and the transportation industry.
Stationary power involves the generation of electrical power for residential,
light industrial and large commercial purposes. In each of these areas,
utilizing heat generated as a by-product of the fuel cell adds to their economic
efficiency compared to conventional power sources. In the transportation
industry, fuel cells are being developed for propulsion systems in automotive
applications and also for auxiliary power alongside the internal combustion
engine for enhanced fuel economy and reduced emissions.
a) STATIONARY AND RESIDENTIAL POWER
The electrical power industry is currently being influenced by a number
of factors that have encouraged fuel cell development.
Deregulation
The electrical utility industry throughout North America is currently
in various stages of being deregulated which has increased competition for more
economic and scalable power generation solutions. In general, deregulation will
give consumers the ability to choose their supplier of electrical power and the
means by which it is generated. Currently, most electricity for mass consumption
is produced by coal, oil and natural gas fired generators, hydroelectric
facilities and nuclear power plants. Generating electricity from fossil fuels is
relatively inefficient as much of the energy produced is lost in the form of
heat. In addition, combustion of these fuels is an inherently less efficient
method of producing electricity than the electrochemical reaction utilized by
fuel cells. Further inefficiencies are encountered in conventional power
generation due to extensive transmission and distribution infrastructures
required where as much as 16% of electrical power may be lost. Distributed power
generation utilizing fuel cells for residential power and heat applications
overcomes these inefficiencies. Under a
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climate of deregulation, on-site utilities also may have the opportunity to
participate in distributed power applications as a number of fuel cell
technologies have the ability to utilize natural gas as a source of hydrogen
fuel. With a natural gas distribution network to residences and commercial
sites, these gas utilities could increase the amount of natural gas sold to
consumers utilizing their existing distribution infrastructure.
Increase in power consumption
Electricity consumption is increasing throughout North America and the
world. The prolific growth in computer use is contributing to this consumption
growth. Fuel cells are seen as a method of meeting this increased demand.
Increase dependence on reliability
Concern about the reliability of electrical power is increasing as a
number of areas in Canada and the United States are experiencing shortages or
"brown outs" during peak consumption periods. With the prospect of deregulation,
existing utilities in regulated regions may be hesitant to commit to significant
capital expenditures, the economics of which have yet to be determined. On-site
fuel cell systems avoid the significant capital costs of centralized generating
plants together with their associated transmission and distribution
infrastructure.
The trend towards an information economy driven by the tremendous
growth in internet use and the resultant economies that have emerged from this
use, has created a need for an extremely reliable power supply. Interruptions to
this supply are having more costly economic effects than ever before. In certain
applications power reliability may have to improve to 99.9999% from its
estimated current reliability of 99.9%. Fuel cells may be the source of this
improved reliability and a means to avoid the increasing shortages identified
above.
Increase in demand for remote power
The growth in rural and recreation homes that do not have access to
power from an existing grid has created an increasing demand for remote power
supplies. In addition, growth in the telecommunication industry has created an
increasing need for power for remote telecommunication repeater stations for
example. Fuel cells are seen as a potentially cost-effective and reliable source
of power in the absence of access to existing power grids.
Environmental concern and regulation
In Canada and the United States, environmental regulators have enacted
legislation that requires a reduction in power plant emissions including sulphur
and nitrogen oxides, which cause acid rain. The 1997 Kyoto Agreement will
require reductions in greenhouse gas emissions in those countries that ratify
their participation. Fuel cells emit much less carbon dioxide and negligible
amounts of other greenhouse gases compared to conventional power generating
facilities that rely on the combustion of fossil fuels.
Increasing concern of the security of United States energy sources
Geopolitical tensions and conflict in the Middle East, which area
accounts for 29% of the U.S.'s crude oil imports, has heightened concern about
the reliability and cost of this energy supply. Power generating technologies
that increase the efficiency of oil and gas consumed, and alternatively
technologies that are fuelled with hydrogen instead of conventional hydrocarbon
fuels, are seen as being manners in which this concern may be addressed in the
future.
b) TRANSPORTATION MARKETS
The transportation sector is currently viewed as a major contributor to
air pollution. In the United States, two thirds of petroleum consumption is
attributable to transportation purposes. Reducing environmentally
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damaging emissions while achieving more efficient use of fossil fuels has been
the objective of recent government regulations, particularly in the United
States. Beginning in 2005, ten percent of a manufacturer's new car sales in the
State of California must be zero and low emission vehicles.
In addition to use as a primary propulsion device for automobiles and
commercial vehicles, fuel cells can be utilized as auxiliary power alongside the
conventional internal combustion engine in transportation applications. The
efficiency of an internal combustion engine is limited by the laws of thermal
dynamics and efficiency losses through the transfer of thermal energy to
mechanical energy. In addition, recent innovations in automobile technology have
resulted in higher electric power requirements, today generated via the internal
combustion engine. Utilizing fuel cells, which are inherently more efficient
while producing less harmful emissions, is seen as an alternative source of
electricity for these applications.
FUEL CELL STRATEGY
The Corporation's primary objective is the commercialization of SOFC
systems for residential, commercial, and light industrial power applications.
Remote power applications, where accessibility to conventional power supplies is
limited, are viewed by the Corporation as the most likely immediate application
of its fuel cell technologies.
The Corporation's fuel cell commercialization strategy involves two
primary objectives:
a) TECHNICAL AND PRODUCT DEVELOPMENT
The Corporation has made significant proprietary improvements to the
SOFC technology as follows:
- The Corporation has developed new generation SOFC membranes
that have demonstrated considerably improved power output per
unit of area. At operating temperatures of 750(degree)C, the
Corporation has improved power output by 850 percent compared
to its initial fuel cell design. On July 16, 2002, the
Corporation was awarded its first U.S. patent covering the
design and composition of its fuel cell membrane, which
facilitates these high power densities.
- Through improved fuel cell membrane and stack designs, the
Corporation has improved the operating reliability of these
critical components of the fuel cell system. Long-term testing
(in excess of 2,600 hours) has demonstrated that a stack
service life of 12,000-15,000 hours of continuous operation
can be projected. Long-term testing lasting over a year in
duration has also confirmed that the Corporation's cell
membrane may be expected to have a service life of
approximately 25,000 hours or nearly three years.
- In 2002, the Corporation manufactured five natural gas
prototype fuel cell systems (model "RP-2"). Between May 2002
and the end of March 2003, the five RP-2 systems collectively
operated for approximately 14,200 hours with one system
achieving over 4,100 hours of operation. The RP-2 design also
demonstrated a net peak AC electrical efficiency (after
deducting all parasitic electrical losses) of 29 percent and
peak power output of 2.9 kW using the Corporation's latest
stack design.
- The Corporation's improved fuel cells and assemblies are
capable of producing significant amounts of power at
temperatures in the 700(degree)C to 750(degree)C range. This
lower temperature capability allows fuel cell power systems to
be assembled using the new generation membranes and common
stainless steel alloys, rather than the expensive and
difficult to machine exotic alloys that are generally required
by higher temperature SOFC systems.
- The Corporation has developed a new compressive system to seal
the edges of cell membranes to isolate the hydrogen and oxygen
flow channels from one another. The Corporation believes that
this innovative system will allow the cell stacks to handle
vibration and thermal cycling better than other solid oxide
systems which use glass seals that have a tendency to crack
under such conditions. This system should open up new
opportunities in applications where the unit must be cycled. A
patent application has been filed on behalf of the Corporation
to cover the new compressive sealing system.
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- The Corporation has made advances in its cell membrane
manufacturing processes by simultaneously co-firing all the
layers of the cell membrane. This technique has enabled the
Corporation to reduce manufacturing costs of its fuel cell
membranes. In the summer of 2001, the Corporation demonstrated
a production run of 1,000 cell membranes per week, up from 250
cells per week at the beginning of 2001.
The Corporation actively seeks to protect its intellectual property
being developed. It has filed 59 patent applications on 24 separate inventions.
All employees and contractors supplying strategic services to the Corporation
are required to sign confidentiality agreements governing their non-disclosure
obligations.
The ceramic structure and composition of the Corporation's fuel cell
membrane facilitates the utilization of existing manufacturing techniques
currently being employed in the computer chip industry. The Corporation believes
that its ability to utilize existing manufacturing processes provides a
significant competitive advantage in the pursuit of reduced fuel cell system
manufacturing costs.
Through additional development and commercialization of its technology,
the Corporation intends to reinforce the advantages of SOFCs in applications
where other fuel cell technologies have been better known. The Corporation
believes that the ability to utilize high grade heat to improve fuel efficiency
and the avoidance of expensive external fuel reforming, makes the Corporation's
SFOC technology better suited to smaller scale stationary power applications
than other fuel cell technology. Currently, the Corporation is focusing its
development and commercialization efforts on one to 25 kW applications.
b) STRATEGIC ALLIANCES
The Corporation's fuel cell commercialization strategy is to secure
additional strategic alliances and partnership relationships for the development
and distribution of its future products.
On July 31, 2000, the Corporation entered into a strategic alliance
with Enbridge to develop and distribute fuel cell products suitable for the
on-site supply of electric power and heating to residential homes. Enbridge, a
leader in energy transportation and distribution, owns and operates Canada's
largest natural gas distribution company, Enbridge Gas Distribution.
Under the terms of this alliance, Enbridge purchased $25.0 million of
Series 2 Preferred Shares of the Corporation to fund further residential fuel
cell commercialization. Enbridge is working with the Corporation to provide
commercial input into the product design and development phase with respect to
the residential market, and will have exclusive distribution rights for the
resulting products in Canada. The Corporation retains control over the
development process and owns the technology, designs, patents and trademarks.
From the Corporation's perspective, strategic alliances, such as the one with
Enbridge, provide improved market access to the consumer. In addition, valuable
market data can be obtained, a critical element in designing fuel cells for
broad market acceptance.
On September 5, 2001, the Corporation signed a Memorandum of
Understanding ("MOU") with Suburban Propane L.P. ("Suburban") of Whippany, New
Jersey to establish a strategic alliance for developing and distributing SOFC
power products in propane markets. Suburban is the U.S.'s third largest propane
gas marketer serving approximately 750,000 residential, commercial, industrial
and agricultural customers through more than 350 customer service centres in
over 40 states.
The Corporation views propane users as early adopters of its products.
These potential customers, for a variety of reasons but most often because of
remote locations, have unstable or expensive electricity supply and may be more
willing to access new technologies sooner than other customers.
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Consistent with its focus on propane applications, on January 21, 2002
the Corporation was awarded a grant of up to U.S.$500,000 by the U.S. Propane
Education and Research Council ("PERC"). This award is being used by the
Corporation to develop a propane fuel processor, thereby allowing its fuel cell
systems to extract hydrogen for their operation directly from propane. PERC was
established in 1996 by the U.S. propane industry and is committed to a
multi-year, multi-million dollar effort to improve consumer and employee safety,
to fund research and development of new and more efficient propane equipment and
to expand public awareness of propane and its many uses and environmental
advantages. A key objective of PERC's technology strategy is to develop new
end-use technologies to attract new customers and increase sales to the existing
customer base. In this regard PERC has identified the development of a propane
processor as a key enabling technology. As of December 31, 2002, the Corporation
had received U.S.$350,000 of the contract award based on work completed.
On February 19, 2002, the Corporation announced the signing of an MOU
that would facilitate Superior Propane Inc. ("Superior Propane") joining the
Corporation's alliance with Enbridge. By sublicensing certain distribution
rights in Canada from Enbridge, Superior will be involved in targeting the early
adopter market identified above. Superior Propane is Canada's largest and only
national marketer of propane, propane appliances and related support services
with over 300,000 customers.
As part of its North American initiative to develop additional
distribution channels and partners, on October 10, 2001, the Corporation
announced it had signed an MOU with Citizens Gas ("Citizens") of Indianapolis,
Indiana. On August 15, 2002, the Corporation signed a definitive agreement based
on the MOU. The definitive agreement anticipates the creation of a project to
modify the Corporation's SOFC system for Citizens' specific market as well as
engaging Citizens to distribute the Corporation's future products. Citizens is
the sole natural gas distributor in Indianapolis, Indiana with over 262,000
residential, commercial and industrial customers. Citizens is a Public
Charitable Trust established more than 100 years ago for the sole benefit of the
residents of Marion County and Indianapolis.
On January 29, 2002, the Corporation announced that it had signed an
MOU with Bonneville Power Administration ("Bonneville") to establish a strategic
relationship for the purposes of developing, evaluating and distributing the
Corporation's SOFC systems. Bonneville is also expected to purchase three of the
Corporation's SOFC systems for an anticipated price of U.S.$240,000 for field
testing use. Bonneville is an agency of the U.S. Department of Energy based in
Portland, Oregon. Bonneville sells approximately 46% of the electrical power
consumed in the Northwestern U.S. To deliver that power, Bonneville owns and
operates one of the largest high-voltage electrical transmission systems in the
world. Bonneville's principal service territory includes the states of Oregon,
Washington, Idaho and portions of Montana, California, Nevada, Utah and Wyoming.
Bonneville has been supporting the development and advancement of new
technologies, in particular fuel cells, to promote energy efficiency in its
electricity markets.
On July 16, 2002, the Corporation announced that Montana State
University-Billings ("MSUB") in partnership with Montana Dakota Utilities Co.
("MDU") will be evaluating the Corporation's fuel cell systems. Under terms of
the agreement with MSUB's Center for Applied Economic Research, within 12 months
of the signing date the Corporation will provide a residential natural gas
prototype system and a light industrial prototype methane fuelled system for
anticipated proceeds of U.S.$125,000 to the Corporation.
The Corporation's approach with potential distribution partners is to
structure collaboration around specific product groupings with a single set of
deliverables and timelines to market. This approach allows the Corporation to
maintain a high degree of continuity across its product portfolio and to reduce
time to market, development risk and cost. The MOUs that have been signed are at
various stages of progression towards establishing the working relationships
that the Corporation is seeking.
The Corporation continues its efforts to secure similar strategic
alliances in other jurisdictions around the world, with an initial focus on U.S.
markets.
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COMPETITION
The Corporation's competition in the fuel cell industry can be
categorized into two areas: conventional power technologies and improvements
thereto; and other fuel cell commercialization companies.
The Corporation intends to initially address stationary fuel cell power
generation markets in the one to 25 kW range such as residential, commercial,
light industrial and remote power applications. In addition to centralized power
producers, major competitors in this segment include suppliers of diesel and
natural-gas fuelled generators that produce electricity with internal combustion
engines or turbines. The Corporation believes that it has competitive advantages
due to the higher efficiencies inherent in its SOFC technologies. In addition,
the Corporation's fuel cell systems should operate more quietly than
conventional distributed generating equipment and should produce less harmful
emissions.
The prospect of fuel cell commercialization has spawned a wide range of
entrants into the fuel cell industry. The major competitors include, but are not
limited to, Acumentrics Corporation, Alstom, Anuvu Incorporated, Astris Energi
Inc., Avista Corporation, Ballard Power System Inc., Ceramatec, Inc., Cellex
Power Products Inc., Ceramic Fuel Cell Limited, Chubu Electric Co., Ltd.,
Cummins Power Generation, DCH Technology, Inc., Dais-Analytic Corporation,
Delphi Automotive Systems, Energy Conversion Devices, Energy Partners, L.C.,
Energy Vision Inc., Forschungszentrum Julich, FuelCell Energy, Inc., Fuel Cell
Technologies Ltd., Fuji Electric Co., Ltd., GE Corporation, General Motors
Corporation, Hitachi Electric Co., Ltd., Hyundai, Hydrogenics Corporation,
IdaTech Corporation, INDEC Ltd., International Fuel Cell, Kansai Electric Power
Co., Kyocera, Manhattan Scientifics, Inc., Matsushita Electric Co., Ltd.,
McDermott Technology Inc., Millenium Cell, Mitsubishi Electric Corporation,
Mitsubishi Electric Industrial Co., Ltd., Company, Motorola, NexTech Materials,
Ltd., NuVera Fuel Cells, Inc., Palcan, Plug Power Inc., Proton Energy Systems,
Inc., Rolls-Royce, Sanyo Electric Co., Ltd., Siemens-Westinghouse Power
Corporation, Sony, Sulzer Hexis AG, Toshiba Corporation, Tokyo Gas Co., Ltd.,
United Technologies Corporation, ZeTek Power Plc. and ZTEK Corporation.
The Corporation believes that the inherent benefits of its SOFC
technology and its commitment to accelerated development and commercialization
should provide competitive advantages as compared to other fuel cell companies.
THERMOELECTRIC GENERATORS
The Corporation's first product line was the manufacture and sale of
thermoelectric generators based on technology obtained from the Minnesota Mining
and Manufacturing Company. Thermoelectric generation involves the direct
conversion of heat energy to DC electric power. The Corporation has developed
these thermoelectric generators ("TEGs") into a line of sophisticated products
incorporating solid state controls, automatic startup and shutdown, and options
such as inverters to supply AC current.
TEGs are used as a source of electrical power in remote areas.
Applications include providing power for pipeline cathodic protection systems,
telecommunications and remote monitoring systems. The Corporation sells TEGs
into both the domestic and international markets. To date, sales have been made
to customers in more than 47 countries.
In July 1999, the Corporation received a $19.0 million order to supply
turnkey remote power systems for a pipeline being built for the Gas Authority of
India Limited ("GAIL"). This order was the largest in the Corporation's history,
and involved 304 thermoelectric generators over 65 sites along a 1,200 kilometre
pipeline in India. As of December 31, 2001, the Corporation had completed all of
its commitments under this order, and as of June 30, 2002 had collected the full
$19.0 million owing under this contract.
DESCRIPTION
The Corporation offers seven models of stand-alone thermoelectric
generators ranging in power output from 15 to 550 watts. Each model is supplied
in three or four versions, depending on options such as desired output voltage,
automatic shutdown and whether fuelled by propane or natural gas.
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THERMOELECTRIC TECHNOLOGY
A thermoelectric generator converts heat directly into electricity. As
heat moves from a gas burner through a thermoelectric module, it causes an
electric current to flow.
The heart of the Corporation's thermoelectric generators is a
hermetically sealed thermoelectric module or "thermopile" that contains an array
of lead-tin-telluride semiconductor elements. The durable module provides a
chemically stable environment for the thermoelectric materials ensuring a long
service life. On one side of the thermopile, a gas burner is installed, while
the opposite side is kept cool by aluminium cooling fins or a heat pipe
assembly. An operating generator maintains a temperature of approximately 540EC
on the hot side and 140EC on the cold side. Without the use of moving parts, the
heat flow through the thermopile creates steady DC electricity.
APPLICATION
The Corporation's thermoelectric generators are a reliable source of DC
power and have a wide range of applications. The generators are easily handled
and simple to install and, because they have no moving parts, maintenance
requirements are low and reliability is high. The generators are environmentally
friendly, operate silently, and can be left at remote sites unattended for 12 or
more months without maintenance.
Any application in areas unconnected to a commercial power grid that
requires up to 5,000 watts of DC or AC power with infrequent maintenance and
high reliability is a potential application for the Corporation's generators.
The generators are also often installed as an independent power source to
provide a backup to commercial grid power. The primary applications for the
Corporation's thermoelectric generators are summarized below:
a) CATHODIC PROTECTION
The Corporation's generators are a key component in cathodic protection
systems for underground oil and gas well casings and pipelines. The generators
add an impressed current to the casing or pipeline and therefore reduce
corrosion which could otherwise lead to pipe leaks or breakage and resultant
environmental damage.
b) DATA GATHERING, CONTROL SYSTEMS AND ENVIRONMENTAL MONITORING
The Corporation's thermoelectric generators are used as a power source
for data gathering systems which monitor and transmit oil and gas flow rates,
volumes and other essential data from remote production facilities and for
systems which control key oil and gas production equipment. The generators can
also power environmental monitoring equipment such as the hazardous gas
detection and warning systems frequently used in oil and gas production
operations.
c) TELECOMMUNICATIONS AND RADIO REPEATERS
The Corporation believes that the expanding market for cellular phone
networks and satellite communications systems will generate increased demand for
the Corporation's generators. Thermoelectric generators are capable of providing
an economical and reliable power source for the many transmitters, repeaters and
translators that are located in remote and rural areas to provide such
telecommunication services.
MARKETING STRATEGY
While the original patents for thermoelectric generator electrical
technology acquired from Minnesota Mining and Manufacturing Company in 1975 have
now expired, the Corporation continues to develop new models to address expanded
markets. For example, the Corporation is developing a 500 watt model for natural
gas production and drilling applications that require "hazardous proof"
certification. The Corporation will continue to keep the internal construction
of the generators as proprietary information.
I-15
The Corporation emphasizes customer service and support. Its marketing
team is comprised of engineers and technicians who are trained to identify
customer needs and to design custom solutions. Sales offices are strategically
located in Calgary, Alberta and Houston, Texas. The Corporation also has agents
or representatives in more than 20 countries. The majority of its U.S. and
foreign sales are denominated in U.S. dollars.
For the year ended December 31, 2002, sales outside Canada were
approximately 81% of the Corporation's generator revenue (65% for the year ended
December 31, 2001; 85% for the nine months ended December 31, 2000). Revenue
from GAIL accounted for 11% of the Corporation's generator revenue for the year
ended December 31, 2002 (4% for the year ended December 31, 2001; 38% for the
nine months ended December 31, 2000).
The Corporation intends to review growth opportunities to expand its
generator division's product offerings and geographical presence.
COMPETITION
To the best of the Corporation's knowledge, it is the only commercial
manufacturer of thermoelectric generators in the 15 watts to 550 watts power
range.
Solar panel technology provides indirect competition to the
Corporation's generators; however, the Corporation believes that its
thermoelectric generators offer an operating advantage compared to such
technology since they require less maintenance, and are more dependable than
current solar power industrial applications. In higher power applications,
closed cycle vapour turbine technology offered by a Middle East based company is
sometimes bid in competition to the Corporation's products. The Corporation
believes that its generators are more reliable than that type of device, which
has moving parts.
