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 JUNE 30, 2001 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: 00027527 PLUG POWER INC. (Exact name of registrant as specified in its charter) 968 ALBANY-SHAKER ROAD, LATHAM, NEW YORK 12110 (Address of registrant's principal executive office) (518) 782-7700 (Registrant's telephone number, including area code) Delaware 22-3672377 (State or other jurisdiction (I.R.S. Employer of Incorporation) Identification Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 ___ --- The number of shares of common stock outstanding as of July 31, 2001 was 50,069,305 with a par value of $.01 per share. 1
PLUG POWER INC. INDEX to FORM 10-Q <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION Page <S> <C> Item 1 - Financial Statements Condensed Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations - Three Month and Six Month Periods ended June 30, 2001 and June 30, 2000 and Cumulative Amounts from Inception 4 Condensed Consolidated Statements of Cash Flows - Six Month Periods ended June 30, 2001 and June 30, 2000 and Cumulative Amounts from Inception 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 17 PART II. OTHER INFORMATION Item 1 - Legal Proceedings 18 Item 4 - Submission of Matters to a Vote of Security Holders 18 Item 6 - Exhibits and Reports on Form 8-K 18 - 21 Signature 21 </TABLE> 2
Plug Power Inc. and Subsidiary (A Development Stage Enterprise) Condensed Consolidated Balance Sheets <TABLE> <CAPTION> (Unaudited) Assets December 31, 2000 June 30, 2001 ------------------- ------------------- <S> <C> <C> Current assets: Cash and cash equivalents $ 58,511,563 $ 35,118,449 Restricted cash 290,000 290,000 Marketable securities 28,221,852 19,967,447 Accounts receivable 1,415,049 1,625,873 Inventory 2,168,006 3,690,358 Prepaid development costs 2,041,668 3,672,475 Other current assets 694,178 419,417 ------------------- ------------------- Total current assets 93,342,316 64,784,019 Restricted cash 5,310,274 5,310,274 Property, plant and equipment, net 32,290,492 32,335,080 Intangible asset 6,827,066 5,148,602 Investment in affiliates 9,778,784 8,139,135 Prepaid development costs 2,513,093 - Other assets 767,193 683,624 ------------------- ------------------- Total assets $ 150,829,218 $ 116,400,734 =================== =================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,479,031 $ 2,978,004 Accrued expenses 5,934,529 3,614,993 Deferred grant revenue 200,000 200,000 Current portion of capital lease obligation and long-term debt 377,201 354,646 ------------------- ------------------- Total current liabilities 9,990,761 7,147,643 Long-term debt 5,310,274 5,310,274 Deferred grant revenue 600,000 500,000 Capital lease obligation 30,346 10,466 Other liabilities 767,193 767,193 ------------------- ------------------- Total liabilities 16,698,574 13,735,576 ------------------- ------------------- Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; none issued and outstanding - - Common stock, $0.01 par value per share; 245,000,000 shares authorized at June 30, 2001 and 245,000,000 shares authorized at December 31, 2000; 44,564,813 shares issued and outstanding, June 30, 2001 and 43,795,513 shares issued and outstanding December 31, 2000 437,955 445,648 Paid-in capital 268,923,203 274,784,228 Deficit accumulated during the development stage (135,230,514) (172,564,718) ------------------- ------------------- Total stockholders' equity 134,130,644 102,665,158 ------------------- ------------------- Total liabilities and stockholders' equity $ 150,829,218 $ 116,400,734 =================== =================== </TABLE> The accompanying notes are an integral part of the condensed consolidated financial statements.
Plug Power Inc. and Subsidiary (A Development Stage Enterprise) Condensed Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> Three months ended June 30, Six months ended June 30, Cumulative ------------------------------- ------------------------------- Amounts from 2000 2001 2000 2001 Inception -------------- ------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> <C> Contract revenue $ 2,417,764 $ 1,289,077 $ 5,350,557 $ 2,316,326 $ 29,429,440 Cost of contract revenue 3,491,553 2,198,345 7,390,300 4,169,143 42,812,705 -------------- -------------- -------------- -------------- -------------- Loss on contracts (1,073,789) (909,268) (2,039,743) (1,852,817) (13,383,265) In-process research and development - - 4,984,000 - 9,026,640 Research and development expense: Noncash stock-based compensation - 375,000 - 375,000 622,782 Other research and development 16,932,662 14,870,054 28,376,834 31,620,347 123,716,713 General and administrative expense: Noncash stock-based compensation 31,700 311,000 63,400 311,000 11,346,873 Other general and administrative 1,664,870 1,627,616 3,189,600 3,517,153 21,960,569 Interest expense 59,145 76,278 154,615 154,203 706,785 -------------- -------------- -------------- -------------- -------------- Operating loss (19,762,166) (18,169,216) (38,808,192) (37,830,520) (180,763,627) Interest income 2,184,312 843,171 4,492,478 2,135,965 13,637,524 -------------- -------------- -------------- -------------- -------------- Loss before equity in losses of affiliates (17,577,854) (17,326,045) (34,315,714) (35,694,555) (167,126,103) Equity in losses of affiliates (455,304) (993,636) (963,304) (1,639,649) (5,438,615) -------------- -------------- -------------- -------------- -------------- Net loss $ (18,033,158) $ (18,319,681) $ (35,279,018) $ (37,334,204) $ (172,564,718) ============== ============== ============== ============== ============== Loss per share: Basic and diluted $ (0.42) $ (0.41) $ (0.82) $ (0.85) ============== ============== ============== ============== Weighted average number of common shares outstanding 43,151,810 44,239,208 43,053,998 44,080,352 ============== ============== ============== ============== </TABLE> The accompanying notes are an integral part of the condensed consolidated financial statements.