FACILITIES AND EQUIPMENT
The Corporation's head office is located in a leased facility at 4908
52nd Street S.E., Calgary, Alberta. Certain functions of the Corporation's fuel
cell division are also located in this facility, which is immediately adjacent
to the Corporation's fuel cell pilot production plant situated in leased
premises at 4852 52nd Street S.E., Calgary, Alberta. The Corporation's
thermoelectric generator division and its subsidiary are located in leased
facilities at #9, 3700 78 Ave. S.E., Calgary, Alberta, and at #614, 16760
Hedgecroft, Houston, Texas.
The Corporation also owns a 37,000 square foot facility in Bassano,
Alberta for thermoelectric generator manufacturing. The Corporation places a
high priority on the quality of its products and has qualified its generator
operations for ISO 9002 certification (an internationally recognized quality
assurance standard).
RESEARCH AND DEVELOPMENT
The Corporation incurred the following research, engineering and
product development costs by operating segment (expressed in thousands of
Canadian dollars).
YEAR YEAR NINE MONTHS
ENDED ENDED ENDED
DEC. 31, 2002 DEC. 31, 2001 DEC. 31, 2000
------------- ------------- -------------------
Fuel cell research, engineering and development $ 22,227 $ 13,988 $ 4,643
Generator research, engineering and development 1,094 1,099 337
--------- --------- ----------
$ 23,321 $ 15,087 $ 4,980
========= ========= ==========
I-16
HUMAN RESOURCES
As at the dates below, the Corporation employed the following numbers
of people(1):
DECEMBER 31,
-------------------------
2002 2001 2000
---- ---- ----
Fuel cell division 148 144 70
Generator division 101 83 83
Business development 4 7 1
General and administrative 20 25 19
---- ---- ----
Total 273 259 173
==== ==== ====
---------------
(1) Excludes personnel related to discontinued operations.
As part of its strategy to reduce its cash expenditure levels, on
November 19, 2002, the Corporation reduced its staffing levels by 22 positions.
These reductions were primarily in general and administrative and other support
departments not directly involved in core SOFC development or generator division
operations. On May 6, 2003, Global reduced its workforce in its fuel cell
division by approximately one third, or 47 employees (see "Narrative Description
of the Business -- Recent Developments").
Of the personnel based in Calgary, a significant number have university
degrees or technical diplomas (including 12 Ph.D.s), providing the specialized
skills that the Corporation requires to carry out its research and development
programs.
The Corporation believes its relationship with its employees is strong,
notwithstanding the effects of the downsizing initiatives discussed above. Its
employees are not represented by a labour union. Each employee is required to
sign a non-disclosure and non-competition agreement as a condition of
employment. To encourage attainment of medium and long-term corporate
objectives, and to promote employee retention, generally all employees
participate in the Corporation's incentive stock option plan.
I-17
SELECTED CONSOLIDATED FINANCIAL INFORMATION
YEAR ENDED YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
2002 2001 2000 2000
------------ ------------ ----------------- ----------
(THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA
Revenue from continuing operations $ 21,770 $ 15,357 $ 14,649 $ 18,534
Revenue--fuel cell contract research 541 -- -- --
Gross margin--generators 8,651 4,883 3,798 5,313
Investment income 2,899 5,911 3,605 444
Research, engineering and development-- net 23,321 15,087 4,980 1,980
Net (loss) earnings from continuing operations (24,543) (12,968) (1,967) 140
Per common share--basic and diluted (0.89) (0.49) (0.09) 0.00
Discontinued operations, net of income tax
Earnings (loss) from discontinued operations 137 433 (372) 112
Gain on sale of discontinued operations -- 744 -- --
----------- ----------- ---------- ----------
Total discontinued operations, net of income tax 137 1,177 (372) 112
Per common share--basic and diluted 0.01 0.04 (0.01) 0.01
Net (loss) earnings (24,406) (11,791) (2,339) 252
Per common share--basic and diluted (0.88) (0.45) (0.10) 0.01
Preferred share dividends 500 500 482 48
BALANCE SHEET DATA
Cash and cash equivalents and short-term investments $ 95,306 $ 121,064 $ 135,300 $ 24,290
Total assets 122,403 146,849 160,675 41,439
Long-term obligations 486 407 630 737
Shareholders' equity 114,465 139,272 151,467 35,085
SELECTED QUARTERLY CONSOLIDATED INFORMATION
2002 2001
----------------------------------------- ---------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
------- -------- ------- ------- ------- -------- ------- -------
(THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenue from continuing operations $ 6,047 $ 5,817 $ 5,438 $ 4,468 $ 3,109 $ 3,571 $ 2,379 $ 6,298
Revenue--fuel cell contract research 78 463 -- -- -- -- -- --
Investment income 693 788 753 665 993 1,407 1,636 1,875
Net loss from continuing operations (6,749) (4,871) (6,536) (6,387) (5,843) (2,959) (3,952) (214)
Per common share--basic and diluted (0.25) (0.18) (0.24) (0.23) (0.21) (0.12) (0.14) (0.02)
Net earnings (loss) from discontinued
operations 137 -- -- -- -- 968 (236) 445
Per common share--basic and diluted 0.01 -- -- -- -- 0.03 (0.01) 0.02
Net (loss) earnings (6,612) (4,871) (6,536) (6,387) (5,843) (1,991) (4,188) 231
Per common share--basic and diluted (0.24) (0.18) (0.24) (0.23) (0.21) (0.09) (0.15) 0.00
I-18
CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL THERMOELECTRIC INC.
DECEMBER 31, 2002
I-19
MANAGEMENT'S RESPONSIBILITY FOR REPORTING
The consolidated financial statements contained in this Annual
Information Form have been prepared by management in accordance with Canadian
generally accepted accounting principles. The integrity and objectivity of the
data in these consolidated financial statements are management's responsibility.
Management is also responsible for all other information in the Annual
Information Form and for ensuring that this information is consistent, where
appropriate, with the information and data contained in the consolidated
financial statements.
In support of its responsibility, management maintains a system of
internal controls to provide reasonable assurance as to the reliability of
financial information and the safeguarding of assets. Some of the assets and
liabilities include amounts which are based on estimates and judgments as their
final determination is dependent on future events.
PricewaterhouseCoopers LLP, Chartered Accountants, appointed by the
shareholders, have audited the financial statements and conducted a review of
internal accounting policies and procedures to the extent required by generally
accepted auditing standards and performed such tests as they deemed necessary to
enable them to express an opinion on the consolidated financial statements.
The Board of Directors, through its Audit Committee, is responsible for
ensuring that management fulfills its financial reporting responsibilities. The
Audit Committee is composed of independent directors who are not employees of
the Corporation. The Audit Committee reviews the financial content of the Annual
Information Form and meets regularly with management and PricewaterhouseCoopers
LLP to discuss internal controls, accounting, auditing and financial matters.
The Audit Committee recommends the appointment of the external auditors. The
Audit Committee reports its findings to the Board of Directors for its
consideration in approving the consolidated financial statements for issuance to
the shareholders.
/s/ PETER GARRETT /s/ PAUL A. CRILLY
------------------------------------- ---------------------------
Peter Garrett Paul A. Crilly, CA
President and Chief Executive Officer Vice President, Finance
and Chief Financial Officer
AUDITORS' REPORT
February 11, 2003
To the Shareholders of GLOBAL THERMOELECTRIC INC.
We have audited the consolidated balance sheet of GLOBAL THERMOELECTRIC
INC. as at December 31, 2002 and the consolidated statements of operations and
accumulated deficit and cash flows for the year then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the company as at December
31, 2002 and the results of its operations and its cash flows for the year then
ended in accordance with Canadian generally accepted accounting principles.
The consolidated financial statements as at December 31, 2001 and 2000
and for the periods then ended were audited by other auditors who expressed an
opinion without reservation on those statements in their report dated February
22, 2002.
/s/ PRICEWATERHOUSECOOPERS LLP
---------------------------------
PricewaterhouseCoopers LLP
CHARTERED ACCOUNTANTS
Calgary, Canada
I-20
AUDITORS' REPORT
To the Directors of GLOBAL THERMOELECTRIC INC.
We have audited the consolidated balance sheet of Global Thermoelectric
Inc. as at December 31, 2001 and the consolidated statements of operations and
accumulated deficit and cash flows for the year ended December 31, 2001 and the
nine month period ended December 31, 2000. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the company as at December
31, 2001 and the results of its operations and its cash flows for the year ended
December 31, 2001 and the nine month period ended December 31, 2000 in
accordance with Canadian generally accepted accounting principles.
Calgary, Canada /S/ ERNST & YOUNG LLP
February 22, 2002 ---------------------
Chartered Accountants
I-21
GLOBAL THERMOELECTRIC INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS)
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Current
Cash and cash equivalents $ 29,230 $ 83,370
Short-term investments 66,076 37,694
Accounts receivable (note 3) 4,806 5,155
Inventory (note 4) 3,096 4,220
Prepaid expenses 727 570
Current assets of discontinued operations (note 9) -- 502
--------- ---------
103,935 131,511
--------- ---------
Capital assets (note 5) 18,416 15,286
Investment 52 52
--------- ---------
$ 122,403 $ 146,849
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 7,014 $ 6,485
Income taxes payable 231 269
Current portion of obligations under capital leases (note 8) 207 233
Current liabilities of discontinued operations (note 9) -- 183
--------- ---------
7,452 7,170
--------- ---------
Research and development loan (note 7) 200 200
Site restoration (note 14) 286 --
Obligations under capital leases (note 8) -- 207
Commitments and contingencies (notes 6 and 14)
Shareholders' equity
Share capital (note 11) 158,920 158,821
Contributed surplus 725 725
Accumulated deficit (45,180) (20,274)
--------- ---------
114,465 139,272
--------- ---------
$ 122,403 $ 146,849
========= =========
See accompanying notes
Approved on behalf of the Board of Directors:
/s/ JOHN C. HOWARD /s/ ROBERT B. SNYDER
------------------ --------------------
Director Director
I-22
GLOBAL THERMOELECTRIC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Revenue--Generators $ 21,770 $ 15,357 $ 14,649
Cost of goods sold 13,119 10,474 10,851
-------- -------- ---------
Gross margin 8,651 4,883 3,798
Revenue--Fuel cell contract research 541 -- --
Investment income 2,899 5,911 3,605
-------- -------- ---------
12,091 10,794 7,403
-------- -------- ---------
Expenses
Research, engineering and development 23,321 15,087 4,980
Marketing 1,932 1,697 1,193
Business development 2,713 1,119 86
General and administrative 5,291 3,600 1,935
Interest on obligations under capital leases 29 47 55
Foreign exchange gain (49) (372) (276)
Depreciation 2,981 1,807 495
-------- -------- ---------
Loss from continuing operations before income taxes (24,127) (12,191) (1,065)
Income taxes (note 10)
Current 416 777 902
-------- -------- ---------
Net loss from continuing operations (24,543) (12,968) (1,967)
Discontinued operations net of income tax (note 9)
Earnings (loss) from discontinued operations 137 433 (372)
Gain on sale of discontinued operations -- 744 --
-------- -------- ---------
Net loss (24,406) (11,791) (2,339)
Accumulated deficit, beginning of period (20,274) (7,983) (5,162)
Dividends on preferred shares (note 11) (500) (500) (482)
-------- -------- ---------
Accumulated deficit, end of period $(45,180) $(20,274) $ (7,983)
======== ======== =========
Basic and diluted net loss per common share from
continuing operations (note 13) $ (0.89) $ (0.49) $ (0.09)
Basic and diluted net earnings (loss) per common share
from discontinued operations (note 13) 0.01 0.04 (0.01)
-------- -------- ---------
Basic and diluted net loss per common share (note 13) $ (0.88) $ (0.45) $ (0.10)
======== ======== =========
See accompanying notes
I-23
GLOBAL THERMOELECTRIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS)
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES
Net loss from continuing operations $ (24,543) $(12,968) $ (1,967)
Add (deduct) non-cash items:
Depreciation 2,981 1,807 495
Site restoration (note 14) 641 -- --
Loss (gain) on disposal of capital assets 16 12 (1)
Net change in non-cash working capital balances (note 15) 2,026 853 953
---------- -------- --------
(18,879) (10,296) (520)
---------- -------- --------
FINANCING ACTIVITIES
Proceeds from research and development loan -- 10 100
Repayment of obligations under capital leases (233) (249) (306)
Proceeds on issuance of share capital, net of issue costs (note 11) 99 96 119,203
Preferred share dividends (note 11) (500) (500) (482)
Net change in non-cash working capital balances (note 15) -- (314) 314
---------- -------- --------
(634) (957) 118,829
---------- -------- --------
INVESTING ACTIVITIES
Purchase of capital assets (6,127) (9,007) (5,551)
Proceeds on sale of capital assets -- 37 3
Purchase of investment -- (52) --
(Purchase) proceeds of short-term investments (28,382) 93,026 (130,720)
Cash from discontinued operations 456 5,160 (1,751)
Net change in non-cash working capital balances (note 15) (574) 879 --
---------- -------- --------
(34,627) 90,043 (138,019)
---------- -------- --------
(Decrease) increase in cash and cash equivalents during the period (54,140) 78,790 (19,710)
Cash and cash equivalents, beginning of period 83,370 4,580 24,290
---------- -------- --------
Cash and cash equivalents, end of period $ 29,230 $ 83,370 $ 4,580
========== ======== ========
Supplemental cash flow information (note 15)
See accompanying notes
I-24
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
1. NATURE OF OPERATIONS
The principal business of Global Thermoelectric Inc. (the "Company") is
the development and commercialization of power generating equipment based on
solid oxide fuel cell technology. The Company's research, engineering and
development expenditures are predominately focused on residential combined heat
and power products and small-scale industrial stationary products. The Company
also manufactures and distributes thermoelectric generators for remote power
needs. The principal applications for thermoelectric generators include natural
gas well and pipeline protection systems and remote power for instrumentation,
automation and telecommunication systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have, in management's opinion,
been properly prepared within the framework of the accounting policies
summarized below.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada ("Canadian GAAP"). A
reconciliation of results from operations to United States GAAP ("U.S. GAAP") is
provided in note 18.
USE OF ESTIMATES
The timely preparation of consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those
estimates.
The Company has estimated the useful lives of capital assets based on
an assessment of historical experience, expected lives commonly used by industry
participants, and management's expectations based on the assets' purpose.
Significant changes in assumptions related to the assets' purpose and changes in
the competitive environment could result in impairment of the carrying value of
the Company's capital assets.
The Company has estimated the warranty provision based on historical
warranty claims experience of the particular products sold and the terms of the
related contracts. As at December 31, 2002, the warranty provision included in
current liabilities was $1,016,465 (December 31, 2001 -- $1,048,827). Product
customization as well as environmental conditions relating to a product's
operational location could result in actual warranty costs differing from the
warranty provision.
CONSOLIDATION
These consolidated financial statements include the assets,
liabilities, and results of operations of Global Thermoelectric Inc. and its
wholly owned subsidiary company, Global Thermoelectric Corporation, a company
incorporated under the laws of the State of Delaware.
I-25
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
CASH AND CASH EQUIVALENTS
At December 31, 2002, cash and cash equivalents consist of cash on
deposit and short-term interest bearing securities with interest rates ranging
from 2.4% to 2.8% maturing within three months of the date of purchase. Interest
is accrued in the statement of operations as earned.
INVESTMENTS
At December 31, 2002, short-term investments consist of government
securities, corporate bonds and commercial paper with high credit ratings which
have original maturities of three months or more and interest rates ranging from
2.3% to 3.5%. In addition, short-term investments include $1,716,765 (52,117,946
Indian Rupees) of restricted funds held in India. Upon approval by an India
regulatory authority, the Company expects to repatriate these funds from India
in 2003. Short-term investments are classified as held to maturity and are
recorded at cost.
The long-term investment consists of shares in an entity over which the
Company does not exercise control or significant influence. The investment is
carried at cost. During the year, in the normal course of operations, the
Company purchased at fair market value $2,495,174 (year ended December 31, 2001
-- $2,363,544; nine months ended December 31, 2000 -- $1,287,614) of materials
and equipment from this entity.
INVENTORY
Inventories of finished goods and work in progress are valued at the
lower of cost, determined on a unit cost basis, and net realizable value. Unit
cost includes materials, labour and production overhead. Raw materials and
purchased parts are valued at the lower of cost, determined on a first-in,
first-out basis, and net realizable value.
CAPITAL ASSETS
Capital assets are recorded at cost. Depreciation is applied on a
straight-line basis to recognize the cost less estimated salvage value of
capital assets, over their estimated useful lives as follows:
Buildings 20 years
Leasehold improvements 3 - 10 years
Machinery and equipment 3 - 10 years
Computer hardware and software 3 - 5 years
Equipment under capital leases 5 - 20 years
The depreciation of equipment recorded under capital leases is included
in depreciation expense in the statement of operations.
The Canadian Institute of Chartered Accountants ("CICA") issued Section
3063, "Impairment of long-lived assets" which is effective April 1, 2003 on a
prospective basis. The Company has chosen to adopt this standard effective
January 1, 2002. This standard requires that in cases where undiscounted
expected cash flows associated with long-lived assets are less than their
carrying value, an impairment loss be recognized. This assessment of
recoverability must be tested whenever events or changes in circumstances
indicate that the long-lived asset's carrying amount may not be recoverable.
Should the Company determine that an asset's carrying amount is not recoverable,
an impairment loss is recognized based upon the amount by which the carrying
amount exceeds the asset's fair value, or discounted cashflows. Previously, the
Company's policy was to recognize an impairment loss based upon the asset's
undiscounted cashflows. The adoption of this standard did not have any impact on
the Company's current financial position or results or operations, however its
impact in future years could be material.
I-26
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
GOODWILL
Effective January 1, 2002, the Company adopted the new CICA Section
3062, "Goodwill and other intangible assets." Under the new standard, goodwill
and certain intangible assets are no longer subject to amortization, but are
instead tested at least annually for impairment. The adoption of this standard
did not have any impact on the Company's current financial position or results
or operations, however its impact in future years could be material.
RESEARCH, ENGINEERING AND DEVELOPMENT EXPENDITURES
With the exception of those that are capital in nature, research,
engineering and development costs are expensed as incurred unless a development
project meets the criteria for deferral. No development costs have been deferred
as at December 31, 2002.
Included in depreciation expense is $2,271,000 (year ended December 31,
2001 -- $1,350,000; nine months ended December 31, 2000 -- $254,000) relating to
depreciation of capital assets for research, engineering and development
activities.
GOVERNMENT ASSISTANCE AND INVESTMENT TAX CREDITS
Government assistance is recorded as either a reduction of the cost of
the applicable capital assets or credited in the statement of operations as
determined by the nature of the assistance. All assistance received was recorded
as a reduction to research, engineering and development expense in the
applicable period.
Investment tax credits as determined under Canadian tax legislation are
accounted for using the cost reduction approach. Credits are recorded, when
utilized, as either a reduction of the cost of applicable capital assets or
credited in the statement of operations depending on the nature of the
expenditures which gave rise to the credits. For the periods presented, no
investment tax credits were applied against capital assets or credited in the
statement of operations.
REVENUE RECOGNITION
Revenue from product sales is recorded on shipment to the customer
provided there are no other significant obligations to be fulfilled by the
Company and collection is reasonably assured. Service revenue is recognized when
the service is performed. Revenue from long-term contracts with multiple
deliverable arrangements is recognized as the elements of the contract are
delivered based upon their respective fair value. In circumstances where
uncertainty exists about customer acceptance relating to certain elements of a
contract, revenue is not recognized until acceptance occurs.
FOREIGN CURRENCY TRANSLATION
Effective January 1, 2002, the Company retroactively adopted the
amended CICA Section 1650, "Foreign currency translation." This amendment
eliminates the deferral and amortization of gains and losses on long-term
foreign currency denominated monetary items. Such gains and losses must now be
included in income in the current period. The adoption of this standard did not
have any impact on the Company's current or prior financial position or results
of operations.
Consistent with amended CICA Section 1650, monetary assets and
liabilities which are denominated in a foreign currency are translated at period
end exchange rates. Revenue and expenses are translated at rates of exchange
prevailing during the period. All exchange gains and losses are reflected in net
loss in the period incurred.
I-27
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
The Company's foreign subsidiary is considered financially and
operationally integrated and therefore the temporal method of translation of
foreign currencies is followed. Monetary items are translated at period end
exchange rates; non-monetary items are translated at historical exchange rates;
revenue and expense items are translated at rates of exchange prevailing during
the period; and, depreciation and amortization are translated at the same
exchange rate as the assets to which they relate.
STOCK-BASED COMPENSATION
The Company has an incentive stock option plan which is described in
note 12. No compensation expense is recognized for this plan when stock options
are issued. Any consideration paid to the Company on the exercise of stock
options is credited to share capital.
Effective January 1, 2002, the CICA introduced "Stock-based
compensation and other stock-based payments." This standard requires companies
to disclose the impact on earnings as if the fair value based method of
accounting for employee stock option plans had been used. Note 12 presents pro
forma information with respect to fair value accounting for stock options and
includes all options granted by the Company since inception.
INCOME TAXES
Income taxes are calculated using the liability method of tax
allocation. Under this method, future tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities, and measured using the substantially enacted tax rates and laws
that will be in effect when the differences are expected to reverse. A valuation
allowance is recorded to the extent there is uncertainty regarding realization
of future tax assets.
RECLASSIFICATIONS
Certain information provided in prior periods has been reclassified to
conform with the current period presentation.
3. ACCOUNTS RECEIVABLE
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Trade receivables $ 3,258 $ 4,473
Interest receivable 1,355 325
Other receivables 193 357
-------- -------
$ 4,806 $ 5,155
======== =======
4. INVENTORY
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Raw materials and parts $ 2,919 $ 3,764
Work in progress and finished goods 177 456
-------- -------
$ 3,096 $ 4,220
======== =======
I-28
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
5. CAPITAL ASSETS
DECEMBER 31, 2002
----------------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
-------- ------------ --------
Land $ 17 $ -- $ 17
Buildings 1,481 1,209 272
Leasehold improvements 3,941 949 2,992
Machinery and equipment 17,989 5,175 12,814
Computer hardware and software 3,451 1,737 1,714
Equipment under capital leases 1,206 599 607
-------- --------- --------
$ 28,085 $ 9,669 $ 18,416
======== ========= ========
DECEMBER 31, 2001
----------------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
-------- ------------ --------
Land $ 17 $ -- $ 17
Buildings 1,455 1,191 264
Leasehold improvements 3,754 570 3,184
Machinery and equipment 13,115 3,524 9,591
Computer hardware and software 2,434 944 1,490
Equipment under capital leases 1,206 466 740
-------- --------- --------
$ 21,981 $ 6,695 $ 15,286
======== ========= ========
At December 31, 2002, machinery and equipment includes $1,240,383 of
purchased assets that have not been depreciated as these assets were not
commissioned or available for use. The Company expects to commission these
assets in early 2003.