Plug Power Inc. and Subsidiary (A Development Stage Enterprise) Condensed Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Six months ended June 30, Cumulative ----------------------------------- Amounts from 2000 2001 Inception --------------- --------------- --------------- <S> <C> <C> <C> Cash Flows From Operating Activities: Net loss $ (35,279,018) $ (37,334,204) $ (172,564,718) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,770,000 2,088,555 7,165,409 Equity in losses of affiliates 963,304 1,639,649 5,438,616 Amortization of intangible asset 1,118,971 1,678,465 4,475,899 Amortization of deferred grant revenue (100,000) (100,000) (300,000) Amortization of other assets - 83,569 83,569 In-kind services - - 1,340,000 Stock based compensation 317,324 686,000 12,223,579 Amortization of deferred rent - - 150,000 Write-off of deferred rent - - 1,850,000 In-process research and development - - 4,042,640 Changes in assets and liabilities : Accounts receivable 580,089 (210,824) (1,625,873) Inventory (2,301,624) (1,522,352) (3,690,358) Prepaid development costs (1,375,000) 3,882,286 4,327,525 Due from investor - - 286,492 Other assets (342,518) 274,761 (122,503) Accounts payable and accrued expenses 1,911,022 (2,610,562) 6,754,889 Deferred grant revenue - - 1,000,000 Due to investor - - (286,492) --------------- --------------- --------------- Net cash used in operating activities (32,737,450) (31,444,657) (129,451,326) --------------- --------------- --------------- Cash Flows From Investing Activities: Purchase of property, plant and equipment (7,183,771) (2,133,143) (27,647,711) Purchase of intangible asset (9,624,500) - (9,624,500) Investment in affiliate (1,500,000) - (1,500,000) Marketable securities (11,242,180) 8,254,405 (19,967,447) --------------- --------------- --------------- Cash provided by (used in) investing activities (29,550,451) 6,121,262 (58,739,658) --------------- --------------- --------------- Cash Flows From Financing Activities: Proceeds from issuance of common stock - - 130,742,782 Proceeds from initial public offering, net - - 94,611,455 Stock issuance costs - - (1,639,577) Proceeds from stock option exercises 1,636,796 1,972,716 6,216,103 Cash placed in escrow - - (5,875,274) Principal payments on capital lease obligations (47,558) (42,435) (186,056) Principal payments on long-term debt - - (560,000) --------------- --------------- --------------- Net cash provided by financing activities 1,589,238 1,930,281 223,309,433 --------------- --------------- --------------- (Decrease) increase in cash and cash equivalents (60,698,663) (23,393,114) 35,118,449 Cash and cash equivalents, beginning of period 171,496,286 58,511,563 - --------------- --------------- --------------- Cash and cash equivalents, end of period $ 110,797,623 $ 35,118,449 $ 35,118,449 =============== ==============- =============== </TABLE> The accompanying notes are an integral part of the condensed consolidated financial statements.
Plug Power Inc. Notes to Condensed Consolidated Financial Statements 1. Nature of Operations Plug Power Inc. (Company) was originally formed as a joint venture between Edison Development Corporation (EDC) and Mechanical Technology Incorporated (MTI) on June 27, 1997. The Company is a development stage enterprise formed to research, develop, manufacture and distribute fuel cells for electric power generation. 2. Liquidity and Equity Offerings Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our residential fuel cell systems, market acceptance of our systems and other factors. We expect to devote substantial capital resources to continue our development programs directed at commercializing our fuel cell systems for worldwide residential use, to hire and train our production staff, develop and expand our manufacturing capacity, begin production activities and expand our research and development activities. We will pursue the expansion of our operations through internal growth and strategic acquisitions and expect such activities will be funded from existing cash and cash equivalents, issuance of additional equity or debt securities or additional borrowings subject to market and other conditions. In July, 2001 we completed a public equity financing raising an additional $51.3 million in net proceeds after fees and expenses. Simultaneous with the closing of the public financing we closed a private equity financing raising an additional $9.6 million in net proceeds. We believe that our current cash balances combined with the recently completed financing are sufficient to fund operations into 2003. 3. Basis of Presentation The condensed consolidated balance sheet as of June 30, 2001, the condensed consolidated statements of operations for the three and six month periods ended June 30, 2001 and 2000 and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2001 and 2000 have been prepared by the Company without audit. In the opinion of management, the accompanying balance sheets and related statements of operations and of cash flows include all adjustments, which consist solely of normal recurring adjustments, necessary for their fair presentation. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000. Marketable Securities: Marketable securities includes investments in corporate debt securities which are carried at fair value. These investments are considered available for sale, and the difference between the cost and the fair value of these securities will be reflected in other comprehensive income and as a separate component of stockholders' equity. There was no significant difference between cost and fair value of these investments at June 30, 2001 and 2000. 6
Recent Accounting Pronouncements: In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141 (SFAS No. 141), "Business Combinations". SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. SFAS No. 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001 (i.e., the acquisition date is July 1, 2001 or after). In June 2001, the FASB issued Statements of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets," which will be effective as of January 1, 2002. Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we are required to adopt SFAS No. 142 on January 1, 2002. 4. Loss Per Share Loss per share for the Company is as follows: <TABLE> <CAPTION> Three Months Three Months Six Months Six Months Ended June 30, Ended June 30, Ended June 30, Ended June 30, 2000 2001 2000 2001 ------------------- ------------------ ------------------ ------------------ <S> <C> <C> <C> <C> Numerator: Net loss $(18,033,158) $ (18,319,681) $ (35,279,018) $ (37,334,204) Denominator: Weighted average number of common shares 43,151,810 44,239,208 43,053,998 44,080,352 </TABLE> No options or warrants outstanding were included in the calculation of diluted loss per share because their impact would have been anti-dilutive. The calculation also excludes 111,851 contingently returnable shares in 2000. 5. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." No benefit for federal or state income taxes has been reported in these condensed consolidated statements of operations as they have been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforward may not be realized. 7
6. Investments in Affiliates In February 1999, the Company entered into an agreement with GE MicroGen, Inc. (formerly GE On-Site Power, Inc.) a wholly owned subsidiary of General Electric Co. to create GE Fuel Cell Systems, L.L.C. (GEFCS) a limited liability company created to market and distribute fuel cell systems world- wide. GE MicroGen owns 75% of GEFCS and the Company owns 25% of GEFCS. The Company accounts for its interest in GEFCS on the equity method of accounting and adjusts its investment by its proportionate share of income or losses. During the six months ended June 30, 2001, GEFCS had an operating and net loss of approximately $1.5 million. For this same period, the Company has recorded equity in losses of this affiliate of approximately $935,000, including goodwill amortization of $563,000. In March 2000, the Company acquired a 28% ownership interest in Advanced Energy Incorporated (AEI) in exchange for a combination of $1.5 million cash and Plug Power common stock valued at approximately $828,000. The Company accounts for its interest in AEI on the equity method of accounting and adjusts its investment by its proportionate share of income or losses. During the six months ended June 30, 2001, AEI had sales of approximately $851,000 and an operating and net loss of approximately $583,000. For this same period, the Company has recorded equity in losses of this affiliate of approximately $705,000, including goodwill amortization of $542,000. 7. Stockholders' Equity Changes in stockholders' equity for the six months ended June 30, 2001 is as follows: <TABLE> <CAPTION> Deficit Accumulated Common stock During the Total Additional Development Stockholders' Shares Amount Paid-in Capital Stage Equity ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance, January 1, 2001 43,795,513 $ 437,955 $268,923,203 $(135,230,514) $ 134,130,644 Stock issued for development 96,336 963 2,999,037 3,000,000 agreement Stock-based compensation 59,030 590 895,409 896,000 Stock option exercises 391,275 3,913 1,033,802 1,037,715 Stock issued under employee 36,745 367 459,906 460,273 stock purchase plan Net loss (37,334,204) (18,319,681) ----------------------------------------------------------------------------------- Balance, June 30, 2001 44,564,813 $ 445,648 $274,784,228 $(172,564,718) $ 102,665,158 =================================================================================== </TABLE> 8. Commitments and Contingencies Litigation: In January 25, 2000, a legal complaint was filed against us, The Detroit Edison Company and Edison Development Company in the Wayne County, Michigan Circuit Court alleging that the entities misappropriated business and technical trade secrets, ideas, know-how and strategies relating to fuel cell systems and breached certain contractual obligations owed to DCT, Inc. The 8
allegations against us with respect to breach of contractual obligations were subsequently dismissed. We believe that the remaining allegations against us in the complaint are without merit and are vigorously contesting the litigation. We do not believe that the outcome of these actions will have a material adverse effect upon our financial position, results of operations or liquidity; however, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of this action. In September, 2000, a shareholder class action complaint was filed in the federal district court for the Eastern District of New York alleging that we and various of our officers and directors violated certain federal securities laws by failing to disclose certain information concerning our products and future prospects. The action was brought on behalf of a class of purchasers of our stock who purchased the stock between February 14, 2000 and August 2, 2000. Subsequently, 14 additional complaints with similar allegations and class periods were filed. By order dated October 30, 2000, the court consolidated the complaints into one action, entitled Plug Power Inc. Securities Litigation, CV-00-5553(ERK)(RML). By order dated January 25, 2001, the court appointed lead plaintiffs and lead plaintiffs' counsel. Subsequently, the plaintiffs served a consolidated amended complaint. The consolidated amended complaint extends the class period to begin on October 29, 1999 and alleges claims under the Securities Act of 1933 and the Exchange Act of 1934, and Rule 10b-5 promulgated under the Exchange Act of 1934. Plaintiffs allege that the defendants made misleading statements and omissions regarding the state of development of our technology in a registration statement issued in connection with our initial public offering and in subsequent press releases. We served our motion to dismiss these claims in May 2001. We believe that the allegations in the consolidated amended complaint are without merit and intend to vigorously defend against the claims. We do not believe that the outcome of these actions will have a material adverse effect upon our financial position, results of operations or liquidity. However, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of these actions. If the plaintiffs were to prevail, such an outcome would have a material adverse effect on our financial condition, results of operations and liquidity. 9