6. CREDIT FACILITIES
The Company has an operating line of credit to a maximum of $20,000,000
and a facility to support contractual guarantees to a maximum of US$4,000,000
with a Canadian chartered bank. Borrowings under these facilities bear interest
at the bank's prime rate, and are repayable on demand. The Company has pledged
as collateral a general security agreement over existing and future property of
the Company and a hypothecation of funds held on deposit with the bank. At
December 31, 2002, letters of guarantee and other guarantees issued pursuant to
these facilities totaled US$2,974,704 (December 31, 2001 -- US$2,849,986).
Included in the Company's outstanding guarantees at December 31, 2002
is US$1,523,471 relating to bid bonds and performance guarantees. These bid
bonds and performance guarantees expire between March 2, 2003 and October 31,
2005.
Subsequent to December 31, 2002, the Company has been notified that its
outstanding performance guarantees have been reduced by US$1,164,932.
7. RESEARCH AND DEVELOPMENT LOAN
The loan advanced from the Canadian Department of Natural Resources is
non-interest bearing and repayable over a 15 year period starting March 31, 2000
based on 5% of revenues relating to the commercialization of fuel cell
technology, up to the original sum received. No amounts have been repaid to
date.
I-29
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
8. OBLIGATIONS UNDER CAPITAL LEASES
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Capital leases, with an average effective interest rate of 8.75%,
repayable in monthly installments not exceeding $21,749 including
interest, due at varying dates to December 31, 2003 $ 207 $ 440
Less current portion (207) (233)
------------ ------------
$ -- $ 207
============ ============
Future minimum lease payments under capital leases are as follows:
2003 $ 214
Amount representing interest (7)
--------
$ 207
========
9. DISCONTINUED OPERATIONS
On June 18, 2001 (the "measurement date"), the Company signed a letter
of intent with a U.S. purchaser for the sale of its military heater business
segment. Closing of the transaction was completed on August 24, 2001. For
reporting purposes, the results of operations and the financial position of this
business segment have been presented as discontinued operations.
Details of the assets and liabilities of the heater business segment
are as follows:
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Current assets of discontinued operations:
Accounts receivable $ -- $ 502
------------ ------------
$ -- $ 502
============ ============
Current liabilities of discontinued operations:
Accounts payable and accrued liabilities $ -- $ 46
Warranty provision -- 137
------------ ------------
$ -- $ 183
============ ============
Based on no warranty claims experienced in 2002, and the previous
expiry of contractual warranty periods, the Company recorded a $136,814 non-cash
recovery during the year ended December 31, 2002 relating to its previous
warranty liability.
I-30
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
Additional selected financial information for the heater business
segment is as follows:
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Revenue $ -- $ 7,607 $ 3,688
Earnings (loss) from discontinued operations prior to the measurement
date, net of income tax -- 433 (372)
Recovery of warranty provision, net of income tax 137 -- --
------------ ------------ ------------
Earnings (loss) from discontinued operations, net of income tax 137 433 (372)
------------ ------------ ------------
Gain on sale of discontinued operations, net of income tax -- 744 --
------------ ------------ ------------
Net earnings (loss) from discontinued operations, net of income tax $ 137 $ 1,177 $ (372)
============ ============ ============
10. INCOME TAXES
The Company's computation of income tax expense is as follows:
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Expected income tax recovery from continuing operations at 39.24%
(December 31, 2001--42.12%; December 31, 2000--44.62%) $ (9,467) $ (5,135) $ (475)
Add (deduct):
Non-deductible expenses 35 32 15
Benefit of tax losses and deductions not recognized 9,432 5,103 460
Foreign income taxes 251 608 590
Large corporations tax 165 169 312
------------ ------------ ------------
Income tax expense $ 416 $ 777 $ 902
============ ============ ============
The Company has available to carry forward the following:
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Scientific research and experimental development expenditures $ 51,531 $ 25,629
Non-capital losses $ 2,684 $ --
Share issue costs $ 3,218 $ 5,638
Investment tax credits $ 11,694 $ 6,686
The utilization of investment tax credits will reduce scientific
research and experimental development expenditures otherwise available.
I-31
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
The scientific research and experimental development expenditures can
be carried forward indefinitely and applied to reduce taxable income in future
years. Non-capital losses and share issue costs can be applied to reduce taxable
income in future years and investment tax credits can be used to offset future
taxes otherwise payable and expire as follows:
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 TOTAL
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Non-capital
losses $ -- $ -- $ -- $ -- $ -- $ 989 $ 1,695 $ -- $ -- $ -- $ 2,684
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Share issue
costs $ 1,586 $ 1,323 $ 309 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 3,218
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Investment tax
credits $ -- $ -- $ -- $ -- $ 189 $ 415 $ 521 $ 1,781 $ 3,628 $ 5,160 $11,694
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Components of future income taxes
The Company has not recognized net future tax assets as reflected by
the valuation allowance reported below. The net future tax asset (current and
non-current) comprises:
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Investment tax credit carry-forwards $ 11,694 $ 6,686
Scientific research and experimental development expenditures 13,991 6,747
Non-capital losses 943 --
Share issue costs 1,130 2,008
Provision for warranty costs 357 374
Differences between tax base and reported amounts of depreciable assets (3,432) (2,729)
Valuation allowance (24,683) (13,086)
------------ ------------
$ -- $ --
============ ============
I-32
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
11. SHARE CAPITAL
a) AUTHORIZED:
Unlimited number of common shares
Unlimited number of preferred shares, issuable in series
b) ISSUED AND OUTSTANDING COMMON AND PREFERRED SHARES:
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------- --------------------- ---------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES
(000's) AMOUNT (000's) AMOUNT (000's) AMOUNT
--------- --------- --------- --------- --------- ---------
COMMON SHARES:
Balance, beginning of period 29,005 $ 134,557 28,923 $ 134,461 25,843 $ 39,522
Issued on sale and exercise of special
warrants -- -- -- -- 2,900 100,050
Share issue costs -- -- -- 11 -- (5,481)
Issued on exercise of options 167 99 82 85 180 370
--------- --------- --------- --------- --------- ---------
Balance, end of period 29,172 $ 134,656 29,005 $ 134,557 28,923 $ 134,461
--------- --------- --------- --------- --------- ---------
SERIES 2 PREFERRED SHARES:
Balance, beginning of period 1,000 $ 24,264 1,000 $ 24,264 -- $ --
Issued for cash -- -- -- -- 1,000 25,000
Share issue costs -- -- -- -- -- (736)
--------- --------- --------- --------- --------- ---------
Balance, end of period 1,000 $ 24,264 1,000 $ 24,264 1,000 $ 24,264
--------- --------- --------- --------- --------- ---------
$ 158,920 $ 158,821 $ 158,725
========= ========= =========
Series 2 non-voting preferred shares were issued with the covenant that
the proceeds of $25,000,000 be used for solid oxide fuel cell development,
subject to certain restrictions. To December 31, 2002, the Company has expended
$56,109,000 on qualifying expenditures. The preferred shares have a cumulative
dividend of 1% to 5% per annum, based on an inverse relationship to the volume
weighted average share price of the Company's common shares, determined
quarterly. The dividend rate decreases in increments of 1% from the maximum rate
of 5% with each $5.00 increase in the weighted average share price above $30.96,
to a minimum rate of 1%. The preferred shares are convertible at the option of
the holder into a lesser number of common shares based on the fraction by which
their face value of $25.00 is of the conversion prices identified below:
PERIOD OF CONVERSION CONVERSION PRICE
-------------------- ----------------
To July 31, 2005 $30.96
August 1, 2005 to July 31, 2010 $33.54
August 1, 2010 to July 31, 2015 $36.12
August 1, 2015 to July 31, 2020 $38.70
After July 31, 2020 95% of the then current market
price
Dividends can be paid at the Company's option with an equivalent number
of the Company's common shares based on their current market price during the
quarter of dividend accumulation, determined on a previous 20 trading day,
volume-weighted, average basis. A minimum of $500,000 of preferred share
dividends must be paid annually. Cumulative unpaid dividends are increased by a
2.45% quarterly rate, compounded quarterly, until
I-33
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
payment thereof. All cumulative unpaid dividends must be paid by December 31,
2010. The shares are redeemable by the Company at their face value after July
31, 2004, subject to certain conditions.
During the year ended December 31, 2002, the Company declared and paid
a dividend of $500,000 on the Series 2 preferred shares (year ended December 31,
2001--$500,000; nine months ended December 31, 2000--$481,910). As at December
31, 2002, dividends in arrears totaled $1,601,600 (December 31, 2001--$762,657).
On December 3, 2002, the Company received approval from the Toronto
Stock Exchange ("TSX") to proceed with normal course purchases of its
outstanding common shares. During the period commencing December 5, 2002 and
ending on December 1, 2003, the Company may acquire up to 1,458,584 common
shares, being 5% of its issued and outstanding common shares. Any common share
purchases will be purchased at the market price at the time of purchase and will
be cancelled and returned to treasury. During the period ended December 31, 2002
no common shares were repurchased.
12. STOCK-BASED COMPENSATION
Under the Company's Amended Incentive Stock Option Plan (the "Plan"),
options to purchase common shares may be granted, at the discretion of the Board
of Directors, to directors, officers, employees and consultants of the Company.
At December 31, 2002, shares reserved for issuance under the Plan totaled
2,205,667. The exercise prices for options are based on the current trading
price of the common shares on the TSX immediately prior to the Board of
Directors approving the option grant. These options are typically granted for
services provided to the Company and generally vest equally over a three or four
year period. The aggregate number of common shares that may be reserved for
allotment pursuant to options granted to any one individual may not exceed, at
the date of the grant, 5% of the common shares outstanding. The options are
non-transferable, and if not exercised, will expire at such time as determined
by the Board, but in any event, shall not exceed a period of five years from the
date the option is granted. A summary of the Company's stock options issued to
directors, officers and employees is as follows:
NUMBER OF WEIGHTED
OPTIONS AVERAGE
(000's) EXERCISE PRICE
------- --------------
Balance March 31, 2000 628 $ 3.32
Options granted 530 27.58
Options exercised (180) 2.05
------- -------------
Balance, December 31, 2000 978 16.70
Options granted 978 15.72
Options exercised (82) 1.05
Options cancelled (30) 21.40
------- -------------
Balance, December 31, 2001 1,844 16.10
Options granted 817 2.98
Options exercised (167) 0.59
Options cancelled (971) 19.58
------- -------------
Balance, December 31, 2002 1,523 $ 8.54
======= =============
I-34
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
The following table summarizes information about stock options
outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 2002 (000's) LIFE (YEARS) PRICE 2002 (000's) PRICE
------------------------ -------------- ------------- -------------- -------------- --------------
$ 1.15 to $ 3.35 619 4.39 $ 2.34 29 $ 1.15
$ 4.66 to $ 7.60 222 4.13 6.64 33 7.42
$ 8.60 to $ 14.00 397 3.15 9.86 154 9.48
$ 18.55 to $ 27.00 285 2.98 21.63 104 22.26
--------- --------- -------------- --------- --------------
$ 1.15 to $ 27.00 1,523 3.77 $ 8.54 320 $ 12.65
========= ========= ============== ========= ==============
The following table presents pro forma information with respect to fair
value accounting for stock options. The fair value of stock options has been
estimated on the date of grant by reference to the Black-Scholes option-pricing
model. For the year ended December 31, 2002, the Company assumed that the life
of all options granted equals four years, no common share dividends will be
paid, average expected volatility of 121.9% (December 31, 2001--126.2%; December
31, 2000--128.4%) and an average risk free interest rate of 3.89% (December 31,
2001--3.50%; December 31, 2000--5.00%). The effects of applying Section 3870 may
not be representative of the effects on reported net (loss) income for future
years.
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Net loss
As reported $ (24,406) $ (11,791) $ (2,339)
Compensatory fair value of options granted 5,399 5,265 2,078
------------ ------------ ------------
Pro forma net loss $ (29,805) $ (17,056) $ (4,417)
============ ============ ============
Basic and diluted pro forma net loss per common share $ (1.07) $ (0.63) $ (0.18)
============ ============ ============
13. NET LOSS PER SHARE
Net loss per common share is based on the weighted average number of
common shares outstanding during the period. The Company utilizes the treasury
stock method in the determination of the diluted per common share amounts. Under
this method, the diluted weighted average number of common shares amount is
calculated on the basis that all stock options and convertible preferred shares
were exercised with the related proceeds used to purchase common shares of the
Company at their average market price for the period.
I-35
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
The numerators and denominators used in the calculation of basic net
loss per common share are determined as detailed in the following table. Stock
options and convertible preferred shares are not included in the denominator as
they would be anti-dilutive for the periods presented.
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Numerator:
Net loss from continuing operations $ (24,543) $ (12,968) $ (1,967)
Less: Dividends on preferred shares 500 500 482
Dividends in arrears on preferred shares 839 763 --
------------ ------------ ------------
(25,882) (14,231) (2,449)
------------ ------------ ------------
Net earnings (loss) from discontinued operations 137 1,177 (372)
------------ ------------ ------------
Net loss available to common shareholders $ (25,745) $ (13,054) $ (2,821)
============ ============ ============
Denominator (000's):
Number of common shares outstanding at beginning
of period 29,005 28,923 25,843
Weighted average number of common shares issued
during period 110 38 1,070
------------ ------------ ------------
Weighted average number of common shares
outstanding at end of period 29,115 28,961 26,913
============ ============ ============
14. COMMITMENTS AND CONTINGENCIES
The Company has entered into future commitments including operating
leases for office premises, plant facilities and office equipment with future
minimum lease payments for the next five years as follows:
2003 $ 939
2004 775
2005 735
2006 62
2007 --
--------
$ 2,511
========
Operating leases relating to the Company's corporate office and fuel
cell facilities contain renewal options to extend the leases for two additional
five-year periods beyond the current expiry date of January 31, 2006.
Land adjacent to the Company's Bassano manufacturing facility requires
remediation as a result of historical operations. Based on an independent
assessment, the Company has estimated and provided for current and subsequent
restoration and monitoring expenditures of $640,877. Actual results could differ
from estimated amounts.
I-36
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
15. CHANGE IN NON-CASH WORKING CAPITAL BALANCES; SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Changes in non-cash working capital balances are comprised of the
following:
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Changes in non-cash working capital:
Accounts receivable $ 349 $ 3,520 $ (2,648)
Inventory 1,124 (307) 422
Prepaid expenses (157) (352) 68
Accounts payable and accrued liabilities, net of current site restoration 174 (487) 2,468
Income taxes payable (38) (551) 624
Deferred revenue -- (405) 333
------------ ------------ ------------
$ 1,452 $ 1,418 $ 1,267
============ ============ ============
Attributable to:
Operating activities $ 2,026 $ 853 $ 953
Financing activities -- (314) 314
Investing activities (574) 879 --
------------ ------------ ------------
$ 1,452 $ 1,418 $ 1,267
============ ============ ============
Supplemental cash flow information:
Interest paid $ 29 $ 53 $ 55
Income taxes paid $ 465 $ 1,340 $ 285
============ ============ ============
I-37
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
16. OPERATING SEGMENT INFORMATION
The Company has two operating segments consisting of the development
and commercialization of fuel cell technology and the commercial manufacturing
and sale of thermoelectric generators. Revenue derived from fuel cells during
the year ended December 31, 2002 relates to the development of propane reforming
solutions as part of a project funded by the U.S. Propane Education and Research
Council.
The accounting policies used in these business segments are the same as
those described in the summary of significant accounting policies.
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------
FUEL CELLS GENERATORS CORPORATE TOTAL
---------- ---------- --------- ---------
Revenue--Domestic $ -- $ 4,100 $ -- $ 4,100
--International -- 17,670 -- 17,670
--------- --------- --------- ---------
-- 21,770 -- 21,770
Cost of goods sold -- 13,119 -- 13,119
--------- --------- --------- ---------
Gross margin -- 8,651 -- 8,651
Revenue--Fuel cell contract research 541 -- -- 541
Investment income -- -- 2,899 2,899
--------- --------- --------- ---------
541 8,651 2,899 12,091
--------- --------- --------- ---------
Expenses
Research, engineering and development 22,227 1,094 -- 23,321
Marketing -- 1,932 -- 1,932
Business development 2,496 217 -- 2,713
General and administrative 552 677 4,062 5,291
Interest on obligations under capital leases -- -- 29 29
Foreign exchange gain -- -- (49) (49)
Depreciation 2,225 508 248 2,981
--------- --------- --------- ---------
(Loss) earnings from continuing operations before income taxes $ (26,959) $ 4,223 $ (1,391) $ (24,127)
========= ========= ========= =========
Capital asset expenditures $ 5,628 $ 233 $ 266 $ 6,127
========= ========= ========= =========
Total assets utilized in the segment $ 16,290 $ 8,350 $ 97,763 $ 122,403
========= ========= ========= =========
I-38
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
YEAR ENDED DECEMBER 31, 2001
------------------------------------------------
FUEL CELLS GENERATORS CORPORATE TOTAL
---------- ---------- --------- ---------
Revenue--Domestic $ -- $ 5,717 $ -- $ 5,717
--International -- 9,640 -- 9,640
--------- --------- --------- ---------
-- 15,357 -- 15,357
Cost of goods sold -- 10,474 -- 10,474
--------- --------- --------- ---------
Gross margin -- 4,883 -- 4,883
Investment income -- -- 5,911 5,911
--------- --------- --------- ---------
-- 4,883 5,911 10,794
--------- --------- --------- ---------
Expenses
Research, engineering and development 13,988 1,099 -- 15,087
Marketing -- 1,697 -- 1,697
Business development 1,103 16 -- 1,119
General and administrative 274 489 2,837 3,600
Interest on obligations under capital leases -- -- 47 47
Foreign exchange gain -- -- (372) (372)
Depreciation 1,307 337 163 1,807
--------- --------- --------- ---------
(Loss) earnings from continuing operations before income taxes $ (16,672) $ 1,245 $ 3,236 $ (12,191)
========= ========= ========= =========
Capital asset expenditures $ 7,917 $ 219 $ 871 $ 9,007
========= ========= ========= =========
Total assets utilized in the segment $ 13,021 $ 10,788 $ 122,538 $ 146,347
========= ========= ========= =========
NINE MONTHS ENDED DECEMBER 31, 2000
-----------------------------------------------
FUEL CELLS GENERATORS CORPORATE TOTAL
---------- ---------- --------- ---------
Revenue--Domestic $ -- $ 2,281 $ -- $ 2,281
--International -- 12,368 -- 12,368
--------- --------- --------- ---------
-- 14,649 -- 14,649
Cost of goods sold -- 10,851 -- 10,851
--------- --------- --------- ---------
Gross margin -- 3,798 -- 3,798
Investment income -- -- 3,605 3,605
--------- --------- --------- ---------
-- 3,798 3,605 7,403
--------- --------- --------- ---------
Expenses
Research, engineering and development 4,643 337 -- 4,980
Marketing -- 1,193 -- 1,193
Business development 86 -- -- 86
General and administrative 75 162 1,698 1,935
Interest on obligations under capital leases -- -- 55 55
Foreign exchange gain -- -- (276) (276)
Depreciation 227 217 51 495
--------- --------- --------- ---------
(Loss) earnings from continuing operations before income taxes $ (5,031) $ 1,889 $ 2,077 $ (1,065)
========= ========= ========= =========
Capital asset expenditures $ 5,196 $ 256 $ 99 $ 5,551
========= ========= ========= =========
Total assets utilized in the segment $ 5,748 $ 15,104 $ 135,470 $ 156,322
========= ========= ========= =========
I-39
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
International revenue includes generator sales and service as follows:
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
United States $ 8,404 $ 3,450 $ 1,916
Asia 4,280 3,784 8,524
South America 2,699 898 1,740
Middle East 2,068 1,151 --
Other international 219 357 188
------- ------- -------
Total international revenue $17,670 $ 9,640 $12,368
======= ======= =======
Asian revenue includes sales to the Gas Authority of India of
$2,431,000 for the year ended December 31, 2002 (year ended December 31,
2001--$666,000; nine months ended December 31, 2000--$7,006,000). In addition,
revenue from three other customers exceeded 10% of total revenue during the year
ended December 31, 2002. Revenue and location of these three customers are as
follows: $3,704,000--United States, $2,706,000--United States and
$2,068,000--Middle East.
17. FINANCIAL INSTRUMENTS
a) Fair values of financial assets and liabilities
The fair value of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities and income taxes
payable approximates their carrying value because of the short-term nature of
these instruments. The carrying value of obligations under capital leases and
the site restoration liability approximate their fair value. The fair value of
the research and development loan is not determinable as the timing of repayment
is dependant upon commercial revenue derived from the related technology.
b) Credit risk
The Company manufactures thermoelectric generators for sale primarily
to customers in the oil and natural gas industry in North America and
international locations. The Company generally extends unsecured credit to North
American customers, and therefore, the collection of these receivables may be
affected by changes in economic or other conditions and may accordingly impact
the Company's overall credit risk. Management believes the risk is mitigated by
the size, reputation and diverse nature of the companies to which they extend
credit. Material international sales are generally secured with letters of
credit or by Export Development Canada to reduce risk of material losses on the
collection of receivables.