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the accompanying Condensed Consolidated 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 filed for the fiscal year ended December 31, 2000. In addition to historical information, this Form 10-Q and the following discussion contain forward-looking statements that reflect our plans, estimates, intentions, expectations and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under the caption "Risk Factors" in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000. Overview We design and develop on-site electric power generation systems utilizing proton exchange membrane fuel cells for stationary applications. We were formed in June 1997 as a joint venture to further the development of fuel cells for electric power generation in stationary applications. We are a development stage company and expect to deliver our initial product during the third quarter of 2001. We continue to advance the development of our initial commercial product. Since inception, we have devoted substantially all of our resources toward the development of PEM fuel cell systems and have derived substantially all of our revenue from government research and development contracts. Through June 30, 2001, our stockholders in the aggregate have contributed $229.9 million in cash, including $93.0 million in net proceeds from our initial public offering of common stock, which closed on November 3, 1999, and $32.4 million in other contributions, consisting of in-process research and development, real estate, other in-kind contributions and equity interests in affiliates, including a 25% interest in GE Fuel Cell Systems. From inception through June 30, 2001, we have incurred losses of $172.6 million and expect to continue to incur losses as we expand our product development and commercialization program and prepare for the commencement of manufacturing operations. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial as a result of, among other factors, the number of systems we produce and install for internal and external testing, the related service requirements necessary to monitor those systems and potential design changes required as a result of field testing. There can be no assurance that we will manufacture or sell fuel cell systems successfully or achieve or sustain product revenues or profitability. Acquisitions, Strategic Relationships and Development Agreements Since our inception in June 1997, we have formed strategic relationships with suppliers of key components, developed distributor and customer relationships, and entered into development and demonstration programs with electric utilities, government agencies and other energy providers. GE Entities: In 1999, we and GE MicroGen, Inc. formed GE Fuel Cell Systems to serve as the distributor worldwide (other than in Illinois, Indiana, Michigan and Ohio) of our PEM fuel cell systems under 35 kW designed for use in residential, commercial and industrial stationary power applications. GE MicroGen, Inc. is a wholly owned subsidiary of General Electric Company that operates within the GE Power Systems business. Under the terms of our distribution agreement with GE Fuel Cell Systems, we will serve as GE Fuel Cell Systems' exclusive supplier of the PEM fuel cell systems and related components meeting the specifications set forth in the distribution agreement. Under the agreement, we will sell our systems directly to GE Fuel Cell Systems, which will then seek to sell the systems to sub-distributors. The 10
systems sold by GE Fuel Cell Systems will be co-branded with both the General Electric and Plug Power names and trademarks. Our distribution agreement with GE Fuel Cell Systems generally does not cover PEM fuel cell systems designed for transportation or vehicle applications, certain extended run uninterruptible power supply for data center applications, rack-mounted equipment in telecommunications, cellular or cable television applications and other applications in which the fuel cell system is integrated with another device that consumes 100% of the fuel cell system's output. However, we recently entered into a memorandum of understanding with GE Fuel Cell Systems to extend the term of the agreement through the end of 2014 and to amend the distribution agreement to replace the product specifications, prices and delivery schedule in our current distribution agreement with a high-level, multi-generation product plan with subsequent modifications subject to mutual agreement. Under the memorandum of understanding, GE Fuel Cell Systems' distribution rights would be expanded to include PEM fuel cell systems of any electric power output, including greater than 35 kW, for use in any stationary power application. We would also issue GEPS Equities for no additional cash consideration $5.0 million worth of common stock at a price per share equal to the per share offering price in the recently completed public offering. Finally, our percentage ownership in GE Fuel Cell Systems would be increased from 25% to 40%. We expect to execute definitive amendments to the distribution and operating agreements in the third quarter of this year. We have secured resources of GE MicroGen, Inc. and its affiliates to assist us in our product development effort, and we have committed to purchase a minimum of $12.0 million of technical support services, including engineering, testing, manufacturing and quality control services from GE Power Systems over a three-year period, which began September 30, 1999. In July, 2001 GEPS Equities invested $5.0 million in a private placement concurrent with the closing of our public offering. We have also entered into a separate agreement with General Electric Company under which General Electric acts as our agent in procuring fuel cell equipment, parts and components. In addition, General Electric has agreed to provide training services to our employees regarding procurement activities. These services are made available to us essentially at General Electric's cost. Gastec: In February 2000, we acquired from Gastec, NV, a Netherlands-based company, certain fixed assets and all of its intellectual property related to fuel processor development for fuel cell systems capable of producing up to 100 kW of electric power. The total purchase price was $14.8 million, paid in cash. In connection with the transaction, we recorded in-process research and development expense in the amount of $5.0 million, fixed assets in the amount of $192,000 which were capitalized at their fair value and will be depreciated over their useful life, and intangible assets in the amount of $9.6 million which has been capitalized and is being amortized over 36 months. Through June 30, 2001, we have expensed $4.5 million related to the intangible assets. Vaillant: In March 2000, we finalized a development agreement with Vaillant GmbH of Remscheid, Germany, Europe's leading heating appliance manufacturer, to develop a combination furnace, hot water heater and fuel cell system that will provide both heat and electricity for the home. Under the agreement, Vaillant will obtain fuel cells and gas-processing components from GE Fuel Cell Systems and then will produce the fuel cell heating appliances for its customers in Germany, Austria, Switzerland and the Netherlands, and for GE Fuel Cell Systems customers throughout Europe. Celanese: In April 2000, we finalized a joint development agreement with Celanese GmbH, to develop a high temperature membrane electrode unit. Under the agreement, we and Celanese will exclusively work together on the development of a high temperature membrane electrode unit for our stationary fuel cell system applications. As part of the agreement we will contribute an estimated $4.1 million (not to exceed $4.5 million) to fund our share of the development efforts over the course of the agreement. As of June 11