The Company has not previously experienced any material credit losses
on the collection of receivables. Of the Company's significant individual
accounts receivable at December 31, 2002, approximately 34% were owing from two
customers (December 31, 2001--47% from four customers; December 31, 2000--48%
from two customers).
c) Foreign exchange risk
Foreign exchange risk is the risk that variations in exchange rates
between the Canadian dollar and foreign currencies will affect the Company's
operating and financial results. The Company earns a significant portion of its
operating revenue in U.S. dollars and does not use derivative instruments to
reduce its exposure to this foreign exchange risk. For the year ended December
31, 2002, 72% of the Company's revenue was denominated in U.S. dollars (year
ended December 31, 2001--63%; nine months ended December 31, 2000--84%).
I-40
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
d) Interest rate risk
The Company is exposed to interest rate risk in relation to interest
income earned on short-term interest bearing securities and short-term
investments. At December 31, 2002, the increase or decrease in net earnings for
each 1% change in interest rates earned on cash and cash equivalents, and
short-term investments amounts to approximately $953,000 per annum (year ended
December 31, 2001--$1,210,000; nine months ended December 31, 2000--$1,015,000).
18. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Company's consolidated financial statements have been prepared in
accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP.
The effects of significant accounting differences on the Company's consolidated
statements of operations and accumulated deficit are as follows:
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Net loss under Canadian GAAP $(24,406) $(11,791) $ (2,339)
Deduct adjustments for:
Stock-based compensation (9) -- --
-------- -------- --------
Net loss and comprehensive loss under U.S. GAAP (24,415) (11,791) (2,339)
-------- -------- --------
Accumulated deficit, beginning of period (20,274) (7,983) (5,162)
Dividends on preferred shares (500) (500) (482)
-------- -------- --------
Accumulated deficit, end of period $(45,189) $(20,274) $ (7,983)
======== ======== ========
Basic and diluted net loss per common share $ (0.88) $ (0.45) $ (0.10)
======== ======== ========
Stock-Based Compensation
Pursuant to Note 12, the Company has disclosed the effects on reported
net loss of the compensatory value of stock options granted using the fair value
method. Under U.S. GAAP, the Company has adopted the intrinsic value method of
accounting for stock options. Under the intrinsic value method, 347,325 options
granted to certain officers and directors in 2002 are subject to variable
accounting, resulting in an additional expense under U.S. GAAP of $9,000 in
2002.
Asset Retirement Obligations
In June 2001, FASB issued FAS 143, "Accounting for Asset Retirement
Obligations," effective for years beginning after June 15, 2002. The standard
requires legal obligations associated with the retirement of long-lived tangible
assets be recognized at fair value. The adoption of this standard does not have
any impact on the Company's current financial position or results of operations,
however its impact in future years could be material.
Recent Accounting Standards
In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45
I-41
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. It also requires additional disclosures be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. The initial recognition and
measurement provisions of Interpretation No. 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The adoption of
this standard is not expected to have a significant impact on the Company's
current financial position or results of operations, however its impact in
future years could be material.
In July 2002, FASB issued FAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement eliminates the definition and
requirements of Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)." FAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Such a liability must be
measured at fair value. FAS 146 is effective for exit or disposal activities
initiated after December 31, 2002. The adoption of this standard does not have
any impact on the Company's current financial position or results of operations,
however its impact in future years could be material.
In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities." This interpretation is effective for variable
interest entities created after January 31, 2003. It applies to all other
variable interest entities in which an enterprise holds a variable interest in
the first fiscal year or interim period beginning after June 15, 2003. The
adoption of this standard does not have any impact on the Company's current
financial position or results of operations, however its impact in future years
could be material.
I-42
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction
with the Corporation's audited consolidated financial statements and related
notes.
FORWARD LOOKING STATEMENTS
Certain statements included in this Annual Information Form may contain
forward-looking statements about the Corporation, the development of its
technologies, the establishment of its strategic business relationships and its
thermoelectric sales projects. Forward-looking statements are statements that
are not historical facts and are generally, but not always, identified by the
words "expects," "anticipates," "believes," "intends," "estimates," "projects"
and similar expressions, or that events or conditions "will," "may," "could" or
"should" occur.
These forward-looking statements are subject to various risks,
uncertainties and other factors that could cause the Corporation's actual
results or achievements to differ materially from those expressed in or implied
by such forward-looking statements. These risks, uncertainties and other factors
include, without limitation: uncertainty as to the Corporation's ability to
successfully implement its business strategy; the risk that development projects
and prototypes will not be completed successfully or in a timely manner; a
dependence on the contributions and performance of the Corporation's major
alliance partners; the ability of the Corporation to successfully negotiate and
execute definitive agreements governing its relationships with its major
alliance partners; uncertainties as to the availability and cost of financing;
the development of competing technologies and the possibility of increased
competition; fluctuating energy prices; uncertainties involving government
policies and government regulations affecting the Corporation's business; and
other factors identified in the other reports filed with securities commissions
in Canada and available at www.sedar.com.
Forward-looking statements are based on beliefs, opinions and
expectations of the Corporation's management at the time they are made, and the
Corporation does not assume any obligation to update its forward-looking
statements if those beliefs, opinions or expectations, or other circumstances
should change.
YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Revenue for the year ended December 31, 2002, totaled $22.3 million,
comprised of thermoelectric generator sales and service revenue of $21.8 million
and revenue from fuel cell contract research of $0.5 million. Revenue for 2001
was $15.4 million, which was comprised exclusively of thermoelectric sales and
service. During 2002, the Corporation experienced an increase in the volume of
its generator products sold in international markets, notably the U.S., South
America and the Middle East. Strong revenue growth in these markets offset
sluggishness in western Canadian demand for the first three quarters of 2002.
The Corporation's markets in Canada are principally driven by natural gas
drilling and completion activity.
In the second quarter of 2002, the Corporation received and
consequently recognized the remaining revenue of $2.0 million of a $19.0 million
contract with the Gas Authority of India Limited ("GAIL"). This amount
represented the final contractual amount due from GAIL which was contingent on
their appraisal of work completed, and its collection reflected the
Corporation's operational success in completing this very large and
engineering-intensive project.
In August 2001, the Corporation divested its military heater division
to a U.S. based manufacturer. As part of the sales agreement, the Corporation
negotiated a royalty and supply contract with the purchaser for key components
of the heater product. In 2002, the purchaser was successful in obtaining
follow-on orders from the U.S. military, which marked the commencement of the
Corporation's supply agreement. In 2002, this supply contract generated $2.1
million of revenue. It is expected that this agreement will provide a multi-year
revenue stream to the Corporation, and in the process, add stability to its
revenue base which historically has been dependent on securing larger
intermittent orders.
I-43
The fuel cell division reported revenue of $0.5 million in 2002 which
was derived from the Corporation's contract with the Propane Education and
Research Council ("PERC") for contract research on propane-fuelled SOFC
applications. The Corporation expects to complete this U.S.$500,000 contract in
the first half of 2003.
A gross margin of $8.7 million (39.7 percent of revenue) was generated
in 2002, an increase of 77 percent compared to the gross margin of $4.9 million
(31.8 percent of revenue) in the prior year. International orders, primarily in
the Middle East and South America accounted for the margin improvement. The
Corporation's generators typically attract premium pricing in certain
applications and geographic regions due to their uniqueness as a very reliable
remote power source.
The gross margin in 2002 was also positively affected by the receipt of
the final amount owing from GAIL, due to the fact that most of its associated
costs were expensed in the prior year because of their non-refundable nature.
Investment income of $2.9 million was generated in the current year on
an average cash and short-term investment balance of $108.2 million. Lower money
market returns together with a decreasing cash and short-term investment
position accounted for the reduction in investment income from $5.9 million in
the prior year.
Research, engineering and product development costs in aggregate were
$23.3 million in the current year, of which the fuel cell division and generator
division accounted for $22.2 million and $1.1 million, respectively. In the
prior year these divisions reported expenditures of $14.0 million and $1.1
million, respectively. Research, engineering and development costs in the fuel
cell division included labor costs of $12.1 million in 2002 as compared to $6.7
million in 2001, accounting for a significant portion of the overall increase in
research, engineering and development expenditures. In previous years and in the
first nine months of 2002, the Corporation strategically increased its fuel cell
related expenditures for purposes of attaining its product commercialization
targets with respect to timing, product cost and reliability. To this end, the
Corporation increased its engineering and technical staff during 2001 and 2002.
Furthermore, in 2002 the Corporation incurred additional manufacturing and
material costs of producing eight prototypes for internal and external testing
in 2002 and early 2003. In late 2002, however, in recognition of difficult
capital markets and the challenge they may pose to raising future equity
capital, the Corporation rationalized its expenditures on non-core fuel cell
development programs. After implementing this downsizing in November 2002, the
Corporation ended 2002 with 148 personnel directly involved in fuel cell
development, a decrease of 33 positions from our peak staffing levels in
mid-2002 and a modest increase of four positions from the beginning of 2002.
General and administrative expenses increased to $5.3 million in the
current year from $3.6 million in the prior year. Severance costs associated
with the departure of former officers and other employees accounted for $0.9
million of this increase. An increase in personnel in the Corporation's various
administration departments in late 2001 and early 2002 to support the growth of
our fuel cell program also contributed to an increase in the current year
general and administrative expenses. In late 2002, each of these departments
were significantly reduced in size which is expected to yield cost reductions in
2003.
Business development expenditures increased to $2.7 million in the year
from $1.1 million in the prior year. The increase in expenditures related to
various business development initiatives undertaken throughout the year,
including the retention of Salomon Smith Barney Inc. (now Citigroup Global
Markets Inc.).
Marketing expenditures, which relate solely to the Corporation's
generator division, increased to $1.9 million (8.9 percent of revenues) in 2002
from $1.7 million (11.1 percent of sales) in 2001. The reduction of marketing
expenditures as a percentage of revenue reflected the economies of scale
relative to the fixed component of our marketing program. The Corporation
utilizes a broad network of agents around the world in conjunction with an
internal sales and contract administration group. As in prior years, agents'
commissions are reported in cost of sales, while all other sales related
expenses are reported in marketing expenses.
I-44
Depreciation expense increased $1.2 million in 2002 from $1.8 million
in 2001. Capital expenditures of $6.1 million in 2002 and $9.0 million in 2001
accounted for this increase.
Interest on long-term debt of $29,000 decreased in accordance with the
repayment of capital lease obligations in the year. At December 31, 2002,
remaining capital lease obligations totaled only $207,000, all of which were
current.
Income tax expense comprised large corporation tax of $0.2 million and
international income tax of $0.2 million. As in the prior year, and consistent
with the expensing of fuel cell development expenses to which the losses relate,
no benefit of the Corporation's unused tax deductions or credits were recognized
as assets on the balance sheet at year end. At December 31, 2002, the
Corporation had $57.4 million in tax deductions available in Canada and $11.7
million of investment tax credits.
Despite significant improvement in profitability of the Corporation's
generator division, the increase in fuel cell commercialization expenditures
resulted in a net loss from continuing operations of $24.5 million ($0.89 per
common share) for the year ended December 31, 2002, compared to a loss for the
previous calendar year of $13.0 million ($0.49 per common share).
Discontinued operations, which relate to the Corporation's military
heater division divested in 2001, reported earnings of $0.1 million ($0.01 per
common share) as a result of the inclusion into income of a previous warranty
provision, the liability for which has been assessed as nil.
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE NINE MONTHS ENDED DECEMBER 31,
2000
The Corporation changed its fiscal year end from March 31 to December
31 effective December 31, 2000. For purpose of comparisons to the audited
consolidated financial statements of the year ended December 31, 2001, the
following discussion will include reference to the unaudited consolidated
financial statements for the twelve-month period ended December 31, 2000,
together with the previously reported audited consolidated financial statements
for the nine-month period ended December 31, 2000.
On August 24, 2001, the Corporation completed the sale of its military
heater business. The results of operations and financial position of this
business have been reported as discontinued operations. Accordingly, prior
period financial statements, including segmented information, have been
reclassified to reflect this change.
Sales revenue, which comprises thermoelectric sales and service, for
the twelve months ended December 31, 2001 was $15.4 million compared to $25.4
million for the twelve months ended December 31, 2000. The reduction in revenue
in the year reflected the substantial completion of the Corporation's contract
with GAIL in 2001 for the supply and installation of thermoelectric generators
along a new pipeline constructed by GAIL. Revenue from this contract decreased
in the current year to $0.7 million compared to $15.0 million for the twelve
months ended December 31, 2000. The Corporation was successful in partially
offsetting the impact of the completion of its India contract, with non-India
sales increasing by $4.3 million over the prior year. Revenue for the previous
fiscal period, which comprised the nine months ended December 31, 2000, was
$14.6 million.
The Corporation has successfully completed its contractual commitments
on the GAIL pipeline project and is negotiating the release of the final ten
percent ($2.0 million) contract holdback. The Corporation is in discussions with
GAIL concerning delays in the completion of the Corporation's commitments under
the contract and the impact of these delays on the release of the holdback
amount. It is the Corporation's position that delays in the construction of the
pipeline itself, of which the Corporation was reliant on to complete its work,
accounted for any delays incurred by the Corporation. The Corporation is
confident that it will be successful in recovering substantially all of the
holdback amount. However, as confirmation of this recovery is dependent on
certain documentation from GAIL, including a formal acceptance certificate of
the equipment and services provided, the Corporation has not recognized an
equivalent amount of revenue equal to the holdback amount. If and when the
I-45
holdback is recovered, an equal amount of revenue will be reported in the period
of recovery. The Corporation has recognized expenses directly attributable to
the holdback amount, except for expenses that are contingent on the receipt of
this final amount.
A gross margin of $4.9 million, or 31.8 percent of revenue was
generated in the current year compared to $7.0 million, or 27.6 percent of
revenue in the prior calendar year. The majority of the Corporation's sales are
denominated in U.S. dollars, and the strength of the U.S. dollar relative to its
Canadian counterpart contributed to a stronger gross margin percentage in the
current year and to the realization of foreign currency gains of $0.4 million.
Additionally, the Corporation realized premium margins on certain international
orders in the current year.
Investment income increased to $5.9 million in the year ended December
31, 2001 from $3.9 million in the previous year. This increase reflects a full
year of investment returns on $94.6 million of net proceeds from the
Corporation's equity offering in August of 2000, partially offset with lower
money market returns on a year over year basis.
Research, engineering and development expenses increased nearly
threefold to $15.1 million, from $5.9 million in the previous year. The
Corporation expenses its research, engineering and development expenses as
incurred. Commercialization activities in the Corporation's fuel cell division
accounted for $14.0 million compared to $5.4 million in the previous year. A
doubling of personnel directly involved in fuel cell research and development
contributed to the significant, albeit anticipated, increase of expenditures in
this division. In the current year, the Corporation also increased the
manufacturing of fuel cell membranes, stacks and prototypes for testing
purposes, the material and fabrication costs of which increased research and
development expenses. Research engineering and development expenditures incurred
in the generator division increased to $1.1 million compared to $0.4 million in
the previous calendar year. These expenses comprise primarily engineering
support and product development costs related to generator sales and services.
The increase in expenses reflects a shift to new product development and
engineering initiatives in 2001 from primarily production support and product
customization which is typically expensed to cost of goods sold.
Marketing expenses increased to $1.7 million in the current year
compared to $1.6 million in the prior calendar year, despite a decrease in total
revenues. Additional marketing expenses incurred by the Corporation reflect the
generator division's continued focus on expanding international markets for its
products.
Business development expenditures increased significantly in the
current year to $1.1 million compared to $0.1 million in the prior year. This
increase reflects the addition of six professionals to the Corporation's
business development team, whose work was evident with the signing of four
memorandums of understanding with alliance partners in 2001.
General and administrative expenses increased to $3.6 million in 2001
compared to $2.4 million in the prior calendar year. The Corporation added
additional administrative personnel and implemented enhanced systems to manage
the rapid expansion of its fuel cell commercialization efforts in 2001.
Depreciation expense was $1.8 million for the year ended December 31,
2001 compared to $0.6 million in the previous calendar year. The increase in
depreciation was reflective of the Corporation's investment in fuel cell
manufacturing and testing equipment and additional facilities in the current and
prior year.
Income tax expense, which is comprised of Indian income taxes related
to in-country work and Canadian capital tax, was $0.8 million in the current
year compared to $1.0 million in the prior calendar year. The Corporation does
not record any future benefit of income tax losses and other deductions
available for carryforward due to uncertainty in their utilization within the
carryforward periods.
A significant increase in fuel cell commercialization expenditures
resulted in an increased loss from continuing operations in the year ended
December 31, 2001, to $13.0 million ($0.49 per share) compared to a loss
I-46
of $0.4 million ($0.03 per share) in the previous calendar year. The net loss
from continuing operations for the previous fiscal year, which comprised the
nine months ended December 31, 2000, was $2.0 million ($0.09 per share).
Consistent with its strategy of focusing on power generating
technologies, including both fuel cells and thermoelectric generators, the
Corporation divested of its military heater division in 2001 and accounted for
the division's results as discontinued operations. The Corporation recorded a
gain on sale of the heater division of $0.7 million on sales proceeds of $2.1
million, reflecting the sale of the division's fixed assets, goodwill and
inventory. The Corporation generated earnings from discontinued operations from
the accelerated completion of its contract with the U.S. military of $0.4
million prior to the disposition. A net loss from discontinued operations of
$0.2 million was incurred in the previous calendar year. As part of the sale
agreement, the Corporation may also receive additional payments from the
purchaser based on heater sales over a five-year period should the purchaser be
successful in obtaining a follow-on contract with the U.S. military at specified
pricing levels. These additional payments could total an estimated $2.6 million
over the five-year period in the event that these conditions are met.
In selling this non-core business, the Corporation realized $5.2
million in cash through sale proceeds and reductions of working capital balances
related to the heater division. This cash will be redeployed in the
Corporation's fuel cell division.
For the year ended December 31, 2001, the Corporation incurred a net
loss, after discontinued operations, of $11.8 million ($0.45 per share) compared
to a net loss of $0.7 million ($0.04 per share) for the year ended December 31,
2000.
CRITICAL ACCOUNTING POLICIES
Warranty Provision
In establishing the appropriate provisions for warranty, the
Corporation estimates the likelihood that the thermoelectric generators and
related parts it sells will experience warranty claims. Management makes this
assessment based on historical warranty claims experience and the terms of the
related contracts. Product customization, environmental conditions relating to a
product's operational location, or a change in the supplier or type of raw
material used in the Corporation's products could result in actual warranty
claims being lower than, or in excess of that estimated by management.
Revenue Recognition
Substantially all of the Corporation's revenues are derived from the
generator segment. These revenues consist of the sale and service of generator
products, and in the case of long-term contracts, may include multiple
deliverable arrangements such as delivery, installation, and commissioning.
The Corporation's revenue recognition policies within the generator
segment, as well as the fuel cell segment, vary depending upon the nature of the
sales contract and take into account customer acceptance provisions. Therefore,
prior to recognizing revenue, management must use judgment in determining when a
contract deliverable has been fulfilled, and whether customer acceptance has
occurred.
Research and Development Expenditures
With the exception of those that are capital in nature, research,
engineering and development costs are expensed as incurred unless a development
project meets the criteria for deferral. Management has concluded that the
criteria for the capitalization of development costs pursuant to Canadian
generally accepted accounting principles have not been met.
I-47
In addition, the Corporation derives future tax benefits in the form of
deductions and tax credits available for carryforward from its research and
development and other operating expenditures. Due to the uncertainty of
utilization of these deductions and tax credits, the Corporation has not
recognized any future tax assets relating to these benefits.
Recoverability of Long-Lived Assets
The Corporation has estimated the useful lives of capital assets based on
historical experience, lives commonly used by industry participants, and
management's expectations based on the assets' purpose. Management also
determines whether circumstances exist that indicate a capital asset's carrying
amount may not be recoverable, and if so, recognizes an impairment loss. Factors
affecting the useful lives and recoverability of capital assets include economic
and market conditions, environmental regulation, changes in technology, market
acceptance of the Corporation's products as compared to competing and substitute
products, the development of new markets or lack thereof, and their usefulness
in the processes of developing a commercially viable fuel cell product.
NEWLY ISSUED CANADIAN ACCOUNTING STANDARDS
Disposal of Long-Lived Assets and Discontinued Operations
A new accounting standard has been issued relating to disposal activities
initiated after May 1, 2003. The standard specifies the accounting and
disclosure requirements relating to assets that are or will be disposed of,
including those relating to discontinued operations. The adoption of this
standard does not have any impact on the Corporation's current financial
position or results of operations, however its impact in future years could be
material.
Asset Retirement Obligations
Effective January 1, 2004, the Corporation will adopt the new accounting
standard relating to asset retirement obligations. The new standard focuses on
the recognition and measurement of liabilities for obligations associated with
the retirement of property, plant and equipment when those obligations result
from the acquisition, construction, development or normal operation of the
assets. The obligations are measured initially at fair value and the resulting
costs capitalized into the carrying amount of the related asset. In subsequent
periods, the liability is adjusted for the accretion of discount and any changes
in the amount or timing of the underlying future cash flows. In addition, the
asset retirement cost is amortized to income on a systematic and rational basis.
The adoption of this standard does not have any impact on the Corporation's
current financial position or results of operations, however its impact in
future years could be material.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Corporation held cash and short-term investments
of $95.3 million compared to $121.1 million at the end of 2001. These amounts
reflect $125.0 million of gross proceeds raised from two equity financings
completed by the Corporation in 2000. The Corporation maintains a very strict
and conservative investment policy governing its cash and short-term
investments. Investment of the Corporation's cash reserves are limited to
Canadian bank and government securities and low credit risk, money market
instruments.
The Corporation had net working capital of $96.5 million at the end of the
current year, compared to $124.3 million at December 31, 2001.
The Corporation's long-term indebtedness at December 31, 2002, consisted
of a $200,000 research and development loan from a Canadian government program
which promoted energy efficiencies and renewable energy technologies. This loan
is non-interest bearing and is repayable up to the principal amount based on 5
percent of revenue generated to 2015 from certain fuel cell technology
developed. The Corporation has also recognized a long-term liability at December
31, 2002 of $286,000 (in addition to a current portion of $355,000
I-48
recorded in accrued liabilities) for costs associated with restoring soil
adjacent to its Bassano manufacturing facility back to its original state. This
facility has been used by the Corporation for over 20 years, and Global is
committed to ensuring it meets current environmental standards.