30, 2001, we have contributed $1.5 million under the terms of the agreement and have expensed all of such costs. Engelhard: In June 2000, we finalized a joint development agreement and a supply agreement with Engelhard Corporation for development and supply of advanced catalysts to increase the overall performance and efficiency of our fuel processor. Over the course of the agreements we will contribute $10.0 million to fund Engelhard's development efforts, and Engelhard will purchase $10.0 million of our common stock. The agreements also specify rights and obligations for Engelhard to supply products to us over the next 10 years. As of June 30, 2001, we have contributed $8.0 million under the terms of the agreement while Engelhard has purchased $8.0 million of our common stock. In connection with the transaction, we have recorded $8.0 million under the balance sheet caption "Prepaid development costs." Through June 30, 2001, we have expensed $4.3 million of such costs. Advanced Energy Incorporated: In March 2000, we acquired a 28% ownership interest in Advanced Energy Incorporated, in exchange for a combination of $1.5 million in cash and our common stock valued at approximately $828,000. We account for our interest in Advanced Energy Incorporated on the equity method of accounting and adjust our investment by our proportionate share of income or losses. Results of Operations Comparison of the Three Months Ended June 30, 2001 and June 30, 2000. Revenues. Total revenues for the second quarter ended June 30, 2001, were $1.3 million as compared to $2.4 million for the second quarter of 2000. The decrease is primarily the result of reduced government contract activity with the U.S. Department of Energy, as we complete our largest contract with them. Our revenues since inception have been derived primarily from cost reimbursement government contracts relating to the development of PEM fuel cell technology and contract revenue generated from the delivery of PEM fuel cells and related engineering and testing support services for other customers. Our government contracts provide for the partial recovery of direct and indirect costs from the specified government agency, generally requiring us to absorb from 25% to 50% of contract costs incurred. As a result of our cost sharing requirements we will report losses on these contracts as well as any future government contracts awarded. Cost of revenues. Cost of contract revenue includes compensation and benefits for the engineering and related support staff, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies used and other directly allocable general overhead costs allocated to specific government contracts. Cost of contract revenue was $2.2 million for the three months ended June 30, 2001, as compared to $3.5 million for the same period last year. The decrease in contract costs was related to reduced government contract activity. The result was a loss on contracts of $909,000 for the three months ended June 30, 2001 compared to a loss on contracts of $1.1 million last year. Research and Development. Research and development expense includes compensation and benefits for the engineering and related staff, expenses for contract engineers, materials to build prototype units, fees paid to outside suppliers for subcontracted components and services, supplies used, facility related costs, such as computer and network services and other general overhead costs. Research and development expenses decreased to $15.2 million for the three months ended June 30, 2001 from $16.9 million for the three months ended June 30, 2000. The decrease is primarily the result of increased focus cash conservation. We produced 33 PEM fuel cell systems during the second quarter ended June 30, 12
2001 compared to 39 PEM fuel cell systems during the same period last year. Additionally we have reduced the direct material cost of our PEM fuel cell systems by 27 percent since January 1, 2001. General and Administrative. General and administrative expense includes compensation, benefits and related costs in support of our general corporate functions, including general management, finance and accounting, human resources, business development, information and legal services. General and administrative expenses increased to $1.9 million for the three months ended June 30, 2001 from $1.7 million for the three months ended June 30, 2000, due to higher general expenses in support of operations. Interest Expense. Interest expense of $76,000 for the three months ended June 30, 2001 consists of interest on a long-term obligation related to a real estate purchase agreement with Mechanical Technology in June, 1999, and interest paid on capital lease obligations. Interest Income. Interest income consisting of interest earned on our cash and cash equivalents and marketable securities decreased to $843,000 for the three months ended June 30, 2001 from $2.2 million for the same period last year. Equity in losses of affiliates. Equity in losses of affiliates, representing our minority interest in GE Fuel Cell Systems and Advanced Energy Incorporated, increased to $994,000 for the three months ended June 30, 2001 from $455,000 for the same period last year. Equity in losses of affiliates for the three month period ended June 30, 2001 is our proportionate share of the losses of GE Fuel Cell Systems and Advanced Energy Systems, which we account for under the equity method of accounting, in the amount of $675,000 and goodwill amortization on those investments in the amount of $318,000. Income Taxes. No benefit for federal and state income taxes has been reported in the financial statements because the deferred tax asset generated from our net operating has been offset by a full valuation allowance. We were taxed as a partnership prior to November 3, 1999, the effective date of our merger into a C corporation, and the federal and state income tax benefits of our losses were recorded by our stockholders. Effective on November 3, 1999, and began accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Comparison of the Six Months Ended June 30, 2001 and June 30, 2000. Revenues. Total revenues for the six months ended June 30, 2001, were $2.3 million as compared to $5.4 million for the same period of last year. The decrease is primarily the result of reduced government contract activity with the U.S. Department of Energy, as we complete our largest contract with them. Our revenues since inception have been derived primarily from cost reimbursement government contracts relating to the development of PEM fuel cell technology and contract revenue generated from the delivery of PEM fuel cells and related engineering and testing support services for other customers. Our government contracts provide for the partial recovery of direct and indirect costs from the specified government agency, generally requiring us to absorb from 25% to 50% of contract costs incurred. As a result of our cost sharing requirements we will report losses on these contracts as well as any future government contracts awarded. Cost of revenues. Cost of contract revenue includes compensation and benefits for the engineering and related support staff, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies used and other directly allocable general overhead costs allocated to specific government contracts. Cost of contract revenue was $4.2 million for 13
the six months ended June 30, 2001, as compared to $7.4 million for the same period last year. The decrease in contract costs was related to reduced government contract activity. The result was a loss on contracts of $1.9 million for the six months ended June 30, 2001 compared to a loss on contracts of $2.0 million for the same period last year. Research and Development. Research and development expense includes compensation and benefits for the engineering and related staff, expenses for contract engineers, materials to build prototype units, fees paid to outside suppliers for subcontracted components and services, supplies used, facility related costs, such as computer and network services and other general overhead costs. Research and development expenses decreased to $32.0 million for the six months ended June 30, 2001 from $33.4 million for the six months ended June 30, 2000. The amount in 2000 includes a one-time charge of $5.0 million related to the write off of in-process research and development expenses related to our acquisition of intellectual property in the first quarter of 2000. Excluding the write-off, research and development expenses increased by $3.6 million which is the result of increased research and development activities, including $3.8 million of additional amortization of our of joint development agreements with Engelhard and Celanese and is offset by a reduction in the direct material cost of our PEM fuel cell systems. Year to date we have reduced the direct material cost of our PEM fuel cell systems by 27 percent. Additionally we have produced a total of 52 PEM fuel cell systems compared to 61 PEM fuel cell systems during the same period last. General and Administrative. General and administrative expense includes compensation, benefits and related costs in support of our general corporate functions, including general management, finance and accounting, human resources, business development, information and legal services. General and administrative expenses increased to $3.8 million for the six months ended June 30, 2001 from $3.3 million for the six months ended June 30, 2000. The increase was primarily due to higher general expenses in support of operations. Interest Expense. Interest expense of $154,000 for the six months ended June 30, 2001 includes interest on a long-term obligation related to a real estate purchase agreement with Mechanical Technology in June, 1999, and interest paid on capital lease obligations. Interest Income. Interest income consisting of interest earned on our cash, cash equivalents and marketable securities decreased to $2.1 million for the six months ended June 30, 2001 from $4.5 million for the same period last year. Equity in losses of affiliates. Equity in losses of affiliates, representing our minority interest in GE Fuel Cell Systems and Advanced Energy Incorporated, increased to $1.6 million for the six months ended June 30, 2001 from $963,000 last year. Equity in losses of affiliates during the six months ended June 30, 2001 includes our proportionate share of the losses of GE Fuel Cell Systems and Advanced Energy Incorporated, which we account for under the equity method of accounting, in the amount of $535,000 and goodwill amortization on those investments in the amount of $1.1 million. Income Taxes. No benefit for federal and state income taxes has been reported in the financial statements because the deferred tax asset generated from our net operating has been offset by a full valuation allowance. We were taxed as a partnership prior to November 3, 1999, the effective date of our merger into a C corporation, and the federal and state income tax benefits of our losses were recorded by our stockholders. Effective on November 3, 1999, and began accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." 14