The Corporation maintains an operating line of credit of $20.0 million
with a Canadian chartered bank and a U.S.$4.0 million facility to support
letters of guarantee and bid bonds, of which no amounts, except as noted below,
were drawn at December 31, 2002 and December 31, 2001. The amount of borrowing
under these facilities is limited by the amount of short-term investments held
on account with the same bank and the amount of trade accounts receivable
outstanding. Letters of guarantees and bid bonds issued pursuant to these
facilities totaled U.S.$3.0 million at December 31, 2002, compared to U.S.$2.8
million at December 31, 2001. Bid bonds may only be called by the customer
should the Corporation withdraw its bid or fail to have entered into the
contract after it has been awarded to the Corporation. Letters of guarantee
issued in relation to performance may be claimed by the customer should the
Corporation fail to comply with the terms and conditions of the sales contract.
Generally, on larger international orders the Corporation retains insurance for
wrongful calls under these guarantees.
On July 31, 2000, in conjunction with a strategic alliance with Enbridge,
the Corporation issued Series 2 Preferred Shares for gross proceeds of $25.0
million. These Series 2 Preferred Shares have a cumulative dividend, payable in
cash or the Corporation's common shares, ranging from five percent to a minimum
of one percent per annum based on an inverse relationship to the volume weighted
average share price of the Corporation's common shares, determined quarterly.
For 2002, the cumulative dividend rate was five percent. The Corporation must
pay a minimum of $500,000 in preferred share dividends annually, and unpaid
cumulative dividends are increased by a 2.45% quarterly rate, compounded
quarterly, until payment thereof. The Series 2 Preferred Shares are redeemable
at the option of the Corporation at their face value after July 31, 2004,
subject to certain conditions. For the year ended December 31, 2002, the
Corporation declared and paid dividends of $500,000 on these Series 2 Preferred
Shares. At December 31, 2002, Series 2 Preferred Share dividends in arrears
totaled $1,601,600.
The Corporation maintains conservative financial policies with respect to
its ongoing investment in fuel cell development and commercialization relative
to its cash resources. In light of unpredictability of external sources of
capital, the Corporation strives to maintain a significant cash reserve base to
continue its fuel cell initiatives, in spite of fluctuations in its access to
external capital. However, in light of the downturn in capital markets,
especially within the alternative energy sector, and the challenges these
markets pose to raising additional capital, the Corporation initiated a cost
reduction program in its non-core fuel cell activities and general and
administrative departments. In late 2002, the Corporation reduced its personnel
count in these areas by 22 people, and implemented aggressive cost containment
measures.
INVESTING ACTIVITIES
Capital expenditures were $6.1 million for the year ended December 31,
2002 compared to $9.0 million in 2001. Expenditures of $5.6 million in the fuel
cell division in the current year related primarily to fuel cell test stand
equipment and other equipment used in the Corporation's pilot manufacturing
facilities. Fuel cell capital expenditures in the prior year were $7.9 million.
The Corporation has now incurred substantially all the capital cost to equip its
approximately 100,000 square feet of fuel cell facilities located in Calgary,
Alberta. Additional fuel cell capital expenditures will generally be limited to
project specific equipment. Accordingly, capital expenditures for 2003 are
expected to decrease substantially from 2002 and 2001 levels.
As in prior years, capital expenditures in the Corporation's
thermoelectric generator division were nominal, totaling $0.2 million related to
plant equipment and support. Similarly, $0.2 million of capital expenditures
were incurred in the prior calendar year.
As at December 31, 2002, the Corporation had no commitments outstanding
related to the purchase of capital assets.
I-49
FINANCING ACTIVITIES
On December 3, 2002, the Corporation received approval from the Toronto
Stock Exchange ("TSX") to proceed with normal course purchases of its common
shares. During the period commencing December 5, 2002 and ending December 1,
2003, the Corporation may acquire up to 1,458,584 common shares, being five
percent of its issued and outstanding common shares. At the time of approval,
the board of directors of the Corporation believed that the market price of the
common shares was less than the fair market value of those shares. Purchases of
common shares pursuant to the normal course issuer bid will be effected, on
behalf of the Corporation, by a registered investment dealer through the
facilities of the TSX. The price paid by the Corporation for any common shares
purchased by it will be the market price of the shares at the time of the
purchase. The Corporation intends to fund the purchase of common shares pursuant
to the normal course issuer bid from its cash reserves. During the period ended
December 31, 2002, no common shares were repurchased.
A shareholder may obtain a copy of the Notice of Intention to Make a
Normal Course Issuer Bid filed with the TSX without charge, by contacting the
Corporation's head office at the address at the end of this Annual Information
Form.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation has not used derivative instruments or engaged in hedging
activities. The Corporation does, however, experience market risk from interest
rate and foreign currency exchange exposure.
INTEREST RATE RISK
The Corporation is exposed to interest rate risk in relation to interest
income earned on short-term interest bearing securities and short-term
investments. Based on balances as of December 31, 2002, an increase or decrease
of 1% in interest rates earned on short-term investments would affect net
earnings by approximately $953,000 annually. There is no assurance that interest
rates will increase or decrease in the future.
FOREIGN CURRENCY RISK
For the year ended December 31, 2002, 72% of the Corporation's revenue was
denominated in U.S. dollars. Should the Corporation continue to earn such a
significant portion of its revenue in U.S. dollars, future income denominated in
U.S. dollars will expose the Corporation to market risk with respect to
fluctuations in the Canadian dollar value of future U.S. earnings. A 10% decline
in the value of the U.S. dollar relative to the Canadian dollar in fiscal year
2002, for example, would have reduced revenues by approximately $1.6 million.
BUSINESS RISKS AND OUTLOOK
Fuel Cells
The Corporation's primary focus is the development and commercialization
of fuel cell technologies, particularly stationary and remote power
applications.
The viability of the fuel cell industry is contingent on the ability to
produce fuel cells that operate reliably on a cost competitive basis with
conventional power sources, including the existing electrical grid. The
Corporation has set cost and reliability objectives, which it believes are
necessary for the wide spread adoption of its future products in certain
targeted markets. To achieve these objectives, further advances in its SOFC
technology are required. Furthermore, economies of scale derived from large
volume production are necessary if cost targets are to be achieved. The ability
of the Corporation to successfully achieve the commercialization of its
technology is largely dependent on it successfully meeting its technology and
cost objectives. To the extent that these objectives are not met, or not
anticipated to be met, on the timelines originally projected by the Corporation,
additional cash resources will be required to fund commercialization programs
over extended
I-50
periods of time. The availability of additional capital will largely be
dependent on the state of the capital markets and the Corporation's success in
demonstrating its commercialization progress. The Corporation may revisit the
prudence of continuing to invest in fuel cells if the investment does not
provide adequate return to the Corporation's shareholders based on the
technology, commercialization and financing risk inherent in fuel cell
development.
The fuel cell industry has attracted an increasing number of companies,
and the Corporation's future profitability will depend, in part, on its ability
to maintain technology leadership in SOFC technology. A number of the
Corporation's existing competitors utilize proton exchange membrane ("PEM")
technology in their respective fuel cell development programs, which generally
are farther advanced in the commercialization process. The Corporation believes
that each of these technologies has advantages in different applications, and
consequently has chosen to focus on applications where it has judged SOFC
technology, in terms of cost and fuel flexibility, to be superior. The fuel cell
industry also faces competition in certain applications from other emerging
power technologies such as micro-turbines. The Corporation's success will depend
on its ability to compete on a performance and cost effective basis with these
technologies.
Environmental regulations that govern emissions and air quality standards
have also accelerated the development of fuel cells and alternative energy
sources. In addition, fuel cells and other alternative energy technologies may
be relied upon to reduce the United States' and other countries' dependency on
foreign sources of energy. Availability of capital and the market for the
Corporation's fuel cell products in the future will continue to be influenced by
these factors.
THERMOELECTRIC GENERATORS
Customer demand for thermoelectric generators has historically been
contingent on regional natural gas development drilling and pipeline activity,
which in turn has been affected by the relative strength in natural gas prices.
It is expected that recent increases in natural gas prices in North America will
result in an increase in natural gas drilling and well completions. The prospect
of continued gas exploration and development in such areas as the Mackenzie
Delta in northern Canada also provides additional opportunities for the
Corporation's products. The market for the Corporation's thermoelectric
generators is expected to expand as other countries around the world develop
their natural gas infrastructure. The construction of natural gas and liquids
pipelines in developing countries has typically provided sales opportunities for
the Corporation's generators. As with all commodity prices, however, pricing
volatility and cyclicality exists, and the market for the Corporation's
generators is affected by this volatility. The unpredictability of additional
pipeline projects in international markets contributes to significant
variability in the Corporation's revenue. The Corporation also competes with
alternative electrical generating technologies for remote power applications.
Although the Corporation believes its thermoelectric generators have significant
reliability advantages over other competing products, the emergence of new
technologies, including fuel cells, will influence the Corporation's ability to
compete in remote power applications.
MARKET FOR SECURITIES
The common shares of the Corporation are listed for trading on the Toronto
Stock Exchange under the symbol "GLE".
I-51
DIRECTORS AND OFFICERS
The following table sets forth the name, municipality of residence and
principal occupation for the past five years of the directors and officers of
the Corporation. The term of office of each director will expire at the end of
the next annual meeting of shareholders of the Corporation.
DIRECTORS
NAME AND MUNICIPALITY
OF RESIDENCE DIRECTOR SINCE PRINCIPAL OCCUPATION OR EMPLOYMENT FOR PAST FIVE YEARS
--------------------- -------------- ------------------------------------------------------
Robert B. Snyder(2)(3) January 13, 1994 Chairman of the Board of Directors of the Corporation
Edmonton, Alberta since June 2, 1997; prior thereto, President and Chief
Executive Officer of the Corporation from August 1996.
Peter C. Garrett(3) August 13, 2002 President and Chief Executive Officer of the Corporation
Calgary, Alberta since July 16, 2002; prior thereto Chief Operating
Officer of the Corporation from November 13, 2001; prior
thereto President of Garrett & Associates (a private
consulting company) from February 2001; prior thereto
Vice President, Wireless Product Development, Nortel
Networks from January 1997.
Kerry W. Brown(1)(3) February 14, 1992 President and CEO of Foundation Equity Corporation since
St. Albert, Alberta 1992; Chairman of McCoy Bros. Inc. (a TSX listed truck
parts and service company) since July 1995.
John W. Chomiak(2) May 11, 1994 President and Chief Executive Officer, Hemisphere
Edmonton, Alberta Engineering Inc. (a domestic and international
engineering services company).
John C. Howard(1) August 14, 1996 Managing Partner, Howard Kirkpatrick Associates,
Edmonton, Alberta Chartered Accountants; Director of Foundation Equity
Corporation; Director of McCoy Bros. Inc. (a TSX listed
truck parts and service company).
Stephen J.J. Letwin January 24, 2003 Group Vice President, Gas Strategy & Corporate
Toronto, Ontario Development, Enbridge Inc. since April 1, 2003; prior
thereto Group Vice President, Distribution & Services,
Enbridge Inc. since September 1, 2000; prior thereto
President & Chief Operating Officer, Energy Services,
Enbridge Inc. since March, 1999; prior thereto Senior
Vice President, Corporate Services & Chief Financial
Officer, TransCanada PipeLines Limited since March 1998;
prior thereto President, Marketing TCE USA since October
1995.
Henry Yip(2) September 10, 1998 Executive Vice President of Network Services, AT&T Canada
Edmonton, Alberta since March 2001, prior thereto, Vice President, Network
Operations, TELUS Communications Inc. from March 1999;
prior thereto, Vice President--Network Services and
Technology Planning, TELUS from September, 1995.
I-52
NAME AND MUNICIPALITY
OF RESIDENCE DIRECTOR SINCE PRINCIPAL OCCUPATION OR EMPLOYMENT FOR PAST FIVE YEARS
--------------------- -------------- ------------------------------------------------------
Norman Fraser(2) September 27, 2000 Independent financial consultant since 1995; prior
Toronto, Ontario thereto, Vice President and Director of RBC Dominion
Securities Inc.
------------------
NOTES:
(1) Member of the Audit Committee.
(2) Member of the Corporate Governance and Compensation Committee.
(3) Member of the Executive Committee.
OFFICERS
NAME AND MUNICIPALITY
OF RESIDENCE TITLE PRINCIPAL OCCUPATION OR EMPLOYMENT FOR PAST FIVE YEARS
--------------------- -------------- ------------------------------------------------------
Jim Barker Vice President, Vice President, Business Development & Marketing since
Calgary, Alberta Business March 5, 2002; prior thereto, Vice President, Business
Development & Development since January 2, 2001; prior thereto, Chief
Marketing Executive Officer of RMS Research Management Systems
since January 1, 1999; prior thereto, President and Chief
Executive Officer of AgriVest Capital Corporation since
October 1, 1997.
Donelda P. Bester Assistant Corporate Assistant Corporate Secretary of the Corporation from
Calgary, Alberta Secretary August, 1997; prior thereto, various positions from
1990.
Brian Borglum Vice President and Vice President and Chief Technology Officer since
Calgary, Alberta Chief Technology August 13, 2002; prior thereto Director of Advanced
Officer Materials since July 3, 2001; prior thereto Manager of
Advanced Technology of Siemens Westinghouse Power
Corporation since January 2001; prior thereto Team
Leader of Cell Process Development of Siemens
Westinghouse Power Corporation since October 1998; prior
thereto Senior Scientist of Siemens Westinghouse Power
Corporation since May 1993.
Paul A. Crilly Vice President, Vice President, Finance & Chief Financial Officer since
Calgary, Alberta Finance & Chief June 2000; prior thereto, Senior Vice President, Finance
Financial Officer, and Chief Financial Officer of Ryan Energy Technologies
Corporate Inc. since July 1996.
Secretary
Bernie LeSage Vice President, Vice President of the Corporation from 1997; prior
Calgary, Alberta Generator Division thereto, Manager of Manufacturing Systems from November,
1992.
Brian McGurk Vice President, Vice President, Human Resources since October 2, 2001;
Calgary, Alberta Human Resources prior thereto, Manager, Human Resources since October 2,
2000; prior thereto, Manager of Employee Effectiveness at
Telus Mobility Inc. since February 2000; prior thereto,
Senior HR Advisor at Telus Management Services Inc. since
February 1998.
Eric Neary Vice President, Vice President, Engineering since August 13, 2002; prior
Calgary, Alberta Engineering thereto Director of Engineering since June 1, 2002; prior
thereto Manager Systems Test since March 11, 2002; prior
thereto President and CEO of OR-CAL Power since March
2001; prior thereto Manager, Field Service of Ballard
Power Systems since April 1998 and Manager, Systems Test
since March 1997.
I-53
As at the date hereof, the directors and officers of the Corporation, as a
group, beneficially owned directly or indirectly, or exercised control or
direction over, 1,266,935 common shares or approximately 4.3% of the issued and
outstanding common shares of the Corporation. The information as to the shares
beneficially owned, not being within the knowledge of the Corporation, has been
furnished by the respective directors and officers of the Corporation.
Mr. Henry Yip is a senior officer of AT&T Canada Inc. ("AT&T Canada"). On
October 15, 2002, AT&T Canada announced a consensual restructuring plan relating
to AT&T Canada's $4.5 billion of outstanding public debt. The restructuring was
carried out under the Companies' Creditors Arrangement Act (Canada). The
restructuring was approved by AT&T Canada's securityholders and the Ontario
Superior Court of Justice in February of 2003 and became effective on April 1,
2003.
Foundation Equity Corporation ("Foundation") and Mr. Kerry Brown entered
into a settlement agreement with the Alberta Securities Commission (the "ASC")
dated December 13, 1999 and Foundation entered into a settlement agreement with
the Ontario Securities Commission (the "OSC") dated September 30, 2002, both of
which relate to a sale by Foundation of common shares of the Corporation carried
out in April of 1999. On April 16 and 19, 1999 Foundation sold approximately 1.2
million common shares that it owned in the Corporation through the Toronto Stock
Exchange from its control block without satisfying the applicable prior notice
periods under the Securities Act (Alberta) and the Securities Act (Ontario) and
did not comply with the hold period requirements under the Securities Act
(Ontario). At the time of the sale, Foundation owned more than 20% of the issued
and outstanding shares of the Corporation and therefore was deemed under such
legislation to be a party in a position to materially affect the control of the
Corporation. Upon Foundation becoming aware of the filing requirements on April
19, 1999, it contacted the ASC, made a late filing of the required notices and
disclosed that prior sales had occurred.
Under the terms of the settlement agreement with the ASC, Foundation and
Mr. Brown agreed to undertake to comply diligently with the Securities Act
(Alberta) and to pay an administrative penalty in the amount of $28,000 and
costs of $2,000. Pursuant to the settlement agreement with the OSC, Foundation
agreed to take additional measures to comply with Ontario securities law, was
reprimanded by the OSC and paid costs in the amount of $2,000. The full
cooperation of the respondents and the absence of any prior sanctions were
specifically noted in the settlement agreement with the ASC.
DIVIDEND RECORD AND POLICY
The Corporation has not paid any dividends on any of its outstanding
common shares and does not intend to pay such dividends in the foreseeable
future. Any future determination to pay dividends on the common shares will be
at the discretion of the board of directors of the Corporation and will be
dependent upon the Corporation's earnings, capital requirements and financial
position, as well as general economic conditions, bank lending requirements and
other factors deemed relevant by the board of directors of the Corporation. In
addition, there may be restrictions placed on the Corporation's ability to
declare dividends on one class or series of shares in preference to other
classes or series.
The Corporation has issued Cumulative Redeemable Convertible Preferred
Shares, Series 2, for which dividends are payable in accordance with the terms
thereof.
I-54
RISK FACTORS
The risks and uncertainties described below are not the only ones the
Corporation faces. Additional risks and uncertainties, including those that the
Corporation does not know about now or that it currently deems immaterial, also
may adversely affect the Corporation's business.
THE COMBINATION OF THE CORPORATION AND QUANTUM MAY NOT OCCUR
The combination of the Corporation and Quantum is subject to various
conditions including shareholder and regulatory approvals. There can be no
assurance that these and other conditions will be satisfied.
THE CORPORATION CANNOT GIVE ANY ASSURANCE OF A SUCCESSFUL COMBINATION WITH
QUANTUM
In evaluating the terms of the transaction, the Corporation and Quantum
each analyzed their respective businesses and made certain assumptions
concerning their respective future operations. A key assumption was that the
transaction would result in a combined entity with operating results in 2003 and
beyond that were substantially better than those recently experienced by either
of the companies. The Corporation cannot give any assurance, however, that on a
combined basis, the companies will achieve better operating results or be able
to successfully integrate each company's operations, cultures, technologies,
products and personnel.
THE CORPORATION EXPECTS TO INCUR SUBSTANTIAL LOSSES
The Corporation has a history of operating losses and has incurred
substantial expenditures over the last four years on fuel cell development and
commercialization. The Corporation expects to make significant expenditures on
fuel cell technology going forward, which may result in substantial losses in
the future. The Corporation cannot predict whether it will operate profitably.
The Corporation expects to continue to make significant investments in product
development to achieve commercialization of its products. If the Corporation is
unable to achieve profitability, Global's share price could decline.
THE CORPORATION MAY NEVER COMPLETE THE DEVELOPMENT OF COMMERCIALLY VIABLE FUEL
CELLS AND FUEL CELL SYSTEMS
The Corporation does not know when or whether it will successfully
complete development of commercially viable SOFC systems for any of its target
and prospective markets. Despite the Corporation's accomplishments, it must
develop or otherwise acquire access to substantial technological advances in
relation to its systems, particularly in the areas of fuel cell stacks and
systems integration, before it is able to produce a commercially viable product.
Even if the Corporation is able to do so, these efforts will still depend on the
success of other companies in producing related and necessary products for use
in conjunction with the Corporation's products.
THE CORPORATION MUST LOWER THE COST OF ITS FUEL CELL SYSTEMS AND DEMONSTRATE
THEIR RELIABILITY
The Corporation's solid oxide fuel cell systems are currently in the
development stage. While proof of concept prototypes have been developed and
tested in controlled conditions, these systems have not yet undergone extensive
testing, nor have the designs been refined to the level of a commercial product.
The prototypes incorporate specialty components that are produced in one-off or
small batch quantities. The current prototypes cost significantly more, and
perform at a lower level than established competing technologies. If we are
unable to develop and manufacture fuel cell systems that are competitive with
competing technologies in terms of price, reliability and longevity, consumers
will be unlikely to buy products containing our fuel cells and fuel cell
systems. The price of fuel cell systems is dependent largely on material and
manufacturing costs. There can be no assurance that the Corporation will be able
to lower these costs to the level where the Corporation will be able to produce
a competitive product or that any product produced using lower cost materials
and manufacturing processes will not suffer from a reduction in performance,
reliability and longevity.
I-55
A MASS MARKET FOR FUEL CELLS AND FUEL CELL SYSTEMS MAY NEVER DEVELOP OR MAY TAKE
LONGER TO DEVELOP THAN ANTICIPATED
Fuel cell systems represent emerging technologies, and the Corporation
does not know whether consumers will adopt these technologies on a large scale
or whether original equipment manufacturers ("OEMs") will incorporate these
technologies into their products. In particular, if a mass market fails to
develop or develops more slowly than anticipated for fuel cell powered
transportation and power generation applications, the Corporation may be unable
to recover the expenditures incurred to develop the Corporation's fuel cells and
fuel cell systems and may be unable to achieve or maintain profitability, any of
which could negatively impact the Corporation's business. Many factors that are
beyond the Corporation's control may have a negative effect on the development
of a mass market for fuel cells and our fuel cell products and systems. These
factors include the following:
- the cost competitiveness and physical size of fuel cell systems and
"balance of plant" components;
- the availability, future costs and safety of hydrogen, natural gas or
other potential fuel cell fuels;
- consumer reluctance to adopt fuel cell or alternative fuel products;
- OEM reluctance to replace current technology;
- consumer perceptions of fuel cell systems;
- regulatory requirements; and
- the emergence of newer, breakthrough technologies and products within
the fuel cell industry.
DEREGULATION OF UTILITY INDUSTRY
One of the Corporation's markets is for stationary power generators, a
market that is driven by deregulation and restructuring of the electric utility
industry in Canada, the U.S. and elsewhere and by the requirements of utilities,
independent power producers and end users. Deregulation of the electric utility
industry varies by jurisdiction and is subject to government policies that will
determine the pace and extent of deregulation. Changes in government and public
policy over time could impact deregulation and adversely affect the
Corporation's prospects for commercializing stationary power generators and the
Corporation's financial results.
THE CORPORATION HAS ENTERED INTO MEMORANDUMS OF UNDERSTANDING (MOUS) WITH
POTENTIAL STRATEGIC PARTNERS
The Corporation is negotiating definitive agreements with strategic
partners with whom MOUs have been signed. There can be no assurance that the
Corporation will be able to successfully negotiate and execute these definitive
agreements with any of these partners. The failure to do so may effectively
terminate its working relationship with these partners.
THE CORPORATION IS DEPENDENT ON ITS RELATIONSHIPS WITH ITS STRATEGIC PARTNERS
The Corporation has entered into relationships with strategic partners for
design, product development and distribution of natural gas-fueled and propane
fueled SOFC systems. These agreements, terms and conditions governing these
relationships allow for termination by the Corporation's partners. Termination
of any of these agreements could adversely affect our ability to design, develop
and distribute these products to the marketplace.
CERTAIN OF THE CORPORATION'S FUEL CELLS AND FUEL CELL SYSTEMS WILL BE COMPONENTS
OF OTHER COMPANIES' PRODUCTS
To be commercially useful, certain of the Corporation's fuel cells and
fuel cell systems may be integrated into products manufactured by OEMs. The
Corporation can offer no guarantee that OEMs will manufacture appropriate
products or, if they do manufacture such products, that they will choose to use
the Corporation's fuel
I-56
cells and fuel cell systems. Any integration, design, manufacturing or marketing
problems encountered by OEMs could adversely affect the market for the
Corporation's fuel cells and fuel cell systems and its financial results.
CHANGES IN ENVIRONMENTAL POLICIES COULD HURT THE MARKET FOR THE CORPORATION'S
PRODUCTS
Stricter environmental laws and regulations governing emissions of green
house gases and pollutants have given impetus to the development of fuel cells
generally. Although the development of alternative energy sources, and in
particular fuel cells, have been identified as a significant priority by many
governments, there is no certainty that governments will not change their
priorities or that any such change would not materially affect the Corporation's
development of its products.
THE CORPORATION CURRENTLY FACES AND WILL CONTINUE TO FACE SIGNIFICANT
COMPETITION
The Corporation's products face and will continue to face significant
competition. New developments in technology may negatively affect the
development or sale of some or all of its products or make its products
uncompetitive or obsolete. Other companies, many of which have substantially
greater resources, are currently engaged in the development of products and
technologies that are similar to, or may be competitive with, certain of the
Corporation's products and technologies. As the fuel cell has the potential to
replace existing power sources, competition for fuel cell 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. Each of the Corporation's target markets is currently serviced by
existing 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. Additionally, there are competitors working on developing other fuel
cell technologies in the Corporation's targeted markets. A large number of
corporations, national laboratories and universities in the United States,
Canada, Europe and Japan possess fuel cell technology and/or are actively
engaged in the development and manufacture of fuel cells. Each of these
competitors has the potential to capture market share in various markets, which
would have a material adverse effect on the Corporation's position in the
industry and its financial results. Many of the Corporation's competitors have
financial resources, customer bases, businesses or other resources, which give
them significant competitive advantages.
THE CORPORATION DEPENDS ON ITS INTELLECTUAL PROPERTY AND FAILURE TO PROTECT THAT
INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT THE CORPORATION'S FUTURE GROWTH AND
SUCCESS
Failure to protect the Corporation's existing intellectual property rights
may result in the loss of its exclusivity or the right to use its technologies.
If the Corporation does not adequately ensure its freedom to use certain
technology, it may have to pay others for rights to use their intellectual
property, pay damages for infringement or misappropriation and/or be enjoined
from using such intellectual property. The Corporation relies on patent, trade
secret, trademark and copyright law to protect its intellectual property. Some
of its intellectual property is not covered by any patent or patent application.
The Corporation's 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, the Corporation cannot assure that any of
the patents filed by it or other patents that third parties license to it will
not be invalidated, circumvented, challenged, rendered unenforceable, or
licensed to others or that any of the Corporation's pending or future patent
applications will be issued with the breadth of claim coverage sought by it, 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. The Corporation also seeks to protect its 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 strategic partners and employees. The
Corporation cannot assure that these agreements will not be breached, that it
will have adequate remedies for any breach or that such persons or institutions
will not assert rights to intellectual property arising out of these
relationships. Additionally, the steps the Corporation has taken and may take in
the future may not prevent the misappropriation of our solutions or
technologies, particularly in
I-57
foreign countries where laws or enforcement practices may not protect the
Corporation's proprietary rights as fully as in Canada and the United States.
THE CORPORATION'S FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN
INTELLECTUAL PROPERTY MAY NEGATIVELY AFFECT ITS BUSINESS
The Corporation's future success and competitive position depends in part
upon its ability to obtain or maintain certain proprietary intellectual property
used in its principal products. This may be achieved, in part, by prosecuting
claims against others who it believes are infringing its rights and by defending
claims of intellectual property infringement by its competitors. While the
Corporation is not currently engaged in any material intellectual property
litigation, it could become subject to lawsuits in which it is alleged that the
Corporation has infringed the intellectual property rights of others or commence
lawsuits against others who it believes are infringing upon the Corporation's
rights. The Corporation's involvement in intellectual property litigation could
result in significant expense to it, adversely affecting the development of
sales of the challenged product or intellectual property and diverting the
efforts of the Corporation's technical and management personnel, whether or not
such litigation is resolved in its favour. In the event of an adverse outcome as
a defendant in any such litigation, the Corporation may, among other things, be
required to:
- pay substantial damages;
- cease the development, manufacture, use, sale or importation of
products that infringe upon other patented intellectual property;
- expend significant resources to develop, redesign, re-engineer or
acquire non-infringing intellectual property;
- discontinue processes incorporating infringing technology; or
- obtain licences to the infringing intellectual property.
The Corporation cannot assure that it would be successful in such
development or acquisition or that such licences would be available upon
reasonable terms, if at all. Any such development, acquisition or licence could
require the expenditure of substantial time and other resources and could have a
material adverse effect on the Corporation's business and financial results.
THE CORPORATION HAS NO EXPERIENCE MANUFACTURING FUEL CELLS AND FUEL CELL SYSTEMS
ON A COMMERCIAL BASIS
To date, the Corporation has focused primarily on research and development
and has no experience manufacturing fuel cells and fuel cell systems on a
commercial basis. In order to produce fuel cells and fuel cell systems at
affordable prices, the Corporation will have to make its fuel cells and fuel
cell systems through high volume automated processes. The Corporation does not
know whether it will be able to develop efficient, automated, low-cost
manufacturing capability and processes that will enable it to meet the quality,
price, engineering, design and production standards or production volumes
required to successfully mass market its fuel cells and fuel cell systems. Even
if the Corporation is successful in developing its manufacturing capability and
processes, it does not know whether it will do so in time to meet its product
commercialization schedule or to satisfy the requirements of its customers. The
Corporation's failure to develop such manufacturing processes and capabilities
could have a material adverse effect on its business and financial results.
THE CORPORATION IS DEPENDENT ON THIRD PARTY SUPPLIERS FOR THE SUPPLY OF KEY
MATERIALS AND COMPONENTS FOR ITS PRODUCTS
A supplier's failure to supply materials or components in a timely manner,
or to supply materials and components that meet the Corporation's quality,
quantity or cost requirements, or the Corporation's inability to
I-58
obtain substitute sources for these materials and components in a timely manner
or on terms acceptable to it, could harm its ability to manufacture fuel cells
and fuel cell systems. In addition, certain components of the Corporation's fuel
cells utilize scarce natural resources, and the Corporation is dependent upon a
sufficient supply of this commodity. While the Corporation does not anticipate
significant near or long-term shortages in the supply of these resources, such
shortages could adversely affect its ability to produce commercially viable fuel
cells or significantly raise its cost of producing fuel cells.
THE CORPORATION MAY NOT MEET ITS PRODUCT DEVELOPMENT AND COMMERCIALIZATION
MILESTONES
To gauge the Corporation's progress, it intends to operate, test and
evaluate fuel cells and fuel cell systems under actual conditions. If its
systems exhibit technical defects or are unable to meet cost or performance
goals, including power output, useful life and reliability, its
commercialization schedule could be delayed and potential purchasers of its
initial commercial systems may decline to purchase further systems or may choose
to purchase alternative technologies. Delayed commercialization schedules may
also impact our cash flow projections, which could require increased funding in
excess of the Corporation's forecasts.
DEPENDENCE ON KEY PERSONNEL
The success of the Corporation is dependent upon, among other things, the
services of the President and Chief Executive Officer, the Vice Presidents, and
other key management and technical personnel. The loss of the services of these
personnel for any reason could have a material adverse effect on the prospects
of the Corporation. The Corporation currently has key man insurance for some of
its critical personnel. There is no guarantee that the funds received from such
policies in case of mishap would fully compensate the Corporation for the loss
of such personnel. In addition, the future success of the Corporation will
depend in large part on its ability to attract and retain qualified personnel,
particularly highly skilled engineers, and there can be no assurances such
personnel can be attracted and retained. The loss of services of one or more of
the Corporation's senior executive officers or key personnel or the inability to
continue to attract qualified personnel could delay product development cycles
or otherwise materially harm the Corporation's business, financial condition and
results of operations.
SKILLED LABOUR SHORTAGES
The Corporation requires experienced engineers, technicians and journeyman
welders and machinists to conduct its business. No assurance can be given that
the supply of these skilled persons will always be adequate to meet the
Corporation's requirements or that the Corporation will be able to attract an
adequate number of skilled persons.
MARKET CONDITIONS RELATED TO THE CORPORATION'S THERMOELECTRIC GENERATORS
Demand for the Corporation's thermoelectric generators depends primarily
on the level of spending by oil and natural gas companies for gas exploration
and development activities, and on the level of gas pipeline construction
activity. These activity levels are directly affected by fluctuations in world
energy prices, world supply and demand for oil and natural gas and government
regulations, both domestic and international, all of which are beyond the
control of the Corporation and its customers. Reduced levels of activity in the
oil and natural gas industry can intensify competition and result in lower
revenue and operating profit margin.
WARRANTY COSTS
The Corporation has made a provision for thermoelectric generator warranty
expenses in its financial accounts. The Corporation believes that this provision
is adequate and reasonable given the past reliability and experience with its
products. There is no certainty that this provision will be sufficient, and
material adverse financial effects could be encountered should future
reliability not be as anticipated.
I-59
INTERNATIONAL ACTIVITIES
The Corporation's international activities can be subject to inherent
risks, including: (i) exposure to currency fluctuations; (ii) managing potential
difficulties in enforcing contractual obligations and intellectual property
rights; (iii) the burden of complying with a wide variety of laws and
regulations, including product certification, environmental and import and
export laws; (iv) political instability; and (v) difficulties collecting
international accounts receivable. To mitigate certain of these risks, the
Corporation may obtain insurance when such insurance is available on acceptable
terms. Such coverage is not always available and, when available, may be subject
to unilateral cancellation by the insuring companies on short notice. The
Corporation's operating results may be subject to changes in the Canadian
dollar/United States dollar exchange rate since most international sales are
transacted in U.S. dollars. Any significant fluctuations in the value of the
dollar against currencies in foreign markets in which the Corporation transacts
business may negatively impact the Corporation's competitiveness in foreign
markets. The Corporation has seldom hedged its exposure to such currency
fluctuations to date.
INSURANCE
The Corporation carries insurance that it considers adequate having regard
to the nature of the risks and the costs of coverage. The Corporation may not,
however, be able to obtain insurance against certain risks or for certain
equipment located from time to time in certain areas of the world. The
Corporation is not fully insured against all possible risks, nor are all such
risks insurable.
THE CORPORATION MAY BE REQUIRED TO CONDUCT ENVIRONMENTAL REMEDIATION ACTIVITIES,
WHICH COULD BE EXPENSIVE
The Corporation is subject to a number of environmental laws and
regulations, including those concerning the handling, treatment, storage and
disposal of hazardous materials. These environmental laws generally impose
liability on present and former owners and operations, transporters and
generators for remediation of contaminated properties. Although the Corporation
believes that its businesses are operating in compliance in all material
respects with applicable environmental laws, many of which provide for
substantial penalties for violations, there can be no assurance that future
changes in such laws, interpretations of existing regulations or the discovery
of currently unknown problems or conditions will not require substantial
additional expenditures. Any noncompliance with these laws and regulations could
subject the Corporation to material administrative, civil or criminal penalties
or other liabilities. Additionally, the Corporation may be required to incur
substantial costs to comply with current or future environmental and safety laws
and regulations.
In late 2002, a site inspection at the Corporation's manufacturing
facility in Bassano, Alberta, Canada detected certain on-site soil and
groundwater contamination, as well as contamination of off-site groundwater. The
Corporation has engaged a third party international environmental consulting
firm to further evaluate the extent of the contamination and assist the
Corporation in developing a remediation strategy.
Based on the data available as of February 2003, the Corporation's
environmental consultant proposed a remediation strategy to prevent further
offsite contaminant migration and to capture and remediate existing offsite
contamination. The Corporation's consultant has proposed two alternatives for
groundwater remediation. The Corporation's consultant currently estimates total
costs for operation of the groundwater remediation system preferred by the
Corporation for a period of ten years to be $755,000. The Corporation has made a
present value provision of $640,877 in its December 31, 2002 financial
statements for site remediation expenses, though the actual remediation costs
associated with this remediation could vary significantly.
I-60
ADDITIONAL INFORMATION
The Corporation will provide the following documents to any person upon
request to the Assistant Corporate Secretary of the Corporation at 4908--52nd
Street S.E. Calgary, Alberta T2B 3R2:
1. when any securities of the Corporation are in the course of a
distribution pursuant to a short 1 form prospectus or a preliminary
short form prospectus has been filed in respect of a distribution of
any such securities:
a) one copy of this Annual Information Form, together with one
copy of any document, or the pertinent pages of any document,
incorporated by reference herein;
b) one copy of the comparative financial statements of the
Corporation for the year ended b December 31, 2002, together
with the report of the auditors (the "Financial Statements"),
and one copy of any interim financial statements issued
subsequent thereto;
c) one copy of the Management Information Circular of the
Corporation in respect of the annual c meeting of shareholders
of the Corporation held on June 5, 2002 (the "Information
Circular"); and
d) one copy of any other documents that are incorporated by
reference into the preliminary d short form prospectus or the
short form prospectus and not required to be provided under
paragraphs (a) through (c) above; or
2. at any other time, one copy of any of the documents referred to in
paragraph 1(a) through (c) above.
Additional information, including information concerning directors' and
officers' remuneration and indebtedness, principal holders of the Corporation's
securities, options to purchase common shares and the interests of insiders in
material transactions is contained in the Information Circular. Additional
financial information is provided in the Financial Statements.
I-61
GLOBAL THERMOELECTRIC INC.
INTERIM REPORT 1
FOR THE QUARTER ENDED MARCH 31, 2003
I-62
Global Thermoelectric Inc. (www.globalte.com) is a world leader in the
development of solid oxide fuel cell ("SOFC") products. The Company is also the
world's largest manufacturer and distributor of thermoelectric stationary power
generators for use in remote locations. Global is developing fuel cell products
that are compatible with natural gas or propane. The Company is currently
prototyping systems to address residential and remote applications. Global is
listed on the Toronto Stock Exchange (stock symbol: GLE).
I-63
MESSAGE TO SHAREHOLDERS
SUMMARY HIGHLIGHTS
1. On April 9, 2003, Global announced that it had entered into a
combination agreement with QUANTUM Fuel Systems Technologies Worldwide, Inc.
("QUANTUM") (NASDAQ: QTWW) in a share-for-share exchange. The combination, which
is subject to shareholder, regulatory and court approval and other customary
closing conditions, is expected to close in July 2003. QUANTUM is 19.9 percent
owned by General Motors, is a member of the General Motors Fuel Cell Alliance,
and is focused on component development and system integration, in particular,
the design, manufacture and supply of integrated fuel systems for both
automotive and stationary applications. Global expects to mail a joint
information circular regarding the proposed combination to its shareholders in
the coming weeks.
2. Revenue increases 39 percent: In the first quarter of 2003 Global's
generator sales and service revenue totaled $6.2 million, an improvement of 39
percent in comparison to the same quarter of 2002.
3. Cash burn rate reduced: Research, engineering and development costs
declined in the first quarter to $4.8 million from $6.1 million in the
comparative period of the prior year. These cost savings are attributable to the
Company's cost reduction initiatives implemented in the fourth quarter of 2002.
4. A continuing single cell membrane test now exceeds 11,000 hours
demonstrating near commercial performance. Stack and system development is
ongoing with an improved stack design successfully completing initial testing
this quarter.
RESULTS OF OPERATIONS
FUEL CELL DIVISION -- Core SOFC technology development in the first
quarter continued to build on the momentum achieved in 2002. Key results from
the quarter include an ongoing long-term single cell membrane test, which, as of
the end of March, exceeded 11,000 hours suggesting a projected operational life
of 25,000 hours. These results demonstrate, in our opinion, industry-leading
performance for planar SOFC membranes and were discussed by Global at a major
fuel cell conference (8th International Symposium on SOFCs in Paris, France) in
April 2003. Stack development is also on track to deliver an enhanced stack
design for Global's Aurora project in the third quarter of 2003. Recent testing
of four new 20-cell stacks in an RP-2 natural gas system yielded peak power
output of 3.1 kW and demonstrated a 43 percent improvement in stack power
density (power output measured as a function of surface area).
Ongoing system testing continues to yield valuable design and engineering
data. Collectively Global's five RP-2 natural gas fuel cell power plants have
operated for approximately 14,200 hours between May 2002 and March 2003 with one
system achieving over 4,100 hours of operation. Two systems undergoing testing
by Enbridge Inc. in Toronto have accumulated over 3,400 hours of operation. The
RP-2 design has exceeded our expectations in terms of durability and efficiency.
In parallel the Company is developing Aurora, its next generation prototype
system, for initial testing in late 2003. Aurora is expected to embody
significant improvements in system cost, performance and size and to provide a
stable platform for ongoing system testing in 2004.
Global's continuing development of SOFC technology is also evidenced in
the Company's growing intellectual patent portfolio. At March 31, 2003 the
Company had filed 77 U.S. and international patent applications (36 cell, 26
stack and 15 system) describing 27 distinct inventions. At the same time last
year, the Company had filed 40 patent applications describing 13 distinct
inventions.
GENERATOR DIVISION -- In 2002 the generator division posted excellent
financial results reflecting the Company's strong sales. This trend continues in
2003 with revenues from generator sales and service for the period ending March
31, 2003 totaling $6.2 million.
I-64
On April 10, 2003, the Company announced that it received a Letter of
Intent from the Gas Authority of India Ltd. ("GAIL") for a US$3.6 million order
of thermoelectric power systems for GAIL's Vizag-Secunderabad LPG Pipeline
Project. Within the scope of the project, Global will be responsible for the
supply, installation and commissioning of turnkey thermoelectric generator
systems at 26 sites along the pipeline. In addition the Company will supply fuel
conditioning systems, system control panels, DC-DC converters and civil and
mechanical works at pipeline sites. The contract award follows Global's recently
completed successful collaboration with GAIL on a US$12.9 million contract for
the supply of turnkey power systems to the 1200 km Jamnagar-Loni Pipeline, the
world's longest LPG pipeline.
FINANCIAL RESULTS -- DISCUSSION AND ANALYSIS
Revenue from generator sales and service for the quarter ended March 31,
2003 increased 39 percent to $6.2 million compared to revenue of $4.5 million
for the first quarter of 2002. International orders, particularly to the United
States and Asia, drove the increase in revenue and offset lower sales in western
Canada. With extensive marketing and sales activity conducted around the world
directly by Global sales representatives or through its agent network, the
Company has consistently grown its international customer base with sales into
47 countries.
Investment income of $0.7 million was earned in the current quarter which
approximated the investment income earned in the comparative period. Increased
interest rates in Canada offset a reduction in the Company's cash and short-term
investments.
The Company reported a gross margin of $2.5 million (40.9 percent of
revenue) in the first quarter compared to $1.6 million (35.0 percent of revenue)
in the first quarter of the prior year. Certain international orders attracted
above average margins, while in Canada improved margins were realized as a
result of higher sales of more profitable generator models.
Research, engineering and product development costs in the quarter
decreased to $4.8 million from $6.1 million in the comparative period of the
prior year. The fuel cell division accounted for $4.5 million and $5.8 million
respectively of these expenditures. The decrease in expenditures reflects the
Company's cost reduction initiatives instituted in the fourth quarter of 2002.
At March 31, 2003, there were 149 employees directly involved in fuel cell
development, compared to 171 employees at March 31, 2002.
First quarter generator marketing expenses were $0.5 million, or 8.4
percent of sales, compared to $0.4 million or 10.0 percent of sales, in the
first quarter of 2002. Higher revenues contributed to economies of scale related
to the fixed cost component of our marketing programs.
General and administrative, and business development expenses were $1.0
million and $0.2 million respectively in the current quarter. Cost reduction and
downsizing initiatives taken earlier produced combined savings of $186,000
compared to the first quarter of 2002.
A foreign exchange loss of $366,000 was incurred in the quarter as the
Canadian dollar continued to strengthen against its U.S. counterpart. Global's
primary exposure to the U.S. dollar originates from its international generator
sales and corresponding receivables, offset to a smaller degree by U.S. dollar
accounts payable on U.S. sourced generator and fuel cell expenditures.