Liquidity and Capital Resources Summary Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our residential fuel cell systems, market acceptance of our systems and other factors. We expect to devote substantial capital resources to continue our development programs directed at commercializing our fuel cell systems for worldwide residential use, to hire and train our production staff, develop and expand our manufacturing capacity, begin production activities and expand our research and development activities. We will pursue the expansion of our operations through internal growth and strategic acquisitions and expect such activities will be funded from existing cash and cash equivalents, issuance of additional equity or debt securities or additional borrowings subject to market and other conditions. In July, 2001 we completed a public equity financing raising an additional $51.3 million in net proceeds after fees and expenses. Simultaneous with the closing of the public financing we closed a private equity financing raising an additional $9.6 million in net proceeds. We believe that our current cash balances combined with the recently completed financing are sufficient to fund operations into 2003. We have financed our operations through June 30, 2001, primarily from the sale of equity, which has provided cash in the amount of $229.9 million. As of June 30, 2001, we had unrestricted cash, cash equivalents and marketable securities totaling $55.1 million and working capital was approximately $57.6 million. As a result of our purchase of real estate from Mechanical Technology, we have escrowed $5.6 million in cash to collateralize the debt assumed on the purchase. Since inception, net cash used in operating activities has been $129.4 million and cash used in investing activities has been $58.7 million. 15
Part II - Other Information ITEM 1 - LEGAL PROCEEDINGS - -------------------------- In January 25, 2000, a legal complaint was filed against us, The Detroit Edison Company and Edison Development Company in the Wayne County, Michigan Circuit Court alleging that the entities misappropriated business and technical trade secrets, ideas, know-how and strategies relating to fuel cell systems and breached certain contractual obligations owed to DCT, Inc. The allegations against us with respect to breach of contractual obligations were subsequently dismissed. We believe that the remaining allegations against us in the complaint are without merit and are vigorously contesting the litigation. We do not believe that the outcome of these actions will have a material adverse effect upon our financial position, results of operations or liquidity; however, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of this action. In September, 2000, a shareholder class action complaint was filed in the federal district court for the Eastern District of New York alleging that we and various of our officers and directors violated certain federal securities laws by failing to disclose certain information concerning our products and future prospects. The action was brought on behalf of a class of purchasers of our stock who purchased the stock between February 14, 2000 and August 2, 2000. Subsequently, 14 additional complaints with similar allegations and class periods were filed. By order dated October 30, 2000, the court consolidated the complaints into one action, entitled Plug Power Inc. Securities Litigation, CV-00-5553(ERK)(RML). By order dated January 25, 2001, the court appointed lead plaintiffs and lead plaintiffs' counsel. Subsequently, the plaintiffs served a consolidated amended complaint. The consolidated amended complaint extends the class period to begin on October 29, 1999 and alleges claims under the Securities Act of 1933 and the Exchange Act of 1934, and Rule 10b-5 promulgated under the Exchange Act of 1934. Plaintiffs allege that the defendants made misleading statements and omissions regarding the state of development of our technology in a registration statement issued in connection with our initial public offering and in subsequent press releases. We served our motion to dismiss these claims in May 2001. We believe that the allegations in the consolidated amended complaint are without merit and intend to vigorously defend against the claims. We do not believe that the outcome of these actions will have a material adverse effect upon our financial position, results of operations or liquidity. However, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of these actions. If the plaintiffs were to prevail, such an outcome would have a material adverse effect on our financial condition, results of operations and liquidity. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ At the Company's Annual Meeting of Shareholders ("Annual Meeting") held on May 16, 2001, the Company's shareholders approved the following: (1) To elect the following directors as Class II Directors, each to serve until the Company's 2004 annual meeting of stockholders and until his successor is duly elected and qualified: <TABLE> <CAPTION> Against/ Broker Nominee For Withheld Abstain Non-Votes ------- ---------------------------------------------------------------- <S> <C> <C> <C> <C> George C. McNamee 43,781,423 48,893 -- -- Douglas T. Hickey 43,781,261 49,055 -- -- </TABLE> (2) To approve an amendment to the 1999 Stock Option and Incentive 16
<TABLE> <S> <C> <C> <C> <C> Plan to increase the number of shares authorized to be issued: 42,869,545 853,834 106,937 -- </TABLE> ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- Certain exhibits indicated below are incorporated by reference to documents of Plug Power on file with the Commission. Exhibits nos. 10.25, 10.28, 10.29, 10.30, 10.31, 10.32, 10.33, 10.34, 10.41, 10.38, 10.42 and 10.43 represent the management contracts or compensation plans filed pursuant to Item 14(c) of the Form 10-K. Exhibit No. and Description 2.1 Agreement and Plan of Merger by and between Plug Power and Plug Power, LLC, a Delaware limited liability company, dated as of October 7, 1999. (1) 3.1 Amended and Restated Certificate of Incorporation of Plug Power. (2) 3.2 Amended and Restated By-laws of Plug Power. (2) 3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation of Plug Power. (3) 4.1 Specimen certificate for shares of common stock, $.01 par value, of Plug Power. (1) 10.1 Amended and Restated Limited Liability Company Agreement of GE Fuel Cell Systems, LLC, dated February 3, 1999, between GE On-Site Power, Inc. and Plug Power, LLC. (1) 10.2 Contribution Agreement, dated as of February 3, 1999, by and between GE On-Site Power, Inc. and Plug Power, LLC. (1) 10.3 Trademark and Trade Name Agreement, dated as of February 2, 1999, between General Electric Company and GE Fuel Cell Systems, LLC. (1) 10.4 Trademark Agreement, dated as of February 2, 1999, between Plug Power LLC and GE Fuel Cell Systems, LLC. (1) 10.5 Distributor Agreement, dated as of February 2, 1999, between GE Fuel Cell Systems, LLC and Plug Power, LLC. (1) 10.6 Side letter agreement, dated February 3, 1999, between General Electric Company and Plug Power LLC. (1) 10.7 Mandatory Capital Contribution Agreement, dated as of January 26, 1999, between Edison Development Corporation, Mechanical Technology Incorporated and Plug Power, LLC and amendments thereto, dated August 25, 1999 and August 26, 1999. (1) 10.8 LLC Interest Purchase Agreement, dated as of February 16, 1999, between Plug Power, LLC and Michael J. Cudahy. (1) 10.9 Warrant Agreement, dated as of February 16, 1999, between Plug Power, LLC and Michael J. Cudahy and amendment thereto, dated July 26, 1999. (1) 17
10.10 LLC Interest Purchase Agreement, dated as of February 16, 1999, between Plug Power, LLC and Kevin Lindsey. (1) 10.11 LLC Interest Purchase Agreement, dated as of April 1, 1999, between Plug Power, LLC and Antaeus Enterprises, Inc. (1) 10.12 LLC Interest Purchase Agreement, dated as of April 9, 1999, between Plug Power, LLC and Southern California Gas Company. (1) 10.13 Warrant Agreement, dated as of April 9, 1999, between Plug Power, LLC and Southern California Gas Company and amendment thereto, dated August 26, 1999. (1) 10.14 Agreement, dated as of June 26, 1997, between the New York State Energy Research and Development Authority and Plug Power LLC, and amendments thereto dated as of December 17, 1997 and March 30, 1999. (1) 10.15 Agreement, dated as of January 25, 1999, between the New York State Energy Research and Development Authority and Plug Power LLC. (1) 10.16 Agreement, dated as of September 30, 1997, between Plug Power LLC and the U.S. Department of Energy. (1) 10.17 Cooperative Agreement, dated as of September 30, 1998, between the National Institute of Standards and Technology and Plug Power, LLC, and amendment thereto dated May 10, 1999. (1) 10.18 Joint venture agreement, dated as of June 14, 1999 between Plug Power, LLC, Polyfuel, Inc., and SRI International. (1) 10.19 Cooperative Research and Development Agreement, dated as of February 12, 1999, between Plug Power, LLC and U.S. Army Benet Laboratories. (1) 10.20 Nonexclusive License Agreement, dated as of April 30, 1993, between Mechanical Technology Incorporated and the Regents of the University of California. (1) 10.21 Development Collaboration Agreement, dated as of July 30, 1999, by and between Joh. Vaillant GMBH. U. CO. and Plug Power, LLC. (1) 10.22 Agreement of Sale, dated as of June 23, 1999, between Mechanical Technology, Incorporated and Plug Power LLC. (1) 10.23 Assignment and Assumption Agreement, dated as of July 1, 1999, between the Town of Colonie Industrial Development Agency, Mechanical Technology, Incorporated, Plug Power, LLC, KeyBank, N.A., and First Albany Corporation. (1) 10.24 Replacement Reimbursement Agreement, dated as of July 1, 1999, between Plug Power, LLC and KeyBank, N.A. (1) 10.25 1997 Membership Option Plan and amendment thereto dated September 27, 1999. (1) 10.26 Trust Indenture, dated as of December 1, 1998, between the Town of Colonie Industrial Development Agency and Manufacturers and Traders Trust Company, as trustee. (1) 18
10.27 Distribution Agreement, dated as of June 27, 1997, between Plug Power, LLC and Edison Development Corporation and amendment thereto dated September 27, 1999. (1) 10.28 Agreement, dated as of June 27, 1999, between Plug Power, LLC and Gary Mittleman. (1) 10.29 Agreement, dated as of June 8, 1999, between Plug Power, LLC and Louis R. Tomson. (1) 10.30 Agreement, dated as of August 6, 1999, between Plug Power, LLC and Gregory A. Silvestri. (1) 10.31 Agreement, dated as of August 12, 1999, between Plug Power, LLC and William H. Largent. (1) 10.32 Agreement, dated as of August 20, 1999, between Plug Power, LLC and Dr. Manmohan Dhar. (1) 10.33 1999 Stock Option and Incentive Plan. (1) 10.34 Employee Stock Purchase Plan. (1) 10.35 Agreement, dated as of August 27, 1999, by Plug Power, LLC, Plug Power Inc., GE On-Site Power, Inc., GE Power Systems Business of General Electric Company, and GE Fuel Cell Systems, L.L.C. (1) 10.36 Registration Rights Agreement to be entered into by the Registrant and the stockholders of the Registrant. (2) 10.37 Registration Rights Agreement to be entered into by Plug Power, L.L.C. and GE On-Site Power, Inc. (2) 10.38 Agreement dated September 11, 2000, between Plug Power Inc. and Gary Mittleman. (3) 10.39 Amendment No. 1 to Distributor Agreement dated February 2, 1999, between GE Fuel Cell Systems L.L.C. and Plug Power Inc. (3) 10.40 Amendment to Distributor Agreement dated February 2, 1999, made as of July 31, 2000, between GE Fuel Cell Systems L.L.C. and Plug Power Inc. (3) 10.41 Agreement, dated as of December 15, 2000, between Plug Power Inc. and Roger Saillant. (3) 10.42 Agreement dated February 13, 2001, between Plug Power Inc. and William H. Largent. (3) 10.43 Amendment dated September 19, 2000 to agreement, dated as of August 6, 1999, between Plug Power Inc. and Gregory A. Silvestri. (3) 10.44 Joint Development Agreement, dated as of June 2, 2000, between Plug Power Inc. and Engelhard Corporation. (3) 19
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File Number 333-86089). (2) Incorporated by reference to the Company's Form 10-K for the period ending December 31, 1999. (3) Incorporated by reference to the Company's Form 10-K for the period ending December 31, 2000. B) Reports on Form 8-K. On June 14, 2001, we filed a Form 8-K with the Securities and Exchange Commission announcing that on June 8, 2001, Plug Power Inc. filed a Registration Statement on Form S-3 (Registration Statement No. 333- 62686) in which we, among other things, updated the risk factors disclosed in our Form 10-K filed with the SEC on March 30, 2001. Such risk factors as updated are set forth below. Investors should carefully consider the risk factors set forth below prior to investing in our common stock. On June 27, 2001, we filed a Form 8-K with the Securities and Exchange Commission announcing the issuance of a press release announcing the Company had entered into a non-binding Memorandum of Understanding (MOU) with GE Fuel Cell Systems, L.L.C. (GEFCS), GE MicroGen, Inc. (GEMG), and GEPS Equities Inc., and a separate non-binding MOU with DTE Energy Technologies, Inc., a subsidiary of DTE Energy (NYSE: DTE). These MOU's define expanded distribution agreements for Plug Power's Proton Exchange Membrane (PEM) fuel cell systems for stationary power applications and confirm new cash equity investments in Plug Power. Signature - ---------- Pursuant to 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. PLUG POWER INC. Date: August 13, 2001 by: /S/ Roger Saillant ---------------------- Roger Saillant Chief Executive Officer by: /S/ Mark Schmitz -------------------- Mark Schmitz Chief Financial Officer 20