Depreciation expense increased to $0.8 million compared to $0.7 million in
the first quarter of 2002. Capital expenditures in the fuel cell division
accounted for the majority of the increase in year-over-year depreciation.
The Company reported a net loss of $4.5 million ($0.17 per share) for the
quarter compared to a net loss of $6.4 million ($0.23 per share) for the quarter
ended March 31, 2002. Improved generator gross margins and a reduction in
research and development spending, offset in part by foreign exchange losses,
accounted for the reduced loss in the period.
I-65
CAPITAL RESOURCES AND LIQUIDITY
At March 31, 2003, the Company held $90.6 million in cash and short-term
investments. Short-term investments are defined as investments maturing (or
expected to be held) longer than three months from the initial date of purchase.
The Company adheres to a conservative investment strategy with its cash and
short-term investments, limiting its investments to Canadian government and bank
securities and high-grade commercial paper. During the quarter ended March 31,
2003, the Company declared $312,500 of preferred share dividends.
INVESTING ACTIVITIES
Capital expenditures were $0.4 million in the first quarter, compared to
$0.8 million in the first quarter of 2002. Expenditures related to fuel cell
test stands accounted for the majority of purchases in the current quarter. The
Company has incurred substantially all of the capital cost to equip its fuel
cell facilities, and additional expenditures will generally be limited to
project specific expenditures. Accordingly, capital expenditures in the fuel
cell division are expected to decrease significantly from the prior year.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements about the
Company, the development of its technologies and the establishment of its
strategic business relationships. Forward-looking statements are statements that
are not historical facts and are generally, but not always, identified by the
words "expects," "anticipates," "believes," "intends," "estimates," "projects"
and similar expressions, or that events or conditions "will," "may," "could" or
"should" occur.
These forward-looking statements are subject to various risks,
uncertainties and other factors that could cause the Company's actual results or
achievements to differ materially from those expressed in or implied by
forward-looking statements. These risks, uncertainties and other factors
include, without limitation, uncertainty as to the Company's ability to
successfully implement its business strategy; the risk that development projects
and prototypes will not be completed successfully or in a timely manner; a
dependence on the contributions and performance of the Company's major alliance
partners; the ability of the Company to successfully negotiate and execute
definitive agreements governing its relationships with its major alliance
partners; uncertainties as to the availability and cost of financing; the
development of competing technologies and the possibility of increased
competition; fluctuating energy prices; uncertainties involving government
policies and government regulations affecting the Company's business; and other
factors identified in the Company's Annual Information Form and other reports
filed with securities commissions in Canada and available at www.sedar.com.
Forward-looking statements are based on the beliefs, opinions and
expectations of the Company's management at the time they are made, and the
Company does not assume any obligation to update its forward-looking statements
if those beliefs, opinions or expectations, or other circumstances should
change.
[LOGO]
Peter Garrett
President and Chief Executive Officer
April 30, 2003
I-66
CONSOLIDATED BALANCE SHEETS
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
ASSETS
CURRENT
Cash and cash equivalents $ 60,793 $ 29,230
Short-term investments 29,811 66,076
Accounts receivable 4,357 4,806
Inventory 3,431 3,096
Prepaid expenses 653 727
---------- ---------
99,045 103,935
---------- ---------
CAPITAL ASSETS--NET 18,045 18,416
INVESTMENT 52 52
---------- ---------
$ 117,142 $ 122,403
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities $ 6,669 $ 7,014
Income taxes payable 199 231
Current portion of obligations under capital leases 122 207
---------- ---------
6,990 7,452
---------- ---------
RESEARCH AND DEVELOPMENT LOAN 200 200
SITE RESTORATION 280 286
SHAREHOLDERS' EQUITY
Share capital (note 2) 158,920 158,920
Contributed surplus 725 725
Accumulated deficit (49,973) (45,180)
---------- ---------
109,672 114,465
---------- ---------
$ 117,142 $ 122,403
---------- ---------
See accompanying notes
I-67
CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER COMMON SHARE
AMOUNTS)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2002
------------ ------------
REVENUE--GENERATORS $ 6,191 $ 4,468
COST OF GOODS SOLD 3,656 2,902
---------- ---------
GROSS MARGIN 2,535 1,566
INVESTMENT INCOME 679 665
---------- ---------
3,214 2,231
---------- ---------
EXPENSES
Research, engineering and development 4,777 6,080
Marketing 523 448
Business development 224 336
General and administrative 977 1,051
Interest on obligations under capital leases 4 9
Foreign exchange loss 366 21
Depreciation 786 655
---------- ---------
LOSS BEFORE INCOME TAXES (4,443) (6,369)
INCOME TAXES
Current 38 18
---------- ---------
NET LOSS (4,481) (6,387)
ACCUMULATED DEFICIT, BEGINNING OF PERIOD (45,180) (20,274)
DIVIDENDS ON PREFERRED SHARES (312) (312)
---------- ---------
ACCUMULATED DEFICIT, END OF PERIOD $ (49,973) $ (26,973)
---------- ---------
BASIC AND DILUTED NET LOSS PER COMMON SHARE (NOTE 3) $ (0.17) $ (0.23)
---------- ---------
See accompanying notes
I-68
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net loss $ (4,481) $ (6,387)
Add (deduct) non-cash items:
Depreciation and other 791 657
Net change in non-cash working capital balances (431) (216)
---------- ---------
(4,121) (5,946)
---------- ---------
FINANCING ACTIVITIES
Repayment of obligations under capital leases (85) (57)
Proceeds on issuance of share capital, net of issue costs -- 18
Preferred share dividends (312) (312)
Net change in non-cash working capital balances 312 312
---------- ---------
(85) (39)
---------- ---------
INVESTING ACTIVITIES
Purchase of capital assets (415) (799)
Proceeds (purchase) of short-term investments 36,265 (4,629)
Cash flow from discontinued operations -- 461
Net change in non-cash working capital balances (81) (1,016)
---------- ---------
35,769 (5,983)
---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE PERIOD 31,563 (11,968)
Cash and cash equivalents, beginning of period 29,230 83,370
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 60,793 $ 71,402
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid 4 9
Income taxes paid 67 70
See accompanying notes
I-69
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The principal business of Global Thermoelectric Inc. (the "Company") is
the development, manufacture and distribution of two stationary power
technologies. Specifically, the Company is in the process of commercializing
natural gas and propane compatible solid oxide fuel cell products intended for
residential, small commercial and light industrial markets. The Company also
manufactures and distributes thermoelectric stationary power generators for use
in remote industrial power markets. The principal applications for
thermoelectric generators include natural gas well and pipeline protection
systems and remote power for instrumentation, automation and telecommunication
systems.
These consolidated interim financial statements have been prepared by
management in accordance with Canadian generally accepted accounting principles.
The accounting policies applied are consistent with those outlined in the
Company's annual consolidated financial statements for the year ended December
31, 2002. These interim consolidated financial statements do not include all
disclosures required in the annual consolidated financial statements and should
be read in conjunction with the annual audited consolidated financial
statements. Certain prior period amounts have been reclassified to conform to
current period presentation.
2. SHARE CAPITAL
NUMBER
(000'S) AMOUNT
------- ------
COMMON SHARES:
Balance, December 31, 2002 and March 31, 2003 29,172 $134,656
SERIES 2 PREFERRED SHARES:
Balance, December 31, 2002 and March 31, 2003 1,000 $ 24,264
------ --------
Balance, December 31, 2002 and March 31, 2003 $158,920
--------
As at April 30, the Company had 1,476,692 options outstanding under the
Company's Incentive Stock Option Plan. In addition, Series 2 preferred shares
outstanding at March 31, 2003 were convertible into 807,494 common shares of the
Company.
Under the terms of the Series 2 preferred shares, the Company has the
option in certain circumstances to defer the payment of dividends in excess of
$500,000 annually. As at March 31, 2003 cumulative dividends in arrears amounted
to $1,640,072 (December 31, 2002 - $1,601,600).
I-70
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
3. NET LOSS PER SHARE
Net loss per common share is based on the weighted average number of
common shares outstanding during the period. The Company utilizes the treasury
stock method in the determination of the diluted per share amounts.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2002
------------ ------------
Numerator:
Net loss $ (4,481) $ (6,387)
Less: Dividends on preferred shares (312) (312)
Additional dividends in arrears on preferred shares (39) --
----------- -----------
Net loss available to common shareholders $ (4,832) $ (6,699)
----------- -----------
Denominator (000's):
Number of shares outstanding at beginning of period 29,172 29,005
Weighted average number of shares issued during period -- 25
----------- -----------
Weighted average number of shares outstanding at end of period 29,172 29,030
----------- -----------
4. STOCK BASED COMPENSATION
The following table presents pro forma information with respect to fair
value accounting for stock options and includes all options granted by the
Company since inception:
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2002
------------ ------------
Net loss:
As reported $ (4,481) $ (6,387)
Compensatory fair value of options granted (1,560) (1,589)
----------- -----------
Pro forma net loss $ (6,041) $ (7,976)
----------- -----------
Basic and diluted net loss per common share:
As reported $ (0.17) $ (0.23)
Pro forma $ (0.22) $ (0.29)
----------- -----------
No options were granted during the quarter ended March 31, 2003.
I-71
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
5. OPERATING SEGMENT INFORMATION
The Company has two operating segments consisting of the development
and commercialization of fuel cell technology and the commercial manufacturing
and sale of thermoelectric generators.
International revenue includes generator sales and service as follows:
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2002
----------- ------------
United States $ 2,945 $ 1,358
Asia 1,564 831
South America 87 103
Other international 62 96
----------- -----------
Total international revenue $ 4,658 $ 2,388
----------- -----------
THREE MONTHS ENDED MARCH 31, 2003
------------------------------------------------------
FUEL CELLS GENERATORS CORPORATE TOTAL
---------- ---------- --------- ----------
Revenue - Domestic $ -- $ 1,533 $ -- $ 1,533
- International -- 4,658 -- 4,658
---------- ---------- --------- ----------
-- 6,191 -- 6,191
Cost of goods sold -- 3,656 -- 3,656
---------- ---------- --------- ----------
Gross margin -- 2,535 -- 2,535
Investment income -- -- 679 679
---------- ---------- --------- ----------
-- 2,535 679 3,214
---------- ---------- --------- ----------
Expenses
Research, engineering and development 4,476 301 -- 4,777
Marketing -- 523 -- 523
Business development 174 50 -- 224
General and administrative 99 224 654 977
Interest on obligations under capital leases -- -- 4 4
Foreign exchange loss -- -- 366 366
Depreciation 619 93 74 786
---------- ---------- --------- ----------
(Loss) earnings before income taxes $ (5,368) $ 1,344 $ (419) $ (4,443)
---------- ---------- --------- ----------
Capital asset expenditures $ 342 $ 56 $ 17 $ 415
---------- ---------- --------- ----------
Total assets utilized in the segment $ 15,826 $ 8,976 $ 92,340 $ 117,142
---------- ---------- --------- ----------
I-72
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002
------------------------------------------------------
FUEL CELLS GENERATORS CORPORATE TOTAL
---------- ---------- --------- ----------
Revenue - Domestic $ -- $ 2,080 $ -- $ 2,080
- International -- 2,388 -- 2,388
---------- ---------- --------- ----------
-- 4,468 -- 4,468
Cost of goods sold -- 2,902 -- 2,902
---------- ---------- --------- ----------
Gross margin -- 1,566 -- 1,566
Investment income -- -- 665 665
---------- ---------- --------- ----------
-- 1,566 665 2,231
---------- ---------- --------- ----------
Expenses
Research, engineering and development 5,813 267 -- 6,080
Marketing -- 448 -- 448
Business development 287 49 -- 336
General and administrative 129 146 776 1,051
Interest on obligations under capital lease -- -- 9 9
Foreign exchange loss -- -- 21 21
Depreciation 489 107 59 655
---------- ---------- --------- ----------
(Loss) earnings before income taxes $ (6,718) $ 549 $ (200) $ (6,369)
---------- ---------- --------- ----------
Capital asset expenditures $ 724 $ 23 $ 52 $ 799
---------- ---------- --------- ----------
Total assets utilized in the segment $ 13,336 $ 10,201 $ 115,476 $ 139,013
---------- ---------- --------- ----------
6. SUBSEQUENT EVENTS
a. On April 8, 2003 Global Thermoelectric Inc. ("Global") and
Quantum Fuel Systems Technologies Worldwide, Inc. ("Quantum") entered into a
combination agreement (the "Combination Agreement") providing for the
combination of Global with Quantum in a share-for-share exchange. Under the
Combination Agreement described below, Global's shareholders will receive
Quantum common stock valued at approximately US$2.51 or $3.69 per Global common
share outstanding (based upon the closing price of Quantum common stock on April
8, 2003). The final value to be received by Global's common shareholders will be
determined based on Quantum's stock price prior to closing as described below.
Under the terms of the Combination Agreement, if approved, Global's
common shareholders will receive Quantum common stock for each Global common
share outstanding. The transaction exchange ratio will be determined by dividing
US$2.628378 by the 20-day volume-weighted average Quantum stock price ending
three days prior to Global's shareholder meeting. The exchange ratio will not be
less that 0.835 or more than 1.020 of Quantum shares; between these two exchange
ratios Global's shareholders will receive approximately US$2.63 of Quantum
stock. Global shareholders will own between 52% and 57% of the pro forma shares
of Quantum common stock outstanding.
This transaction is expected to close in the third quarter of 2003, is
subject to approval by the shareholders of each company and is further subject
to regulatory approvals and other customary closing conditions. This transaction
will also be carried out pursuant to a proposed Plan of Arrangement under the
Alberta Business Corporations Act and as such is subject to Alberta court
approval and shareholder approval by not less than 66 2/3% of the votes cast at
a special shareholders meeting to be held by the Company. Quantum shareholders,
NASDAQ and the Securities and Exchange Commission must also approve of certain
matters related to the transaction.
I-73
GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
Each party to the Combination Agreement has the right to terminate the
agreement upon the occurrence of certain specified events, including the failure
of shareholders to approve the transaction, the modification by either board of
its advice to shareholders or the recommendation of a superior proposal and the
failure to complete the transaction by September 30, 2003.
On May 14, 2003, Enbridge Inc. ("Enbridge"), the owner of all
outstanding Series 2 preferred shares, filed an application in the Court of
Queen's Bench of Alberta opposing the combination and requesting an order to
restrain Global from proceeding with the combination. On June 27, 2003, Global
and Quantum announced that they settled the action commenced by Enbridge. In
connection with the settlement, Enbridge agreed to discontinue its legal action
and agreed not to oppose the combination. In addition, as part of the
settlement, Quantum entered into various agreements with Enbridge that take
effect upon the completion of the combination.
b. On May 6, 2003, Global announced a reduction of its workforce
in its fuel cell division by approximately one third, or 47 employees. The
expense attributable to this reduction in workforce was approximately $1.2
million as of June 30, 2003.
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[LOGO]
GLOBAL THERMOELECTRIC INC.
4908 - 52nd Street SE
Calgary, Alberta, Canada T2B 3R2
Telephone (403) 204-6100
Facsimile (403) 204-6101
Email globalhq@globalte.com
WWW.GLOBALTE.COM
STOCK LISTING
The Toronto Stock Exchange
Trading Symbol: GLE
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GLOBAL THERMOELECTRIC INC.
INTERIM REPORT 2
FOR THE QUARTER ENDED JUNE 30, 2003
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[GLOBAL THERMOELECTRIC LETTERHEAD]
MESSAGE TO SHAREHOLDERS
SUMMARY HIGHLIGHTS
- On August 4, 2003, Global announced that it had entered into a
definitive agreement to combine with FuelCell Energy, Inc.
("FuelCell"). Under the terms of the agreement, the combination is
valued at US$2.72, or approximately C$3.82, per Global common share
for a total value of approximately US$80 million, or approximately
C$112 million. The proposed combination received unanimous support
of both companies' boards of directors. As a result of the proposed
combination with FuelCell, Global terminated its Combination
Agreement with Quantum Fuel Systems Technologies Worldwide, Inc.,
and paid a US$2 million or approximately C$2.8 million break-up fee
in accordance with the terms thereof.
- Research, engineering and development costs were reduced in the
second quarter to $4.2 million from $6.4 million in the comparative
period of the prior year. In the first six months of 2003, research,
engineering and development costs have declined $3.5 million. These
savings are attributable to the Company's cost reduction initiatives
implemented in November 2002 and in May 2003.
- Generator revenues in the second quarter totaled $4.7 million. At
the end of June, Global's order backlog stood at $14 million
including the previously announced US$3.6 million order for
thermoelectric power systems from the Gas Authority of India Ltd.
("GAIL") and US$3.1 million order from the West-East Gas Pipeline
Company of China.
- Ongoing solid oxide fuel cell ("SOFC") research and development
progress is validating significant improvements in single cell and
stack performance. The first of Global's new natural gas prototype
systems ("Aurora") is to be assembled and commissioned in the fourth
quarter of 2003.
RESULTS OF OPERATIONS
In the Company's fuel cell division, long-term single cell testing in the
quarter exceeded 12,600 hours of operation suggesting a projected operational
life of up to 25,000 hours. The current priority of Global's fuel cell program
is stack development. Improvements in thermal cycling capability, stack power
density, stack service life and reduced assembly cost are being targeted. This
development program is yielding positive results and is on track to meet 2003
objectives. Global's progress will be presented at a leading international fuel
cell conference this autumn (Grove Fuel Cell Symposium, London, September 25,
2003).
Ongoing testing of Global's natural gas RP-2 prototype systems exceeded a
cumulative 18,000 hours on five systems since May of last year. These systems
have been fully evaluated and are now approaching end-of-life conditions.
Several systems will be used for testing power inverters and other electronics
as well as new stack technology. System testing at Enbridge's facilities in
Toronto was completed in June following approximately 4,500 hours of natural gas
system demonstrations.
As of June 30, 2003, the Company had filed a total of 81 U.S. and international
patent applications describing 28 distinct inventions relating to the Company's
SOFC technology. This represents a very significant increase in patent filings
over the past year. In June 2002 the patent count stood at 42 applications based
on 14 distinct inventions.
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FINANCIAL RESULTS --- DISCUSSION AND ANALYSIS
Revenue from generator sales and service for the quarter ended June 30, 2003 was
$4.7 million compared to revenue of $5.4 million for the quarter ended June 30,
2002. The decrease in revenue was primarily attributable to longer than
anticipated delivery dates of the Company's previously announced US$3.6 million
order to the Gas Authority of India ("GAIL"), and a slippage in securing other
international orders. On a comparative basis, the second quarter of 2002
included the collection and revenue recognition of a final $2.0 million portion
of a previously completed $19.0 million order from GAIL.
Fuel cell revenues were $0.2 million in the quarter, reflecting the completion
of the final deliverable of a US$0.5 million contract with the Propane Education
and Research Council.
The Company's confirmed order backlog at June 30, 2003, stood at approximately
$14 million. These orders will be completed over the next three quarters in
addition to our ongoing order flow.
Investment income of $0.7 million was earned in the quarter, which was slightly
lower than the $0.8 million earned in the comparative period. Reduced cash and
short-term investments on hand, offset partially with increased investment
returns, accounted for the reduction.
The Company reported a gross margin of $1.6 million or 34.4 percent of revenue
compared to $2.6 million or 46.9 percent of revenue. The receipt of the final
GAIL payment in the second quarter of the prior period, which had a
disproportionately low amount of expenses attributable thereto in the quarter,
accounted for the gross margin percentage variance. In addition, margins were
generally lower than previous quarters as the Company experienced the effects of
the strengthening Canadian dollar against its U.S. counterpart. Approximately 82
percent of the Company's generator sales in the quarter were international, U.S.
dollar denominated sales.
Research, engineering and development costs in the quarter decreased to $4.2
million compared to $6.4 million in the second quarter of last year. The fuel
cell division accounted for $3.9 million of the current quarter research and
product development expenses. The fuel cell division downsizing in November of
2002 and May of 2003, whereby a total of 49 positions were eliminated,
contributed to the decline in spending. The full benefit of the May reductions
will be realized in the third quarter and onward. The fuel cell division
employed 100 people at the end of June 2003 compared to 181 people at the end of
June 2002.
Second quarter generator marketing expenses were $0.5 million, or 10.7% of
sales, compared to $0.5 million or 8.4% of sales in the second quarter of 2002.
Lower revenues in the current quarter reduced economies of scale related to the
fixed cost component of the generator division's marketing programs.
General and administrative, and business development expenses were $0.8 million
and $0.2 million respectively in the current quarter. Downsizing initiatives
produced combined savings of $750,000 compared to the second quarter of 2002.
A foreign exchange loss of $402,000 was incurred in the quarter as the Canadian
dollar continued to strengthen against its U.S. counterpart. Our primary
exposure to the U.S. dollar originates from our international generator sales
and corresponding receivables, offset to a smaller degree by U.S. dollar
accounts payable on U.S. sourced generator and fuel cell expenditures. A
tentative weakening of the Canadian dollar subsequent to quarter end may result
in an exchange gain in Q3.
Depreciation expense totaled $0.8 million, consistent with the comparative
quarter in 2002.
To provide more transparency to the quarterly results, the Company has reported
a number of costs in the quarter separately, under the description of other
expenses. Transaction costs to June 30, 2003, including legal, investment and
accounting fees related to the Quantum transaction totaled $3.6 million.
Restructuring costs associated with the May downsizing were $1.2 million and an
additional accrual for the Bassano facility site restoration of $0.3 million was
recorded in the quarter.
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Primarily as a result of these other expenses, the Company reported an increased
net loss of $9.6 million ($0.34 per share) for the quarter compared to a net
loss of $6.5 million ($0.24 per share) for the quarter ended June 30, 2002.
For the six months ended June 30, 2003, the Company reported generator sales and
service revenues of $10.8 million compared to $9.9 million. A net loss of $14.1
million ($0.51 per share) was incurred in the first six months compared to a net
loss $12.9 million ($0.47 per share) in the prior period.
Capital Resources and Liquidity
At June 30, 2003, the Company held $82.8 million in cash and short-term
investments, and had net working capital of $83.1 million. Transaction costs
related to the Quantum transaction and expenses associated with our downsizing
initiatives had a significant impact on our resources in the quarter.
Investing Activities
Capital expenditures of a nominal $0.2 million were made in the quarter,
compared to $1.8 million in the second quarter of 2002. The Company expects to
maintain lower capital expenditure levels as compared to the previous periods.
COMPANY PROFILE
Global Thermoelectric Inc. (www.globalte.com) is a world leader in the
development of SOFC products. The Company is also the world's largest
manufacturer and distributor of thermoelectric stationary power generators for
use in remote locations. Global is developing fuel cell products that are
compatible with natural gas or propane. The Company is currently prototyping
systems to address residential and remote applications. Global is listed on the
Toronto Stock Exchange (stock symbol: GLE).
FORWARD-LOOKING STATEMENTS
This news release contains forward-looking statements about the Company, the
development of its technologies and the establishment of its strategic business
relationships. Forward-looking statements are statements that are not historical
facts and are generally, but not always, identified by the words "expects,"
"anticipates," "believes," "intends," "estimates," "projects" and similar
expressions, or that events or conditions "will," "may," "could" or "should"
occur.
These forward-looking statements are subject to various risks, uncertainties and
other factors that could cause the Company's actual results or achievements to
differ materially from those expressed in or implied by forward-looking
statements. These risks, uncertainties and other factors include, without
limitation, uncertainty as to the Company's ability to successfully implement
its business strategy; the risk that development projects and prototypes will
not be completed successfully or in a timely manner; a dependence on the
contributions and performance of the Company's major alliance partners; the
ability of the Company to successfully negotiate and execute definitive
agreements governing its relationships with its major alliance partners;
uncertainties as to the availability and cost of financing; the development of
competing technologies and the possibility of increased competition; fluctuating
energy prices; uncertainties involving government policies and government
regulations affecting the Company's business; and other factors identified in
the Company's Annual Information Form and other reports filed with securities
commissions in Canada and available at www.sedar.com. Forward-looking statements
are based on the beliefs, opinions and expectations of the Company's management
at the time they are made, and the Company does not assume any obligation to
update its forward-looking statements if those beliefs, opinions or
expectations, or other circumstance should change.
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GLOBAL THERMOELECTRIC INC.
CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands of Canadian dollars)
(unaudited)
JUNE 30, December 31,
2003 2002
---- ----
ASSETS
CURRENT
Cash and cash equivalents $ 77,875 $ 29,230
Short-term investments 4,928 66,076
Accounts receivable 3,347 4,806
Inventory 4,568 3,096
Prepaid expenses 500 727
--------- ---------
91,218 103,935
--------- ---------
CAPITAL ASSETS - NET 17,484 18,416
INVESTMENT 52 52
--------- ---------
$ 108,754 $ 122,403
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities $ 7,840 $ 7,014
Income taxes payable 196 231
Current portion of obligations under capital leases 49 207
--------- ---------
8,085 7,452
--------- ---------
RESEARCH AND DEVELOPMENT LOAN 200 200
SITE RESTORATION 551 286
SHAREHOLDERS' EQUITY
Share capital (note 2) 158,954 158,920
Contributed surplus 725 725
Accumulated deficit (59,761) (45,180)
--------- ---------
99,918 114,465
--------- ---------
$ 108,754 $ 122,403
========= =========
See accompanying notes
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GLOBAL THERMOELECTRIC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(Amounts expressed in thousands of Canadian dollars, except per common share
amounts)
(unaudited)
THREE MONTHS Three months SIX MONTHS Six months
ENDED ended ENDED ended
JUNE 30, June 30, JUNE 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
REVENUE - GENERATORS $ 4,654 $ 5,438 $ 10,845 $ 9,906
COST OF GOODS SOLD 3,051 2,888 6,702 5,790
-------- -------- -------- --------
GROSS MARGIN 1,603 2,550 4,143 4,116
REVENUE - FUEL CELL CONTRACT RESEARCH 203 -- 203 --
INVESTMENT INCOME 659 753 1,338 1,418
-------- -------- -------- --------
2,465 3,303 5,684 5,534
-------- -------- -------- --------
EXPENSES
Research, engineering and development 4,221 6,419 8,998 12,499
Marketing 497 458 1,020 906
Business development 150 407 374 743
General and administrative 811 1,304 1,788 2,355
Interest on obligations under capital leases 2 8 6 17
Foreign exchange loss 402 143 768 164
Depreciation 802 806 1,588 1,461
Other expenses (note 3)
Corporate transaction costs 3,631 -- 3,631 --
Restructuring costs 1,183 -- 1,183 --
Site restoration 336 -- 341 --
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (9,570) (6,242) (14,013) (12,611)
INCOME TAXES
Current 30 294 68 312
-------- -------- -------- --------
NET LOSS (9,600) (6,536) (14,081) (12,923)
ACCUMULATED DEFICIT, BEGINNING OF PERIOD (49,973) (26,973) (45,180) (20,274)
DIVIDENDS ON PREFERRED SHARES (188) (188) (500) (500)
-------- -------- -------- --------
ACCUMULATED DEFICIT, END OF PERIOD $(59,761) $(33,697) $(59,761) $(33,697)
======== ======== ======== ========
-------- -------- -------- --------
BASIC AND DILUTED NET LOSS PER COMMON SHARE (NOTE 4) $ (0.34) $ (0.24) $ (0.51) $ (0.47)
======== ======== ======== ========
See accompanying notes
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GLOBAL THERMOELECTRIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts expressed in thousands of Canadian dollars)
(unaudited)
THREE MONTHS Three months SIX MONTHS Six months
ENDED ended ENDED ended
JUNE 30, 2003 June 30, 2002 JUNE 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
OPERATING ACTIVITIES
Net loss $ (9,600) $ (6,536) $(14,081) $(12,923)
Add (deduct) non-cash items:
Depreciation and other 799 817 1,585 1,474
Site restoration 336 -- 341 --
Net change in non-cash working capital balances 1,463 1,907 1,032 1,691
-------- -------- -------- --------
(7,002) (3,812) (11,123) (9,758)
-------- -------- -------- --------
FINANCING ACTIVITIES
Repayment of obligations under capital leases (73) (57) (158) (114)
Proceeds on issuance of share capital, net of issue costs 34 71 34 89
Preferred share dividends (188) (188) (500) (500)
Net change in non-cash working capital balances (124) (124) 188 188
-------- -------- -------- --------
(351) (298) (436) (337)
-------- -------- -------- --------
INVESTING ACTIVITIES
Purchase of capital assets (243) (1,846) (658) (2,645)
Proceeds on sale of capital assets 5 -- 5 --
Proceeds (purchase) of short-term investments 24,883 (44,296) 61,148 (48,925)
Cash from discontinued operations -- (5) -- 456
Net change in non-cash working capital balances (210) 18 (291) (998)
-------- -------- -------- --------
24,435 (46,129) 60,204 (52,112)
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
DURING THE PERIOD 17,082 (50,239) 48,645 (62,207)
Cash and cash equivalents, beginning of period 60,793 71,402 29,230 83,370
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 77,875 $ 21,163 $ 77,875 $ 21,163
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 2 $ 8 $ 6 $ 17
Income taxes paid $ 48 $ 178 $ 115 $ 248
See accompanying notes
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GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in thousands of Canadian dollars, except per common
share amounts)
(unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The principal business of Global Thermoelectric Inc. (the "Company") is the
development and commercialization of power generating equipment. The Company's
research, engineering and development expenditures are predominately focused on
residential combined heat and power products and small-scale industrial
stationary products based on solid oxide fuel cell technology. The Company also
manufactures and distributes thermoelectric generators for remote power needs.
The principal applications for thermoelectric generators include natural gas
well and pipeline protection systems and remote power for instrumentation,
automation and telecommunication systems.
These consolidated interim financial statements have been prepared by management
in accordance with Canadian generally accepted accounting principles. The
accounting policies applied are consistent with those outlined in the Company's
annual consolidated financial statements for the year ended December 31, 2002.
These interim consolidated financial statements do not include all disclosures
required in the annual consolidated financial statements and should be read in
conjunction with the annual audited consolidated financial statements. Certain
prior period amounts have been reclassified to conform to current period
presentation.
2. SHARE CAPITAL
Number (000's) Amount
-------------- ------
COMMON SHARES:
Balance December 31, 2002 29,172 $134,656
Issued on exercise of options 29 34
------ --------
Balance June 30, 2003 29,201 $134,690
------ --------
SERIES 2 PREFERRED SHARES:
Balance December 31, 2002 and June 30, 2003 1,000 $ 24,264
------ --------
$158,954
========
As at August 27, 2003 the Company had 1,307,025 options outstanding under the
Company's Incentive Stock Option Plan. In addition, Series 2 preferred shares
outstanding at June 30, 2003 were convertible into 807,494 common shares of the
Company.
Under the terms of the Series 2 preferred shares, the Company has the option in
certain circumstances to defer the payment of dividends in excess of $500,000
annually. As at June 30, 2003 cumulative dividends in arrears amounted to
$1,804,503 (June 30, 2002 - $917,990).
3. OTHER EXPENSES
CORPORATE TRANSACTION EXPENSES
On April 8, 2003 Global Thermoelectric Inc. (the "Company") and Quantum Fuel
Systems Technologies Worldwide, Inc. ("Quantum") entered into a combination
agreement (the "Combination Agreement") providing for the combination of the
Company with Quantum in a share-for-share exchange. Pursuant to this Combination
Agreement and the subsequent amendment on June 27, 2003, the Company incurred
transaction costs including legal, investment and accounting fees of $3,631,072
as of June 30, 2003. See note 7 Subsequent Events, regarding the termination of
this Combination Agreement.
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GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in thousands of Canadian dollars, except per common
share amounts)
(unaudited)
RESTRUCTURING COSTS
On May 6, 2003, the Company announced a reduction of its workforce primarily in
its fuel cell division by approximately one third, or 47 employees. The expense
attributable to this reduction in workforce was $1,183,391 as of June 30, 2003.
The total restructuring costs are expected to approximate $1.3 million. As of
June 30, 2003, the Company has an outstanding liability of $339,742.
SITE RESTORATION
Land adjacent to the Company's Bassano manufacturing facility requires
remediation as a result of historical operations. As of June 30, 2003 the
Company had estimated and accrued $981,835 for restoration and monitoring
expenses. Actual costs incurred could differ from estimated amounts.
4. NET LOSS PER SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. The Company utilizes the treasury stock
method in the determination of the diluted per share amounts.
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
Numerator:
Net loss $ (9,600) $ (6,536) $(14,081) $(12,923)
Less: Dividends on preferred shares (188) (188) (500) (500)
Additional dividends in arrears on
preferred shares (164) (137) (203) (155)
-------- -------- -------- --------
Net loss available to common shareholders $ (9,952) $ (6,861) $(14,784) $(13,578)
======== ======== ======== ========
Denominator (000's):
Number of shares outstanding at beginning of
period 29,172 29,033 29,172 29,005
Weighted average number of shares issued during
period 12 56 6 55
-------- -------- -------- --------
Weighted average number of shares outstanding at
end of period 29,184 29,089 29,178 29,060
======== ======== ======== ========
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GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in thousands of Canadian dollars, except per common
share amounts)
(unaudited)
5. STOCK BASED COMPENSATION
The following table presents pro forma information with respect to fair value
accounting for stock options and includes all options granted by the Company
since inception:
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
Net loss:
As reported $ (9,600) $ (6,536) $(14,081) $(12,923)
Compensatory fair value of options granted (1,147) (1,464) (2,707) (3,053)
-------- -------- -------- --------
Pro forma net loss $(10,747) $ (8,000) $(16,788) $(15,976)
======== ======== ======== ========
Basic and diluted net loss per common share:
As reported $ (0.34) $ (0.24) $ (0.51) $ (0.47)
Pro forma $ (0.38) $ (0.29) $ (0.60) $ (0.57)
======== ======== ======== ========
No options were issued during the six months ended June 30, 2003.
6. OPERATING SEGMENT INFORMATION
The Company has two operating segments consisting of the development and
commercialization of fuel cell technology and the commercial manufacturing and
sale of thermoelectric generators.
International revenue includes generator sales and service as follows:
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
United States $2,632 $1,229 $5,577 $2,588
Asia 664 2,765 2,228 3,595
South America 516 888 603 991
Other international 7 3 69 99
------ ------ ------ ------
Total international revenue $3,819 $4,885 $8,477 $7,273
====== ====== ====== ======
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GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in thousands of Canadian dollars, except per common
share amounts)
(unaudited)
THREE MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------
FUEL CELLS GENERATORS CORPORATE TOTAL
---------- ---------- --------- -----
Revenue - Domestic $ -- $ 835 $ -- $ 835
- International -- 3,819 -- 3,819
--------- --------- --------- ---------
-- 4,654 -- 4,654
Cost of goods sold -- 3,051 -- 3,051
--------- --------- --------- ---------
Gross margin -- 1,603 -- 1,603
Revenue - Fuel cell contract research 203 -- -- 203
Investment income -- -- 659 659
--------- --------- --------- ---------
203 1,603 659 2,465
--------- --------- --------- ---------
Expenses
Research, engineering and development 3,907 314 -- 4,221
Marketing -- 497 -- 497
Business development 102 48 -- 150
General and administrative 90 161 560 811
Interest on obligations under capital leases -- -- 2 2
Foreign exchange loss -- -- 402 402
Depreciation 636 92 74 802
Other expenses
Corporate transaction expenses -- -- 3,631 3,631
Restructuring costs 1,144 -- 39 1,183
Site restoration -- 336 -- 336
--------- --------- --------- ---------
(Loss) earnings before income taxes $ (5,676) $ 155 $ (4,049) $ (9,570)
========= ========= ========= =========
Capital asset expenditures $ 192 $ 51 $ -- $ 243
========= ========= ========= =========
Total assets utilized in the segment $ 15,369 $ 9,788 $ 83,597 $ 108,754
========= ========= ========= =========
THREE MONTHS ENDED JUNE 30, 2002
------------------------------------------------------------------------
FUEL CELLS GENERATORS CORPORATE TOTAL
---------- ---------- --------- -----
Revenue - Domestic $ -- $ 553 $ -- $ 553
- International -- 4,885 -- 4,885
--------- --------- --------- ---------
-- 5,438 -- 5,438
Cost of goods sold -- 2,888 -- 2,888
--------- --------- --------- ---------
Gross margin -- 2,550 -- 2,550
Investment income -- -- 753 753
--------- --------- --------- ---------
-- 2,550 753 3,303
--------- --------- --------- ---------
Expenses
Research, engineering and development 6,134 285 -- 6,419
Marketing -- 458 -- 458
Business development 356 51 -- 407
General and administrative 146 181 977 1,304
Interest on obligations under capital leases -- -- 8 8
Foreign exchange loss -- -- 143 143
Depreciation 527 216 63 806
--------- --------- --------- ---------
(Loss) earnings before income taxes $ (7,163) $ 1,359 $ (438) $ (6,242)
========= ========= ========= =========
Capital asset expenditures $ 1,749 $ 31 $ 66 $ 1,846
========= ========= ========= =========
Total assets utilized in the segment $ 14,169 $ 9,278 $ 109,990 $ 133,437
========= ========= ========= =========
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GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in thousands of Canadian dollars, except per common
share amounts)
(unaudited)
SIX MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------
FUEL CELLS GENERATORS CORPORATE TOTAL
---------- ---------- --------- -----
Revenue - Domestic $ -- $ 2,368 $ -- $ 2,368
- International -- 8,477 -- 8,477
--------- --------- --------- ---------
-- 10,845 -- 10,845
Cost of goods sold -- 6,702 -- 6,702
--------- --------- --------- ---------
Gross margin -- 4,143 -- 4,143
Revenue - Fuel cell contract research 203 -- -- 203
Investment income -- -- 1,338 1,338
--------- --------- --------- ---------
203 4,143 1,338 5,684
--------- --------- --------- ---------
Expenses
Research, engineering and development 8,383 615 -- 8,998
Marketing -- 1,020 -- 1,020
Business development 276 98 -- 374
General and administrative 189 385 1,214 1,788
Interest on obligations under capital leases -- -- 6 6
Foreign exchange loss -- -- 768 768
Depreciation 1,255 185 148 1,588
Other expenses
Corporate transaction expenses -- -- 3,631 3,631
Restructuring costs 1,144 -- 39 1,183
Site restoration -- 341 -- 341
--------- --------- --------- ---------
(Loss) earnings before income taxes $ (11,044) $ 1,499 $ (4,468) $ (14,013)
========= ========= ========= =========
Capital asset expenditures $ 534 $ 107 $ 17 $ 658
========= ========= ========= =========
Total assets utilized in the segment $ 15,369 $ 9,788 $ 83,597 $ 108,754
========= ========= ========= =========
SIX MONTHS ENDED JUNE 30, 2002
------------------------------------------------------------------------
FUEL CELLS GENERATORS CORPORATE TOTAL
---------- ---------- --------- -----
Revenue - Domestic $ -- $ 2,633 $ -- $ 2,633
- International -- 7,273 -- 7,273
--------- --------- --------- ---------
-- 9,906 -- 9,906
Cost of goods sold -- 5,790 -- 5,790
--------- --------- --------- ---------
Gross margin -- 4,116 -- 4,116
Investment income -- -- 1,418 1,418
--------- --------- --------- ---------
-- 4,116 1,418 5,534
--------- --------- --------- ---------
Expenses
Research, engineering and development 11,947 552 -- 12,499
Marketing -- 906 -- 906
Business development 643 100 -- 743
General and administrative 275 327 1,753 2,355
Interest on obligations under capital leases -- -- 17 17
Foreign exchange loss -- -- 164 164
Depreciation 1,016 323 122 1,461
--------- --------- --------- ---------
(Loss) earnings before income taxes $ (13,881) $ 1,908 $ (638) $ (12,611)
========= ========= ========= =========
Capital asset expenditures $ 2,473 $ 54 $ 118 $ 2,645
========= ========= ========= =========
Total assets utilized in the segment $ 14,169 $ 9,278 $ 109,990 $ 133,437
========= ========= ========= =========
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GLOBAL THERMOELECTRIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in thousands of Canadian dollars, except per common
share amounts)
(unaudited)
7. SUBSEQUENT EVENTS
On August 4, 2003, Global Thermoelectric Inc. ("Global") entered a definitive
agreement with FuelCell Energy, Inc. ("FuelCell") for FuelCell to acquire Global
in an all-stock transaction. Under the definitive agreement described below,
Global's shareholders will receive FuelCell common stock valued at approximately
US$2.72 or CDN$3.82 for each outstanding common share of Global (based on
exchange rate of CDN$1.4048 to US$1 as of close of business on August 1, 2003)
for a total value of approximately US$80 million. The final value to be received
by Global's common shareholders will be determined based on FuelCell's stock
price prior to closing as described below.
The exchange ratio for determining the number of shares of FuelCell common stock
or exchangeable shares that a Global shareholder will receive for each Global
share will be equal to US$2.72, or approximately CDN$3.82, divided by FuelCell's
20-day volume-weighted average share price ending on the third trading day
preceding the Global shareholders meeting to be called to approve the
transaction. However, if the 20-day volume-weighted average trading price of
FuelCell stock is less than US$7.96, the exchange ratio will be 0.342, and if
the 20-day volume-weighted average FuelCell trading price is greater than
US$9.74, the exchange ratio will be 0.279.
Global shareholders will be entitled to elect to receive either shares of
FuelCell common stock or exchangeable shares to be listed on The Toronto Stock
Exchange. The disposition of Global shares in exchange for exchangeable shares
by Canadian residents holding Global shares as capital property will not result
in a taxable Canadian transaction and will qualify as Canadian property for
RRSP, RRIF, RESP and other savings and pension plans as long as the exchangeable
shares remain listed on a Canadian stock exchange. The exchangeable shares will
also have equivalent voting and dividend rights as FuelCell common stock.
At closing, outstanding options to purchase Global shares will be assumed by
FuelCell and will represent options to purchase FuelCell common stock based on
the transaction exchange ratio and the existing terms of each individual option
agreement.
The transaction is expected to close in the fourth quarter of 2003 and is
subject to approval by the shareholders of each company, court approval,
regulatory approvals and other customary closing conditions, including mutual
covenants related to cash and working capital positions at closing. The
transaction will be implemented pursuant to a plan of arrangement under the
Business Corporations Act (Alberta).
As a result of the proposed combination with FuelCell, Global has terminated the
Combination Agreement dated as of April 8, 2003, and amended as of June 27,
2003, with Quantum Fuel System Technologies Worldwide, Inc., and has paid a
US$2.0 million break-up fee in accordance with the terms thereof.
I-88
PROXY FUELCELL ENERGY, INC. PROXY
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD OCTOBER 31, 2003
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jerry D. Leitman and Joseph G.
Mahler, and each of them, attorneys with full power of substitution, to vote as
directed below all shares of Common Stock of FuelCell Energy, Inc. registered
in the name of the undersigned, or which the undersigned may be entitled to
vote, at the Special Meeting of Stockholders to be held at the Sheraton Danbury
Hotel, located at 18 Old Ridgebury Road, Danbury, Connecticut, on October 31,
2003, at 10:00 a.m. and at any adjournment or postponement thereof.
1. To approve of the Combination Agreement and the transactions
contemplated thereby.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. As such proxies may in their discretion determine in respect of any
other business properly to come before said meeting (the Board of
Directors knowing of no such other business).
The directors recommend a vote FOR item 1.
(Continued on reverse side)
(Continued from other side)
UNLESS THE STOCKHOLDER DIRECTS OTHERWISE, THIS PROXY WILL BE VOTED FOR ITEMS 1
AS PROPOSED.
PLEASE DATE, SIGN AND RETURN IN THE ENVELOPE PROVIDED.
Dated ________________________________, 2003
______________________________________________
______________________________________________
Signature of Stockholder(s)
(Please sign in the same form as name appears
hereon. Executors and other fiduciaries should
indicate their titles. If signed on behalf of
a corporation, give title of officer signing).
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS FOR THE SPECIAL MEETING OF
STOCKHOLDERS TO BE HELD OCTOBER 31, 2003.